New Developments and Empirical Evidence
Edited by Michael Faure and Xinzhu Zhang
Chapter 6: A comparative study on Welfare results of nonlinear and linear pricing: based on asymmetric duopoly market
Fuliang Chen and Tao Xu
Since the 1970s, nonlinear pricing has been widely used in public utilities, such as electricity, telecommunications, tap water, gas, railways and civil aviation, because industrialized countries have deregulated these industries. However, nonlinear pricing is still a second-best pricing strategy, as theoretical research of nonlinear pricing strategy is derived from the defect of marginal cost pricing (MCP).Microeconomic theory states that without externality, monopoly and commodity tax, MCP is the only pricing method to achieve best resource allocation and social welfare maximum. For a long time, MCP had been proved to be the first-best in theory; however, problems appeared when natural monopoly enterprises put MCP into use.
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