An Empirical Analysis of Ramsey Pricing in Japanese Electric Utilities

Abstract

In this study an empirical analysis of Ramsey pricing in Japanese electric utilities based on the estimation results of electricity cost and demand functions was conducted. The Ramsey pricing rule, which describes the set of uniform prices maximizing the sum of producer and consumer surplus subject to the minimum profit constraint, can be directly applicable to the rate regulation of electric utilities facing intermodal competition where they should serve both competitive and noncompetitive markets. Flexible functional forms such as translog and almost ideal demand systems are employed to obtain estimates necessary for a statistical test of the Ramsey pricing rule. The test result rejects the hypothesis that the rate regulation satisfies the Ramsey optimal criteria, and the movement from actual to Ramsey optimal prices may require a substantial increase in residential electricity price and a slight decrease in industrial electricity price. J. Japan. Int. Econ., September 1993, 7(3), pp. 256–276. Central Research Institute of Electric Power Industry, 1-6-1 Chiyodaku, Tokyo 100, Japan; Senshu University, 2-1-1 Higashimita, Tama-ku, Kawasakishi, Kanangawaken 214, Japan; and University of Tsukuba, Tsukubashi, Ibaragiken 305, Japan.