Faculty of Economics and Business Administration Publications Database

Second Degree Price Discrimination and Natural Monopoly

Volume: 56
Number: 2
Pages: 189 - 200
Month: 4
ISSN-Print: 0307-3378
Year: 2004
Keywords: Natural monopoly, Contestability, Contract theory

This paper considers the efficiency of a contestable natural monopoly if consumers are heterogeneous and the monopolist can differentiate prices imperfectly. The paper shows that a “no-distortion-at-the-top” result, which is standard in models with restricted entry, may also appear in a contestable market. Depending on cost and demand structures, first best efficiency can also be a sustainable equilibrium. However, due to the existence of a continuum of equilibria, first best efficiency is not guaranteed. Most notably, even a stable “distortion-at-the-top” result is possible.