IS PERFECT PRICE DISCRIMINATION REALLY EFFICIENT?: WELFARE AND EXISTENCE IN GENERAL EQUILIBRIUM
Economists often advocate that regulators of natural monopolies seek to maximize the sum of consumer and producer surplus. Although this policy has desirable welfare properties in partial equilibrium, some undesirable properties emerge in general equilibrium. We show that equilibria can be inefficient, and that some Pareto-optima cannot be decentralized. However, we find that when the monopoly has finite returns to scale, equilibria are always efficient. We also provide necessary and sufficient conditions for decentralization. We examine these welfare properties by embedding a perfectly discriminating monopoly in an otherwise standard Arrow-Debreu economy.
Aaron S. Edlin, University of California, Berkeley
Mario Epelbaum, ITAM, Mexico
Walter P. Heller, University of California, San Diego