No. B97-24

IS PERFECT PRICE DISCRIMINATION REALLY EFFICIENT?: WELFARE AND EXISTENCE IN GENERAL EQUILIBRIUM

Abstract

We examine the welfare properties of surplus maximization by embedding a perfectly discriminating monopoly in an otherwise standard Arrow-Debreu economy. Although we discover an inefficient equilibrium, we validate partial equilibrium intuition by showing: (1) that equilibria are efficient provided that the monopoly goods are costly and (2) that a natural monopoly can typically use personalized two-part tariffs in these equilibria. However, we find that Pareto optima are sometimes incompatible with surplus maximization, even when transfer payments are used. We provide insight into the source of this difficulty and give some instructive examples of economies where a second welfare theorem holds.

Aaron S. Edlin
Department of Economics
University of California, Berkeley
and National Bureau of Economic Research

Mario Epelbaum
Morgan Stanley, New York

Walter P. Heller
Department of Economics
University of California, San Diego

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