Monopoly, Pareto and Ramsey Mark-ups

Abstract

Monopoly prices are too high. It is a price level problem, in the sense that the relative mark-ups have Ramsey optimal proportions, at least for independent constant elasticity demands. I show that this feature of monopoly prices breaks down the moment one demand is replaced by the textbook linear demand or, even within the constant elasticity framework, dependence is introduced. The analysis provides a single Generalized Inverse Elasticity Rule for the problems of monopoly, Pareto and Ramsey.