The welfare impacts of discriminatory price tariffs

doi:10.1016/j.eneco.2018.03.011

Energy Economics

Volume 71, March 2018, Pages 321-331

https://doi.org/10.1016/j.eneco.2018.03.011 Get rights and content

Highlights

•
Analysis of asymmetric price controls in profit-constrained markets
•
The impact of partial compared to unified tariffs
•
The regulatory effects of using differential welfare weights across markets.
•
The impact of tighter profit constraints and cost links across market sections.
•
Identification conditions where partial tariffs beat unified tariffs.

Abstract

This paper examines the use of asymmetric tariffs as a regulatory instrument. A monopoly setup is adopted in which the firm sells in two markets but price controls are introduced in just one. The regulator's objective is to increase consumer welfare through this price discriminatory practice, with the firm operating under a profit constraint. We consider cases where consumer welfare in the two markets is weighted both equally and unequally and also cases where the cost of supplying the two retail markets is determined in a monopsonistic input market. The results suggest that in certain situations controlling prices in only one market could be a desirable option from a welfare perspective.

Section snippets

Motivation

In the 1980s and 90s the UK energy market was subject to radical deregulation and restructuring. However, subsequent attempts to internalise environmental costs and capital market reconfiguration have led to higher prices, a focus on energy company profits and a continuing concern over affordability (Department for Business, Energy and Industrial Strategy, 2017). Questions regarding the optimal extent and nature of energy markets regulation are politically salient because of the degree of

The basic model

We begin by establishing notation and a number of simplifying assumptions. This will allow the construction in Section 3 of iso-profit and iso-welfare functions, which link combinations of tariffs in markets 1 and 2 to given levels of total profit and consumer welfare respectively. These prove to be effective devices for analyzing the options for the regulator.

A monopoly electricity supplier faces two identical retail markets, each characterized by a linear inverse demand function: $p_{i} = a - {bq}_{i} i = 1, 2$

Iso-welfare and iso-profit functions

In this section we identify the general nature of the iso-welfare and iso-profit functions used in this analysis. Defining the total consumer welfare, S_T, as the weighted sum of the consumer surplus in markets 1 and 2, for the tariff values ${\bar{p}}_{1}, {\bar{p}}_{2} \leq a$ : $S_{T} = \sum_{i = 1, 2} ω_{i} S_{i} = \frac{1}{2 b} \sum_{i = 1, 2} ω_{i} {(a - {\bar{p}}_{i})}^{2}$ where: $\frac{\partial S_{T}}{\partial {\bar{p}}_{i}} = \frac{- ω_{i} (a - {\bar{p}}_{i})}{b} \leq 0$ and ω_i is the weight put on the consumer surplus in market i.

Consumer welfare is minimized, at the value zero, where ${\bar{p}}_{1}, {\bar{p}}_{2} = a$ . Where the consumers' welfare is fixed at some positive level, ${\bar{S}}_{T}$

Iso-welfare function with equal consumption weights and the zero profits constraint with fixed wholesale prices

It is useful initially to take the special case where the wholesale price is fixed at the level c and is invariant to the output level, so that d = 0, and the welfare weights are both set equal to unity, so that ω₁ = ω₂ = 1. This allows us to specify precisely the iso-welfare and iso-profit curves in a tractable manner and establish some benchmark results. These curves are illustrated as shown in Fig. 1.

We start with the iso-welfare function. From Eq. (6), if consumers in each market are given

Model with un-equal consumer weights (ω₁ > ω₂)

Varying the consumer welfare weights across the two retail markets changes the optimal outcome if the regulator can set a tariff in both markets. Increasing the weight on market 1 shifts the consumer iso-welfare function so that it is tangent to the zero iso-profit curve along the segment ZE. This is illustrated in Fig. 2. The iso-welfare curve W₁ that passes through point Z is no longer tangent to the zero iso-profit curve. The highest (weighted) consumer surplus is now found at point H on the

A tariff in only one of the two markets, zero profit constraint, constant wholesale prices

Up to this point we have essentially outlined a model in which the regulator sets tariffs in each of the two retail markets. However, the primary focus of the paper is the analysis of situations where, for some reason, the extent to which the separate markets can be regulated is restricted and, in particular, the extreme case where tariffs can only be set in one of the two markets. Regulators might face political, ideological or practical constraints in imposing tariffs in all segments of the

A tariff in only one of the two markets, positive profit constraint

Up to now we have only constrained profits to be non-negative. However, if fixed costs are positive, so that Γ > 0, or if the company has some kind of power with which it can push back against the regulator, the profit constraint will be positive. We would expect some implicit profit constraint to be determined by bargaining between the regulator and the incumbent. If this profit level is set too low, there might be a number of consequences. There might be difficulties with financing new

The introduction of a tariff in market 1 where the wholesale price increases with output (d > 0)

6 A tariff in only one of the two markets, zero profit constraint, constant wholesale prices, 7 A tariff in only one of the two markets, positive profit constraint analyse pure cross subsidisation, where the positive profits made in the unregulated retail market 2 are used to subsidise consumers in the regulated market 1. Whilst market 2 consumers receive no benefit from the regulation, neither do they experience any detrimental impact. However, in this section, where we introduce a positively

Conclusions

It is often the case that in regulated markets with a degree of monopoly power price controls are imposed in only one segment of the market. Examples in the UK apply in the retail electricity, rail transport, education and housing markets. This behaviour is typically motivated by redistributive considerations, with the welfare of one set of consumers weighted more heavily than others. In the case of the electricity market this could be motivated by concerns over affordability.

The decision not

Acknowledgements

The authors thank three anonymous referees for valuable comments on a previous version of this paper.

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Tripartite evolutionary game analysis for “Deceive acquaintances” behavior of e-commerce platforms in cooperative supervision
2020, Physica A: Statistical Mechanics and its Applications
Citation Excerpt :
From the perspective of government, the government’s policies, punishments and subsidies would boost the development of enterprises [8,9]. Besides, it may boost consumer surplus when e-commerce platforms-maintained self-discipline [10] and third-party agencies participated in regulation [11,12]. Community supervision can maximize the positive impact of e-commerce platforms [13,14].
In the growing e-commerce market, “deceitful pricing for acquaintances” has increasingly attracted widespread attention from all walks of life. To protect the rights of consumers and maintain the sustainable development of e-commerce market, an evolutionary game model in accordance with PT-MA (Prospect Theory and Mental Account) is developed from the perspective of cooperative supervision between the government and consumers. Through theoretical derivation and simulation analysis, it is suggested that the evolution game of participants’ strategy does not have stable equilibrium point. Increasing the cost reference point and reducing the valance reference point can quickly reduce the probability of “deceitful pricing for acquaintances” and non-supervision. The greater the punishment will be, the e-commerce platforms are more likely to adopt the strategy of “non-deceitful pricing for acquaintances”. Increasing cooperative income and commission coefficient can encourage the government to adopt supervision strategies and make consumers participate in supervision. The results can guide the participants to make better decisions on e-commerce market.

^☆: Funding: This research did not receive any specific grant from funding agencies in the public, commercial, or not-for-profit sectors.

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The welfare impacts of discriminatory price tariffs☆

Highlights

Abstract

Section snippets

Motivation

The basic model

Iso-welfare and iso-profit functions

Iso-welfare function with equal consumption weights and the zero profits constraint with fixed wholesale prices

Model with un-equal consumer weights (ω1 > ω2)

A tariff in only one of the two markets, zero profit constraint, constant wholesale prices

A tariff in only one of the two markets, positive profit constraint

The introduction of a tariff in market 1 where the wholesale price increases with output (d > 0)

Conclusions

Acknowledgements

Renew. Sust. Energ. Rev.

Electr. J.

Electr. J.

J. Environ. Econ. Manag.

Util. Policy

Energy Econ.

J. Environ. Econ. Manag.

Price discrimination

Effects of the change from rate-of-return to price-cap regulation

Am. Econ. Rev.

Rail Fares and Ticketing, Commons Briefing Paper SNO 1904