Regulation, competition, and the structure of prices

Abstract

Many competition policy issues in regulated industries concern the structure of prices charged by multi-product firms - for example price discrimination, non-linear pricing, cross-subsidies, and network access pricing. This article first sets out the (Ramsey) principles of optimal pricing to recover fixed costs. The sometimes conflicting aims of promoting competition and pursuing social objectives are brought into the analysis. Questions of whether to allow pricing structure discretion to the firm, and how much, are considered next. With asymmetric information, some discretion is often desirable, but its optimal form is hard to characterize. The article then turns to the controversial network access pricing problem - on what terms should an integrated dominant firm be required to supply inputs required by its rivals? Finally, there is discussion of pricing structure regulation in the transition from more to less regulation, which, it is to be hoped, is in prospect in parts of the regulated industries as effective competition develops.