Volume 8, Issue 3

This paper examines the pricing of a utility with an underdeveloped network facing a competitive fringe, short-run network adjustment costs, theft of service, and the threat of retaliatory government intervention that is increasing with the price it charges. Under a variety of plausible assumptions (in the context of developing countries) the utility will find its long-run profits enhanced if it exercises pricing restraint in the early stages of network development. These findings provide some useful insights for the design of post-privatization regulatory governance in developing countries where years of price controls have contributed to choking off investment in network expansion.

We study the pricing and welfare implications of changing the VAT status of the national postal operator (NPO) from exempt to rated. We build a model where the NPO offers both single-piece and bulk mail to customers, some of them VAT rated, others VAT exempt. We solve for the optimal Ramsey prices under monopoly and under access-based competition for bulk mail. We finally perform numerical simulations in order to determine how prices, volumes and welfare might be affected by the change in the NPO’s VAT status, both under monopoly and under access-based competition for bulk mail.

This paper develops a new model, which allows for the co-existence of hub-and-spoke and point-to-point networks in the airline industry. Passengers are segmented between the non-stop and one-stop services. In the baseline model, the monopoly airline’s ability to segment the market and effectively set up the mixed network depends on the cost savings due to the through-hub service relative to exogenous quality difference between the one-stop and non-stop flights. Socially inefficient entry with the new non-stop service where an incumbent is operating the hub-and-spoke network is possible.

Rochet and Tirole have derived an elasticity rule for relative prices in two-sided markets. This rule is seen as counterintuitive because it seems to imply that the "more elastic side of the market" is charged more. In this note it is argued that this interpretation is based on the assumption that elasticity of demand can be treated as a parameter. If elasticity is treated as function of price, the Rochet-Tirole rule is perfectly in line with economic intuition.