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Second-degree price discrimination and universal access under (weighted average) price cap regulation

Li Ning, Jorge (2009): Second-degree price discrimination and universal access under (weighted average) price cap regulation.

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Abstract

This paper analyzes the efficiency of the Price Cap regulatory scheme and its impact on universal access, when the monopolist is allowed to set a menu of alternative plans as part of a self-selection strategy (second-degree price discrimination) and the cap is calculated as the weighted average of the tariff plans he offers. In this context, we characterized the solution of the monopolist; who, besides offering a menu of plans more distorted than the second-best outcome -even distorting the plan for high-valuation consumers- because the trade-off between efficiency and rents extraction is exhibited in different way, can exclude consumers who are willing to pay for the service -shutdown policy- despite of universal access obligation have been imposed by the regulator. This happens regardless of the weighted average price cap (WAPC) set by the regulator. Consequently, if the Price Cap regulatory scheme is going to be used by the regulator, this mechanism must be applied to a single regulated plan, leaving the monopolist some flexibility to offer alternative plans that will be incentive compatible with this single regulated plan (tariff flexibility).

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