NONLINEAR PRICING AND PRICE CAP REGULATION

This paper analyzes profit-maximizing nonlinear pricing by a firm that is subject to price cap regulation. Two forms of regulatory constrain t are considered: (i) a cap on the firm's average revenue, and (ii) a constraint that the firm must continue to offer each consumer the opti on of buying at the uniform price. Optimal nonlinear price schedules i n these regimes are shown to have simple characterizations that are re lated to the nonlinear tariffs that an unregulated monopolist would ch arge. Of the regulatory regimes, the firm prefers the average revenue constraint to the option constraint and likes uniform pricing least. C onsumers in aggregate prefer the option regime to uniform pricing and like the average revenue constraint least, but there are also distribu tional effects between consumers. Although the optional tariff regime Pareto dominates uniform pricing, it is ambiguous whether welfare is h igher under uniform pricing or under the average revenue regime. An ex ample is used to illustrate the nature of the ambiguity.