CHAPTER 8 - RAMSEY PRICING

Abstract

This chapter discusses Ramsey pricing. Ramsey pricing is characterized by a trade-off between the level of prices and the structure of prices. Ramsey pricing can stand for low-pricing and high-pricing policies, for deficit enterprises, cost-covering ones, or for profit-making enterprises. Ramsey prices range from zero tariffs to unconstrained profit-maximizing prices. There is a similarity between the Ramsey price structure and the price structure of a profit-maximizing monopolist. If the price-cost margin of a commodity is larger, the absolute value of its price elasticity is smaller. As the compensated elasticities are always negative, all prices lie either above or below marginal costs. For instance, the case of positive price-cost margins can be achieved by a break-even constraint for a public enterprise working under increasing returns to scale. The economic consequences of the inverse elasticity rule are different for positive and for negative price-cost margins. The case of positive price-cost margins leads to relatively higher prices of price inelastic goods and to relatively lower prices of price elastic goods.