Optimal non-linear pricing with regulatory preference over customer type

Abstract

In this paper we characterize the Pareto-optimal set of non-linear pricing schedules when non-negative weights are assigned to each customer type. Our analysis first compares general non-linear tariff schedules and sets of self-selecting two-part tariffs, when there are two customer types and the cost function is linear. We then derive optimal sets of two-part tariffs for arbitrary numbers of customer types and general cost functions. We also consider the sustainability of non-linear pricing schedules under the threat of entry of rival firms.