Incremental Costs and Efficient Prices with Lumpy Capacity

The Two Product Case

by Rolla Edward Park

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Applies the theory of optimal pricing to local telephone service. The two products are patterned after two important products supplied by local exchange companies: access to telephone service (monthly subscriptions) and use of telephone service (local calls). Finds that (1) welfare-maximizing (optimal) constant prices offer only limited welfare gains over average incremental cost prices and (2) optimal variable prices offer proportionately much larger gains over Boiteux prices than do optimal constant prices.

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