CHAPTER 13. PRICING PRACTICES.......................................................................................

1
SECTION 1. MARKET EQUILIBRIUM, SHORTAGES AND SURPLUSES..........................1
EXAMPLES: Price Controls in Different Kinds of Markets..........................................4
SECTION 4. RETURN ON INVESTMENT................................................................................6
A. The Permitted Rate of Return............................................................................................6
B. The Rate Base.......................................................................................................................6
SECTION 5. PRICE DISCRIMINATION AND PEAK LOAD PRICING..................................8
A. Peak Load Pricing................................................................................................................9
B. Price Discrimination............................................................................................................9
1. Third Degree Price Discriination......................................................................................!
". Second degree #rice discriination...................................................................................1"
$. %irst Degree Price Discriination.....................................................................................14
SECTION 6. MULTIPLE PRODUCT PRICING......................................................................15
". Tied Prod&cts....................................................................................................................1'
EXAMPLE: T(ing )oe )ealth Care to )os#ital Ser*ices...........................................1+
SECTION 7. CONCLUSION.................................................................................................16
CHAPTER 1. PR!C!"# PRACT!CE$
The ,.S. go*ernent contin&all( redisco*ers the *ariet( and co#le-it( of anageent
techni.&es /hen it atte#ts to control anagerial discretion. 0n this cha#ter1 /e /ill foc&s on the
last large scale ,.S. go*ernent atte#t to control #ricing in /hich the go*ernent learned the hard
/a( a2o&t different #ricing techni.&es. %ro this e-ercise it /ill 2e #ossi2le to re*ie/ *ario&s
#ricing techni.&es and ho/ anagers o#tii3e /hen &sing se*eral instr&ents si&ltaneo&sl(. Most
i#ortantl(1 it /ill 2e a##arent that rigid #ricing r&les do not /ork /ell for go*ernent or for firs.
SECTION 1. MARKET EQUILIBRIUM, SHORTAGES AND SURPLUSES
0n arkets /here one( is &sed1 2&(ers and sellers #ro*ide the detailed inforation /ith
/hich to esta2lish #rices for the goods that are traded. This inforation is e-treel( detailed and
a##lies to the oent at /hich trade occ&rs. )o&rs later a ne/ set of circ&stances in*ol*es a ne/
set of inforation and #rices can draaticall( change. That4s the reason that #eo#le sit at their
co#&ter terinals all da( or stand in the #it at f&t&res arkets or hang 2( the tele#hone /aiting for
deals5 circ&stances are al/a(s changing. These #eo#le are /aiting for inforation a2o&t the s&##l(
and deand conditions that affect the #rice each oent and the( can ake a lot of one( si#l(
2( taking ad*antage of the changes in #rices d&e to the oent6to6oent changes in inforation
a2o&t s&##l( and deand.
The deand is /hat 2&(ers are /illing and a2le to 2&( at different #rices d&ring a gi*en
#eriod1 ceteris #ari2&s 7holding other factors constant8. This deand is affected 2( certain
9deand deterinants9 7see cha#ter '8. :n the other hand1 s&##l( indicates /hat sellers are
/illing and a2le to #ro*ide at different #rices d&ring a gi*en tie #eriod1 ceteris #ari2&s. The
s&##l( is affected 2( s&##l( deterinants. These are the sae infl&ences that /o&ld affect a fir4s
arginal cost c&r*e 7see cha#ter ;8. The .&antit( s&##lied is sensiti*e to #rice1 <&st as the .&antit(
deanded is. =hile the deand c&r*e sho/s the .&antit( deanded 2ecoes larger at lo/er
#rices1 the s&##l( c&r*e sho/s that the .&antit( s&##lied 2ecoes lo/er at lo/er #rices.
=here the s&##l( and deand c&r*es cross is the e.&ili2ri&. %ig&re 161 sho/s s&ch an
e%ui&i'rium. )o/e*er1 /hen decision aking is centrali3ed either 2( gi*ing #ricing a&thorit( to
the go*ernent or 2( gi*ing #rice a&thorit( to higher le*els of anageent /ithin a fir1 there is
likel( to 2e a loss of ca#a2ilit( to #rocess and &se the inforation necessar( to ake good #ricing
decisions. >ather than choosing a #rice that /ill 2e acce#ta2le to 2&(ers or sellers1 a #rice a( 2e
#icked that does not ?clear the arket.@ Clearing the arket eans that the .&antit( deanded and
the .&antit( s&##lied of a good or ser*ice are e.&al to each other. The econoic ter for s&ch
arket clearing is e.&ili2ri&.
0f centrali3ed #ricing decisions lead to a #rice that is 2elo/ this e.&ili2ri&1 then a
shortage res&lts 2eca&se 2&(ers /ill /ant to 2&( ore than the( /o&ld at the higher e.&ili2ri&
#rice /hile sellers /ill /ant to s&##l( less than the( /o&ld at the e.&ili2ri& #rice. At an( gi*en
#rice a shortage is the difference 2et/een the .&antit( deanded and the .&antit( s&##lied as
sho/n in %ig&re 161. S&ch shortages are not <&st ca&sed 2( go*ernent. The scal#ing that
occ&rs o&tside an( #ri*ate e*ents reflects the diffic&lt( of the #ri*ate s&##liers of these e*ents to
kno/ all of the conditions that affect their c&stoers4 /illingness and a2ilit( to 2&( tickets.
Scal#ing is the self6organi3ing 7and often illegal8 acti*it( that arises to eliinate a shortage.
Soeties1 shortages are si#l( a arketing #lo( to call attention to a #rod&ct1 as in the Ca22age
#atch doll cra3e.
A&t it is not <&st shortages that can 2e created 2( centrali3ed decision aking. 0f #rices
are set a2o*e an e.&ili2ri& #rice1 then there /ill 2e a s&r#l&s 2eca&se 2&(ers /ill /ant to 2&(
less than the( /o&ld at the lo/er e.&ili2ri& #rice /hile sellers /ill /ant to s&##l( ore than
the( /o&ld at the lo/er e.&ili2ri& #rice. At an( gi*en #rice a sur(&us is the difference 2et/een
the .&antit( s&##lied and the .&antit( deanded as sho/n in %ig&re 161.
%ig&re 1$61. E.&ili2ri& and S&##l( and Deand
Price
B&antit(
S&##l(
Deand
Price )&oor
Price Cei&ing
$H*RTA#E
$+RPL+$
C:TE: The e.&ili2ri& #rice in a arket occ&rs /here the s&##l( and deand c&r*es intersect.
0f #rices are 2elo/ the e.&ili2ri& le*el1 then a shortage e-ists. 0f #rices are too high then a
s&r#l&s /o&ld occ&r.
=hene*er a arket is in dise.&ili2ri& there are nat&ral arket forces that /ill tend to #&sh
#rices 2ack to the e.&ili2ri& le*el. =hen there are s&r#l&ses there are .&e&es of sellers 7or their
ca#acit( to #ro*ide ser*ice8 standing aro&nd or .&e&es of goods or ser*ices that are sitting in
in*entor( or on the 2ooks. S&ch s&r#l&ses often res&lt fro (rice f&oors 7constraints on ho/ lo/
#rices can 2e set8. =hen there are shortages there are .&e&es of 2&(ers1 and s&ch shortages often
res&lt fro (rice cei&ings 7constraints on ho/ high #rices can 2e set8. Aoth .&e&es of #eo#le and
.&e&es of goods1 ser*ices1 and ca#acit( are e-#ensi*e1 and the #eo#le e-#erience those e-#enses /ill
gladl( ake a c&t rate deal to lo/er those costs6 e*en illegall(.
0n tra*eling aro&nd the /orld1 /e often confronts sit&ations in /hich #eo#le are ada#ting to
dise.&ili2ria. A( /atching /hat is ha##ening /e can identif( /hat arket is in dise.&ili2ri& 2( the
kinds of acti*ities that #eo#le are engaged in. =hen s&r#l&ses occ&r1 the sellers are e-#eriencing high
costs of holding the goods in in*entor( 1 holding onto #eo#le /ho aren4t /orking1 and holding
e-cess ca#acit( to ser*e c&stoers. The sellers /ill 2egin r&nning sales1 #ro*ide disco&nts1 and
lo/er #rices in an( n&2er of creati*e /a(s. 0f the #rice falls too far the( a( si#l( thro/ the
e-cess ite o&t and /rite it off as a total loss. There a( e*en 2e an illegal atte#t to find a /a( to
get ins&rance co#anies to #a( for the loss. ,ltiatel(1 s&r#l&ses lead to the e-it of firs in the
arket #lace.
=hen shortages occ&r1 the 2&(ers cannot get /hat the( /ant and the( intensel( look for
#eo#le /ho ha*e the scarce ite and 2id the #rice of the ite &#/ard. 0f #rices cannot 2e 2id
&#/ard1 2&sinesses or go*ernent &st find a /a( to ration the scarce ite. S&ch rationing incl&des
schees like ?first coe first ser*ed1@ lotteries1 or rationing co&#ons. 0ne*ita2l( #eo#le 2egin to
search /idel( for alternati*e so&rces of a coodit( and to trade aongst each other. 0f s&ch trade
is legal then it is called a ,hite market. 0f s&ch trading is illegal then the arket is called a '&ack
market. ,nfort&natel(1 in either t(#e of arket the seller does not get the 2enefit of the higher #rice
and therefore does nothing to eliinate the shortage.
0n this cha#ter se*eral Aerican e-#eriences /ith #rice controls are e-ained to see /hat
ha##ens6 or doesn4t ha##en in arkets /here centrali3ed control occ&r. The last nation/ide #rice
control #rogra occ&rred in the 1!DEs. )o/e*er1 there ha*e 2een *ario&s kinds of #rice controls in
s#ecific sectors incl&ding #&2lic &tilities1 health care1 energ(1 rental #ro#erties1 /age rates1 interest
rates1 and e-change rates. These t(#es of controls ha*e 2een fre.&ent and #er*asi*e eno&gh that a
great deal can 2e learned fro the a2o&t the diffic&lt( of centrali3ed decision aking6 /hether fro
the #&2lic sector or the #ri*ate sector.
EXAMPLES: Price Controls in Different Kinds of Markets
%ollo/ing are soe sit&ations that a##eared d&e to #rice controls that /ill test (o&r a2ilit( to
detect /hat kind of .&e&es are occ&rring1 /hat t(#e of #rice control 7ceilings or floors8 is in*ol*ed1
/hether there is a shortage or a s&r#l&s of the different ites in .&estion1 and /hat kind of arket
distortions res&lt fro the control:
1. Mini& /age. The ini& /age is onl( s#oradicall( reset 2( congress to reflect
inflation. =hen it is reset1 often the changes in /ages are *er( large. Sall 2&sinesses
and fars a( s&ddenl( find the( cannot afford to hire /orkers at the higher /age rate.
ACS=E>: The arket is the la2or arket and in this arket1 la2or is the seller. Since
sellers are /aiting aro&nd for <o2s1 the ini& /age is a #rice floor and has res&lted in
a s&r#l&s of la2or. So an( #eo#le isclassif( s&ch a sit&ation as a ?shortage of <o2s@
/hich /o&ld res&lt in an incorrect anal(sis of the s&##l( and deand conditions in the
la2or arket. An i#ortant side effect /o&ld 2e the &se of illegal iigrants in #lace of
Aerican la2or.
". :il Price Controls. 0n 1!D$6D4 there /ere #rice controls on oil in the ,nited States.
Long lines of #eo#le co&ld 2e seen at the ser*ice stations1 /aiting for a chance to fill &#
their cars. :ccasionall( #eo#le /o&ld #a( to take soeone else4s #lace at the gas #&#.
ACS=E>: The arket is the arket for gasoline. 0t is the 2&(ers /ho are standing in
line1 and therefore the go*ernent is i#osing a #rice ceiling. The rationing schee that
is 2eing &sed is a first6coe6first6ser*ed /hite arket in gasoline .&e&es. :ne of the side
effects of long lines /as irrita2ilit( and e*en acts of *iolence against ser*ice station
o/ners
$. E-change >ate for the Dollar. After =orld =ar 001 a fi-ed e-change rate /as esta2lished
&nder the Aretton6=oods onetar( s(ste in /hich c&rrencies /ere #egged to gold. A(
1!D11 the ,nited States /as r&nning large 2alance of #a(ent deficits /hich eant that
assi*e ao&nts of dollars /ere lea*ing the co&ntr(. These flo/s of dollars co&ld not 2e
s&stained 2( the gold that /e had in reser*e. England finall( told the ,nited States that it
/o&ld no longer acce#t the certificates the ,.S. &sed in #lace of gold. :n A&g&st 1'1
1!D11 the Ci-on Adinistration res#onded 2( taking the dollar off the gold standard and
letting it float against other c&rrencies. ACS=E>: The dollar is the arket. ,nder the
Aretton6=oods s(ste1 there /ere .&e&es of sellers of dollars /ho co&ldn4t get foreign
co&ntries to acce#t the. )ere there is a s&r#l&s of dollars1 and for the dollar the #rice
control 2ecae a #rice floor. :ne of the side effects /as that Aerican an&fact&rers
2ecae far less co#etiti*e than the Fa#anese or Gerans 2eca&se o&r c&rrenc( /as
o*er*al&ed.
4. >ent Controls. Man( co&nities in the ,nited States ha*e rent controls. 0n #laces
like Ce/ Hork1 the controls ha*e held rents do/n for so long1 that landlords ha*e not
ke#t &# their #ro#erties and renters cannot find a#artents to rent. ACS=E>: The
arket is rental a#artents1 and there are .&e&es of 2&(ers. This eans there are
shortages of a#artents and rent controls take the for of #rice ceilings. :ne of the side
effects is dila#idated rental ho&sing.
'. D>Gs. Diagnostic >elated Gro&#ings 7D>G8 are classifications that allo/ the
go*ernent to deterine the rate at /hich different kinds of edical #roced&res /ill 2e
rei2&rsed. Since an( #eo#le de#end &#on Medicare1 Medicaid and other go*ernent
#rogras the D>Gs effecti*el( set the #rice that can 2e charged. )o/e*er1 an( )M:s
/ithdre/ fro the Medicare #rogra 2eca&se go*ernent rei2&rseent rates /ere too
lo/. This left an( #eo#le /itho&t access to their doctors or /itho&t edical care.
ACS=E>: The arket is the health care arket1 and there are .&e&es of 2&(ers /ho are
not 2eing ser*ed. This eans there are shortages and the D>Gs &st 2e /orking as a
#rice ceiling. The side effect is #oor access and .&alit( of care.
Each of the cases in /hich shortages occ&rred /ere acco#anied 2( arket #ress&res to
raise #rices. Peo#le dealt in a 2lack arket1 /aited in a line1 #aid for soeone elseIs #lace in line1
sold ration tickets1 or &ndertook a host of other costl( techni.&es for co&nteracting the shortage.
The effect of all of these acti*ities /as to raise the costs of 2&(ing the coodit(. A&t /hile #rices
/ent &# to ration 2&(ers the( did not 2enefit the sellers to eliinate the shortage.
Each of the cases in /hich the s&r#l&ses occ&rred /ere acco#anied 2( arket #ress&res to
lo/er #rices. A&sinesses /anted to offer sales1 so&ght alternati*e arkets in /hich to sell the
#rod&ct1 donated it for h&anitarian #&r#oses1 or si#l( d&#ed it. A&(ers1 sensing their arket
#o/er1 2ecae harder negotiators. Again 2lack arkets for the #rod&ct a##eared1 2&t the 2lack
arket #rice /as &nder the list #rice or s&##ort #rice. The effect of all of these acti*ities /as to
lo/er the #rice of the coodit(. Prices generall( /ent do/n to #ro*ide ore #rod&ct to 2&(ers
and lo/er incenti*es to s&##liers1 2&t if #rices /ere not allo/ed to change the ill effects of the
s&r#l&s #ersisted and intensified.
The go*ernentIs e-#erience ser*es as a lesson for anagers of #ri*ate firs. Managers of
#ri*ate firs can ake the sae istake as the go*ernent 2( i#osing rigid for&las on #ricing.
The( can ind&ce shortages <&st as easil( as the go*ernent can fro rigid #ricing. =e contin&all(
see e*idence of these #ri*ate arket shortages incl&ding the scal#ing that goes on at a<or #la(off
gaes1 the cr&shing lines at a<or s#orts e*ents and concerts1 the long /ait for the #o#&lar doctor1
the n&rsing shortage1 &na*aila2ilit( of ho&sehold hel# and 2a2(sitters1 the lines at 2ank teller and
resta&rant carr( o&t /indo/s1 the cro/ding of high/a(s1 the o*er &tili3ation of recreation facilities
or #arks1 the o*er2ooking of hotels1 etc.
SECTION 4. RETURN ON INVESTMENT
0n long r&n decisions a2o&t a ne/ #rod&ct or the contin&ation of an old #rod&ct1 anagers
often /ant to see ho/ the ret&rn on in*estent on one #rod&ct co#ares /ith the ret&rn on others.
0n doing so1 the anager is assessing the o##ort&nit( cost of an in*estent. S&##ose a "EJ ret&rn
can 2e earned on in*estents /ith siilar risks else/here5 then the anager ight set a target rate
of return 7K8 of "EJ. The #rice1 deterined on the 2asis of the target rate of ret&rn1 de#ends &#on
the ao&nt of in*ested ca#ital 7K8 needed to #rod&ce the standardi3ed *ol&e 7BL8 as follo/s:
74618 P M ,N O ,% O KLKPBL
:nce again e-#licit costs are incl&ded in the standardi3ed &nit cost 7,NO,%85 i#licit costs are
co*ered 2( the satisfactor( #rofit 7KLKP BL8. 0f 1E &nits of a ne/ #rod&ct had a &nit cost of Q;1 2&t
Q$E had to 2e in*ested to #rod&ce the ite1 then a #rofit of Q+ 7M"EJLQ$E8 /o&ld 2e needed to
reach a "EJ target rate of ret&rn. This /o&ld translate into a #rice of Q;.+E #er &nit 7MQ;O7Q+P1E
&nits88.
There is one t(#e of ind&str( in /hich ret&rn on in*estent has 2een &sed e-tensi*el( as a
eans to control #rices5 &tilities1 #artic&larl( electric &tilities. %ro this ind&str( /e can learn a great
deal a2o&t the diffic&lties #rice control and #ricing &sing a target ret&rn on in*estent criterion.
A. The Permitted Rate of Return
A stateIs right to reg&late &tilit( rates /as affired in 1;DD 2( the S&#ree Co&rt in the case
M&nn *s. 0llinois 7!4 ,.S. 11$ 71;DD88. A&t that decision also &shered in a cent&r( of s.&a22les
a2o&t ho/ to eas&re the ret&rn on in*estent.
A &tilit( reg&lator t(#icall( set a gi*en 9fair rate of ret&rn9 for a &tilit(. This fair rate of
ret&rn1 r1 &lti#lied 2( the &tilit(Is in*estent 7K8 deterined its a-i& allo/a2le #rofit:
746"8 allo/a2le #rofit M rLK
Generall(1 there /as little #ro2le deterining the fair rate of return1 r. The fair rate of ret&rn /as
often co#&ted 2ased on the ret&rn fro arket o##ort&nities that /ere ost siilar in risk and
*al&e to those of the &tilit(. A &tilit( coission co&ld choose a arket rate of ret&rn for siilar
in*estents /ith siilar degrees of risk.
B. The Rate Base
)o/e*er1 the le*el of in*estent1 K1 /as the s&2<ect of e-tensi*e de2ate and legal /rangling.
The #ro2le /as to deterine ho/ to eas&re a &tilit(Is in*estent1 /hich /as called its rate 'ase.
There are three theoretical a##roaches for eas&ring the rate 2ase:
7a8 :riginal or 9)istorical9 Nal&e. As its nae i#lies1 a fir can *al&e its ca#ital 2ased on the
act&al dollar cost6 origina& cost6 at /hich it /as #&rchased. )o/e*er1 /ith inflation s&ch a
*al&ation &nderstates the c&rrent *al&e of the ca#ital.
728 >e#rod&ction Nal&e. 0f a &tilit( /ished to 2&( or sell its identical facilities on the arket at
c&rrent #rices1 it co&ld co#&te the total c&rrent *al&e or re(roduction -a&ue of its
facilities. This is the kind of *al&e estiation that 2ecoes i#ortant /hen a co#an( is
li.&idated. )o/e*er1 since a &tilit( is o2ligated to #ro*ide ser*ice1 it does not acc&ratel(
re#resent the cost of #ro*iding that ser*ice. 0ts c&rrent facilities are likel( to 2e o&t6of6date.
Co#ara2le facilities a( not 2e fo&nd on the arket1 and that akes *al&ation diffic&lt.
The fir /o&ld not atte#t to 2&( the sae facilities e*en if the( /ere a*aila2le1 #referring
instead to ado#t the latest technolog(.
7c8 >e#laceent Nal&e. 0deall( a fir /o&ld re#lace de#reciated facilities /ith the latest
technolog(. The re(&acement -a&ue is the c&rrent arket *al&e of the firIs ca#acit(1 2ased
on the latest technolog( that /o&ld achie*e the firIs c&rrent #rod&ction ca#acit(.
0f a &tilit( coission /ere to restrict the firs &nder its <&risdiction to a ethod /hich res&lted in
too sall a *al&ation of a firIs in*estent1 #rofits and ser*ices /o&ld 2e s.&ee3ed1 aking f&rther
in*estent ca#ital hard to raise. :n the other hand1 if the *al&ation /ere too high1 the fir /o&ld
ake s&ch high #rofits that its stock /o&ld 2e 2id &# and the &tilit( /o&ld tend to o*ere-#and.
The S&#ree Co&rt tried to resol*e the *al&ation #ro2le 2efore the t&rn of the cent&r(. 0n
S(th *s. Aes 71+! ,.S. 4++ 71;!;881 it created the conce#t of 9fair *al&e9 /hich failed to 2e
s#ecific and also #ro*ided a isleading s&ggestion a2o&t ho/ fair *al&e ight 2e deterined. The
ne/ 9fair *al&e9 criterion /as coonl( inter#reted as an a*erage of the original and re#rod&ction
*al&ation ethods1 2&t it #ro*ided the 2asis for assi*e litigation. %inall(1 in %ederal Po/er
Coission et. al. N. )o#e Cat&ral Gas Co. 7$"E ,.S. '!1 71!44881 the S&#ree Co&rt got a/a(
fro defining fair *al&e. 0t left that &# to the reg&lators as long as the reg&lator( decision #rocess
/as 9<&st and reasona2le.9 Man( of the reg&lators then ado#ted the fla/ed1 2&t relati*el( si#le
original cost ethod of *al&ation of the rate 2ase. A&t there /as no coon #roced&re aongst the
reg&lators.
E*en if an ade.&ate rate 2ase is esta2lished1 a rate of ret&rn control #ro*ides &ndesira2le
incenti*es for a &tilit(. :nce a coission has deterined ho/ it /ill eas&re the rate 2ase1 the
&tilit( has an incenti*e to s#end as &ch one( as #ossi2le to ake the rate 2ase larger.
E-#endit&res on in#&ts s&ch as la2or /hich do not raise the rate 2ase are likel( to 2e held do/n.
)o/e*er e-#endit&res on #lant and e.&i#ent /hich are incl&ded in the rate 2ase are likel( to 2e
fa*ored. Econoists ha*e eas&red a 2ias to/ard e-cessi*e ca#ital e-#endit&re relati*e to
e-#endit&res on other factors. This 2ias is called the A-erch./ohnson effect.
1
A&t the effect is
ore easil( ree2ered as ?gold6#lating.@
SECTION 5. PRICE DISCRIMINATION AND PEAK LOAD PRICING
The #ro2le /ith &sing an( #ricing for&la as a rigid g&ideline is that the for&la can
interfere /ith the rationing f&nction that #rices sho&ld #erfor in a arket econo(. Prices ser*e as
a arket signal to 2&(ers and sellers. >ising #rices constrain 2&(ers /illingness and a2ilit( to 2&(
and can therefore alle*iate shortages. %alling #rices ena2le sellers to clear o&t &n/anted in*entories
that res&lt fro s&r#l&ses. 0f a fir is rigid in its #ricing it a( not 2e a2le to ad<&st its #rices
a##ro#riatel( to eliinate s&r#l&ses or shortages.
1
)ar*e( A*erch and Leland L. Fohnson1 9Aeha*ior of the %ir &nder >eg&lator( Constraint19
Aerican Econoic >e*ie/ '" 7Dece2er 1!+"8: 1E'"6+!. A good1 tho&gh dated s&r*e(
concerning this effect can 2e fo&nd in Eli3a2eth Aaile(1 Theor( of >eg&lator( Constraint 7Le-ington1
Mass.: Le-ington1 1!D$8
To 2e fle-i2le eno&gh to a*oid shortages and s&r#l&ses1 a fir a( ha*e to 2e skilled in
ad<&sting #rices ra#idl(. E*en /ithin the #eriod of a single da(1 deand a( fl&ct&ate 2et/een #eaks
and *alle(s and a single #rice /o&ld e-acer2ate s&ch fl&ct&ations. 0n s&ch circ&stances a fir
sho&ld 2e skilled at (eak &oad (ricing in /hich it charges higher #rices for c&stoers 2&(ing /hen
deand is greatest. Different c&stoers a( ha*e different ca#a2ilities to #a(. A fir charging
different #rices 2ased on c&stoer a2ilit( to #a( is &sing (rice discrimination to ration goods and
ser*ices. Aeca&se go*ernents ha*e learned so &ch a2o&t these t/o #ricing techni.&es fro
closel( reg&lating &tilities1 /e also /ill &se &tilities to learn a2o&t the conditions &nder /hich
different #rices sho&ld 2e charged /ithin a single arket.
%ig&re '61. Peak Load Pricing
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B&antit( 7EEEs K/h8 0 6 9
Peak
Deand
E1(anded
Ca(acit2
:ff
Peak
Deand
Ma!"#a$ C%&'
3 *ff Peak Price
Ma!"#a$
C%&'
B()%(
(*+a#&"%#
Ma!"#a$
C%&'
A)'(
(*+a#&"%#
Peak Price Before e1(ansion
Peak Price
After e1(ansion
4.5
5.6
C:TE: =ith #eak load #ricing a fir can finance e-#ansion to the #oint /here #eak and off6#eak
#ricing /ill 2e the sae.
A. Peak Load Pricing
Aeca&se of reg&lator( lag in granting #rice increases1 inflation1 or restrictions 2( reg&lators a
&tilit( co#an( a( find that there is a greater .&antit( deanded than it has the ca#acit( to #ro*ide.
This ca#acit( shortage is likel( to occ&r onl( at certain #eak #eriods. %ig&re '61 sho/s the short r&n
arginal cost c&r*e of a &tilit( /hich has the ca#acit( to #rod&ce +EEE kilo/att ho&rs of electricit(.
Cotice that deand d&ring #eak #eriods of tie is to the right of the deand at non6#eak #eriods.
To ration the electricit( efficientl(1 the &tilit( sho&ld raise the #rice it charges to #eak &sers to the
#oint /here deand intersects #rice 7at a2o&t QD.'E #er tho&sand K=h in the %ig&re8. )o/e*er1 if
s&ch a #rice /ere charged for off #eak &sers1 the &tilit( /o&ld dro# its re*en&es as off #eak sales
dro# fro + to 4 K=h. The sol&tion is to charge off6#eak &sers the arginal cost of #ro*iding the
electricit( 7at Q'.EE #er tho&sand K=h8 and charge the cost of e-#ansion to the #eak &sers 7at
QD.'E8. S&ch a &lti#le #rice a##roach is called (eak &oad (ricing.
The additional re*en&es fro #eak load #ricing can 2e rein*ested to e-#and ca#acit(. =hen
ca#acit( is e-#anded eno&gh to co*er #eak and off6#eak deand1 the #rice for the t/o ser*ices /ill
con*erge. 0n %ig&re '611 the &tilit( co&ld e-#and to ! K=h in order to eliinate the #rice
differential. 0f a #rice reg&lator ignores #eak load #ricing1 it can ca&se shortages res&lting in
2ro/no&ts or 2lacko&ts5 2efore the &tilit( e-#ansion in %ig&re '61 s&ch shortages /o&ld ha*e
occ&rred at an( #rice 2elo/ QD.'E for #eak deand.
B. Price Discrimination
Peak load #ricing is not the onl( rationale for charging different rates for different c&stoers.
Price discrimination occ&rs /hen c&stoers are charged different #rices for the sae good or
ser*ice1 and /hen the difference in #rice is not related to differences in the cost of #ro*iding ser*ice.
Three t(#es of #rice discriination are defined in econoics:
718 Third degree (rice discrimination occ&rs /hen a fir can identif( gro&#s of 2&(ers /ho
can 2e charged different #rices for the sae #rod&ct.
7"8 $econd degree (rice discrimination occ&rs /hen a fir can charge different #rices for
additional increents of one #rod&ct to a single c&stoer 7or single c&stoer gro&#8.
7$8 )irst degree (rice discrimination occ&rs /hen a fir can charge different #rices for each
additional &nit of o&t#&t according to /hat each c&stoer is /illing and a2le to #a(.
A se#arate anal(sis is re.&ired for each of these three t(#es of discriination.
1. Third Degree Price Discriination
A &tilit( can often segent its arkets 2ased on characteristics of its c&stoers. The ke( to
s&ccessf&l segentation is the a2ilit( to #re*ent c&stoers /ho are charged higher #rices fro
disg&ising thesel*es to .&alif( for lo/er rates and to #re*ent the fro 2&(ing fro the c&stoers
/ho .&alit( for lo/er #rices. Airlines can s&ccessf&ll( segent 2( gi*ing lo/er rates to c&stoers
/ho can #lan in ad*ance. ,tilities are a2le to differentiate 2et/een residential1 coercial1 and
ind&strial &sers.
:nce an effecti*e 2asis for arket segentation and the deand for each arket segent
has 2een fo&nd1 the #rofit a-ii3ation r&le can 2e a##lied. 0t re.&ires the hori3ontal s&ation of
arginal re*en&e c&r*es of the se#arate arkets to deri*e the arginal re*en&e c&r*e for the
co2ined arkets. %ig&re '6" sho/s the h(#othetical deand and arginal re*en&e for ind&strial
7center8 and residential 7left8 &sers. Ass&ing there are no coercial c&stoers1 /e can deri*e the
arginal re*en&e c&r*e for offering ser*ice to 2oth arkets 7right hand diagra8. %or each le*el of
arginal re*en&e1 the corres#onding .&antities in the residential and ind&strial arket are added
together to find the co2ined arginal re*en&e c&r*e.
The #rofit a-ii3ation condition re.&ires that arginal re*en&e of the co2ined arkets
e.&als arginal cost. )o/e*er1 the #ricing in the t/o arkets &st 2e se#arate. Theoreticall( to
kee# track of ho/ to deterine o#tial #rod&ction le*els for t/o arkets1 a anager can follo/ the
follo/ing fo&r ste#s1 as ill&strated in %ig&re '6":
Ste# 1. )ind the com'ined out(ut for each (ossi'&e margina& re-enue &e-e&.. %or
e-a#le1 one arket #rod&ces a arginal re*en&e of Q$.EE #er K/h /hen 1;EE K/h is sold
/hile in the other arket onl( that arginal re*en&e occ&rs after onl( DEE K/h is achie*ed.
0n the co2ined arket the Q$.EE arginal re*en&e is achie*ed /ith #rod&ction of "'EE
K/h. 0f an( ore /ere #rod&ced arginal re*en&e /o&ld fall in 2oth arkets.
Ste# ". #ra(h the cumu&ati-e 7R cur-e. At each arginal re*en&e le*el a gra#h of the
c&&lati*e arginal re*en&e c&r*e can 2e constr&cted as sho/n on the right hand side of
%ig&re +6". This gra#h is si#l( the hori3ontal s& of the o&t#&ts c&&lated at each le*el of
arginal re*en&e in the t/o arkets se#aratel(. These indi*id&al arkets are de#icted in the
left hand and center gra#hs.
Ste# $. 7C3 Cumu&ati-e 7R. ,sing the ne/ arginal re*en&e c&r*e in the right hand
gra#h1 find /here arginal re*en&e and arginal cost of the <oint #rod&cts are e.&al. This
arks on the X6a-is the #rofit a-ii3ing o&t#&t for the t/o goods.
Ste# 4. Read the (rice off the demand cur-es in the indi-idua& markets. %or the
arginal re*en&e 7Q!.'E8 /here MCMc&&lati*e M>1 go 2ack to the indi*id&al arkets and
find the associated o&t#&ts and #rices. Cotice that the #rices in the t/o arkets are different.
0n one arket1 the deand c&r*e associated /ith a arginal re*en&e of Q$.EE corres#onds to
a #rice of Q"'.EE1 2&t in the other arket the deand c&r*e sho/s that the #rice /o&ld onl(
2e Q"E.EE. The differences 2et/een the t/o arkets reflect the differences in the elasticities
of deand in the t/o se#arate arkets.
%ig&re '6"
Hori8onta& Addition of 7argina& Re-enue
9.50
3.00
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1.; .D ".'
>esidential 7K/h8 O 0nd&strial 7K/h8 M Total Marginal >e*en&e
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>esidential
Deand
0nd&strial
Deand
R(&",(#'"a$
Ma!"#a$
(-(#.(
I#,.&'"a$
Ma!"#a$
(-(#.(
H%"/%#'a$
S.0 %)
Ma!"#a$
(-(#.(
Marginal cost
7C37R
Residentia&
Price
!ndustria&
Price
$
12 1a
4a
42
"
95.66
96.66
C:TE: Marginal re*en&e c&r*es in the t/o arket segents are added hori3ontall( to arri*e at the
arginal re*en&e c&r*e for the co2ined arket.
=hile a anager is not generall( going to gra#h the arginal re*en&e and arginal cost
c&r*es <ointl( for <oint #rod&cts1 the anager &st 2e a/are of the co#le- /a(s that the arkets
for <oint #rod&cts interact /ith each other and &st reali3e ho/ the #rice sensiti*it( 7in other /ords1
the elasticit(8 in the different arkets re.&ires different #rices. A( kno/ing the reasoning i#licit in
%ig&re '6"1 a anager is not e2arrassed a2o&t charging different #rices in different arkets1 2&t
kno/s ho/ to <&stif( and e-#lain /h( it is necessar( to charge different #rices if ade.&ate rationing
and o#tial #rofit are to 2e achie*ed.
=ith inforation a2o&t deand in each of its arket segents a &tilit( co&ld deterine /hat
#rice to charge in each arket. Gi*en the #rice elasticit( of deand1 i1 for each gro&#1 i1 the #rofit
a-ii3ing o&t#&t /o&ld 2e esta2lished 2( the follo/ing for&la:

7'618 P M MC P 71 O 1Pi 8
0t a##lies to each gro&# 7residential coercial8 se#aratel(1 rather than to a /hole arket. 0f
allo/ed to discriinate in #rices1 a &tilit( /o&ld need to kno/ the #rice elasticit( of deand for each
of its gro&#s in order to deterine the a##ro#riate #rice.
S&ccessf&l $rd degree #rice discriination can onl( 2e #racticed in arkets /here a fir has
the discretion to charge different #rices and /here it is #ossi2le to gro&# c&stoers into se#arate
arkets. 0n other /ords1 a &tilit( /o&ld not /ant to see residential &sers 2&(ing electricit( indirectl(
fro ind&strial &sers. S&ch secondar( arkets #re*ent s&ccessf&l arket segentation. %inall(1 the
elasticities of deand &st 2e different for each gro&#. 0f the reso&rces associated /ith #rice
discriination and the cost of arket segentation is greater than the re*en&e generated fro #rice
discriination1 then $rd degree #rice discriination a( not 2e /orth/hile. =hen ne/ technologies
s&ch as icro6t&r2ines allo/ c&stoers to sell to other c&stoers1 a &tilit( a( lose #rofit #otential
2( not kno/ing ho/ to discriinate 2et/een different arkets.
". Second degree #rice discriination
0n order to #ro*ide the ao&nt of ser*ice re.&ired 2( c&stoers1 &tilities a( ha*e to
discriinate in #rices in order to 2e #rofita2le. %ig&re '6$ sho/s a &tilit( /ith a do/n/ard slo#ing
long r&n a*erage cost c&r*e. E*en if the a*erage costs /ere not e*er(/here a2o*e deand1
econoies of scale /o&ld ean that the &tilit( /o&ld face losses if it tried to #rice at arginal cost.
70n cha#ter ; /ith econoies of scale /e sa/ that arginal cost /o&ld 2e 2elo/ a*erage costs and
#rice /o&ld therefore 2e 2elo/ a*erage cost8.
Allo/ing a fir to #ro*ide disco&nts for large .&antit( #&rchases can #ro*ide additional
re*en&es /itho&t an( increase in cost. S&ch .&antit( disco&nts a##ear e*er(/here fro the factor(
to the grocer( store. Aeca&se the #rices *ar( /ith 2locks of o&t#&t 9nd degree (rice
discrimination is often called '&ock (rice discrimination. 0n dec&ining '&ock (rice
discrimination the #rices are lo/er for larger #&rchases. )o/e*er1 /ith en*ironentalist #ress&res
and the ina2ilit( to e-#and1 &tilities ha*e soeties 2een forced to eliinate s&ch discriination. 0n
fact1 if a &tilit( co&ld not e-#and e*en tho&gh deand /ere e-#anding it co&ld e*ent&all( 2e forced
to increasing '&ock (rice discrimination.
%ig&re '6$. Alock Price Discriination
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B&antit( 7K/h8 6 9
Deand
L%#! R.# Ma!"#a$ C%&'
L%#!
R.#
Ma!"#a$
C%&'
4.5
6.6
5.6
L%#!
R.#
A-(a!(
C%&'
Re-enue added ,:
Discrimination3
3;4.5.5.6<=63 15
Tota& Re-enue3 ;5.6=9<305
Tota& Cost 3 ;6=9<350
C:TE: 0f the fir /ere onl( to charge one #rice of Q'.EE #er K/h and /ere to #rod&ce !EEE K/h1
there /o&ld onl( 2e Q4'1EEE of re*en&e /hich /o&ld 2e less than the costs 7Q'41EEE8 of #ro*iding
the electricit(. A&t /ith second degree #rice discriination1 Q1'1EEE ore can 2e added. The first
2lock of re*en&e consists of + K=h at a #rice of QD.'E for a re*en&e contri2&tion of Q4'.EE. The
second 2lock of re*en&e consists of $ K=) at a #rice of Q'.EE /hich contri2&tes Q1'.EE of e-tra
re*en&e.
The &tilit( in %ig&re '6$ can increase its re*en&es 2( si#l( lo/ering its #rice for additional
increents of o&t#&t. 0n aking a 2id to install electric ser*ice1 a &tilit( ight offer QD.'E for the
first si- tho&sand K=h and then offer Q'.EE for the ne-t three tho&sand K=h1 as sho/n in %ig&re '6
$. LetIs see ho/ this #ricing schee /o&ld affect the &tilit(Is #rofits.
Table 5-1. Revenue effects of Price Discrimination
============================================================
Block Discrimination No Discrimination
(000/s !/"#$ !(000s !/"#$ ! (000s
%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%
1st & "#$ !'.50 !(5.00 !5.00 !)0.00
*n+ ) "#$ !5.00 ,!15.00 !5.00 ,!15.00
Total Revenue !&0.00 !(5.00
Total -ost !&.00 -!5(.00 !&.00 -!5(.00
Profit (.oss !&.00 -!/.00
0ain from Discrimination=-!&.00- (-/.00= !15.00
============================================================
N1T23 T$e 4rice an+ revenue +iffer onl5 for t$e first block of
out4ut. 6o7ever8 t$e e9tra revenue8 !15.008 from +iscrimination
allo7s t$e utilit5 to take a 4rofit rat$er t$an a loss.
>aising the #rice Q".'E on the first +EEE K=h 2lock generates another Q1'1EEE 7M+EEELQ".'E8 of
re*en&e as sho/n 2( the shaded area in %ig&re '6$. =ith this e-tra discriination1 the &tilit( can
ake a #ositi*e #rofit1 rather than a loss.
$. %irst Degree Price Discriination
0f the &tilit( /as allo/ed to charge e*er( c&stoer /hat each c&stoer /ere /illing and a2le
to #a(1 then the &tilit( /o&ld 2e &sing first degree (rice discrimination. %ig&re '64 sho/s that a
&tilit( /hich can &se 1st degree #rice discriination can ca#t&re the /hole area6 called consumer
sur(&us6 &nder the deand c&r*e. 0n %ig&re '641 the cons&er s&r#l&s is gi*en 2( the triangle
located 2et/een the deand c&r*e and the #rice charged 2( the &tilit(. This cons&er s&r#l&s
eas&res the #otential re*en&e fro charging all c&stoers the a-i& that each is /illing and
a2le to #a( for each &nit.
%ig&re '64. %irst Degree Price Discriination
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B&antit( 7EEEs K/h8 6 9
Deand
L%#! R.# Ma!"#a$ C%&'
L%#!
R.#
Ma!"#a$
C%&'
6.6
5.6
L%#!
R.#
A-(a!(
C%&'
16
Re-enue Added
3Consumer $ur(&us
3.5 ;16.5<=93 99.5
Tota& Re-enue3 ;5.6=9<305
Tota& Cost 3 ;6=9<350
C:TE: The shaded triangle is the cons&er s&r#l&s. Since the deand c&r*e is linear1 the area is
gi*en 2( the for&la: cons&er s&r#l&s M 1P" L o&t#&t L #rice difference
M 1P" L !EEE K=h L 7Q1E.EE6Q'.EE8 M Q"".'E
=ith #erfect inforation a2o&t cons&er deand a &tilit( co&ld deterine #recisel( /hat
#rice to charge each c&stoer for each &nit of o&t#&t. Gi*en the #rice elasticit( of deand1 <1 for
each c&stoer1 <1 the #rofit a-ii3ing condition /o&ld 2e:
7'6"8 P M MC P 71 O 1P< 8
A( no/ this condition sho&ld 2e failiar. )o/e*er1 no/ it a##lies to each indi*id&al se#aratel(1
rather than to a /hole arket or arket segent. Allo/ed to discriinate in #rices1 a &tilit( /o&ld
/ant to kno/ the #rice elasticit( of deand of each of its c&stoers in order to deterine the
a##ro#riate #rice.
=ith the a2ilit( to discriinate in #rice on e*er( &nit /ith res#ect to e*er( c&stoer1 the
&tilit( in %ig&re '64 /o&ld 2e a2le to ake a #rofit. At an o&t#&t of !EEE K=h1 total cost is Q'4EE.
>e*en&e /itho&t #rice discriination /o&ld 2e onl( Q4'EE 7M!EEEK/h L Q'.EE8. )o/e*er1 /ith
first degree #rice discriination1 the &tilit( can t&rn the f&ll cons&er s&r#l&s of Q""'E 7M71P"8L !EEE
K/hL 7Q1E.EE6Q'.EE88 into additional re*en&e. Total re*en&e is therefore1 Q+D'E 7MQ4'EEOQ""'E8
and total #rofit is Q1$'E 7MQ+D'E6Q'4EE8. The &tilit( is #rofita2le /ith first degree #rice
discriination. :f co&rse1 the &tilit( /o&ld ha*e to #re*ent the cons&ers fro getting together in
an( /a( to 2&( fro each other1 /o&ld ha*e to find #recise inforation on cons&er deand1 and
/o&ld ha*e to gain #erission fro reg&lators. These conditions are all *iolated for ost &tilities.
SECTION 6. MULTIPLE PRODUCT PRICING1 T"(, P%,.2'&
:ften 2&sinesses find that the( can ake a great deal of re*en&e 2( offering additional
#rod&cts1 #artic&larl( if the( ha*e arket #o/er in one arket. All the( need to do is to re.&ire
#eo#le /ho /ant the one 7t2ing< #rod&ct in /hich the co#an( has arket #o/er to 2&( the other
7tied8 good off of /hich the co#an( /ishes to ake additional re*en&e. S&ch a re.&ireent /as
once illegal #er se &nder the antitr&st la/s.
)o/e*er1 for decades Econoists .&estioned /hether t(ing of goods co&ld ha*e an(
redeeing *al&e. %irs ha*e goods or ser*ices tied together for an( reasons:
7a8 =hen a fir has arket #o/er in one arket or has a coodit( in short s&##l( 7t(ing
good81 it a( 2e a2le to rid itself of a s&r#l&s or a coodit( in /hich it has no arket
#o/er 7tied good8. 0n airline tra*el1 for e-a#le free &#grades to first class seats 7t(ing
good8 is tied to the n&2er of iles tra*eled thro&gh norall( #aid flights on an airline 7tied
good8.
728 =hen a fir introd&ces a ne/ #rod&ct1 it a( /ish to ens&re .&alit( ser*ice so that the ne/
#rod&ct /ill 2&ild good/ill ore .&ickl(. =hile t(ing is often illegal1
"
the S&#ree Co&rt
$
recogni3ed in a case in*ol*ing an electronics co#an( that t(ing ser*ice to a ne/ #rod&ct
#ro*ided a reasona2le &se of t(ing.
*
Section $ of the Cla(ton Act akes s&ch sales illegal if the( s&2stantiall( lessen co#etition.
)
,nited States *. Ferrold Electronics Cor#oration1 $+' ,.S. '+D 71!+18
7c8 A fir can often &se t(ing for the #&r#ose of 1st degree #rice discriination. S&ccessf&l
discriination re.&ires that the tied good &st 2e &sed in #ro#ortion to a c&stoerIs need for
the t(ing good 7eg. a caera or co#(ing achine8. 0n cha#ter 1E /e sa/ that #hotogra#hic
and co#(ing co#anies like Xero- co&ld ga&ge the needs of c&stoers 2( the n&2er of
co#ies or #hotogra#hs c&stoers ade. A( taking re*en&es fro the n&2er of co#ies ade
or the n&2er of #hotogra#hs taken 7tied good81 the co#anies co&ld set #rices 2ased on
relati*e needs for co#(ing ser*ices. This is a for of #rice discriination.
Aeca&se the deand for the t(ing good affects the deand for the tied good1 the( &st 2e #riced in
tande.
EXAMPLE: T(ing )oe )ealth Care to )os#ital Ser*ices
S&##ose the hos#ital offering hoe health care ser*ices 2egan to find that there /as stiff
co#etition fro other hoe health care agencies. The( ight decide to re.&ire an(one /ho is a
e2er of the hos#ital4s net/ork to &se hoe health ser*ices #ro*ided 2( the hos#ital. P&2licl( the(
ight clai that this /o&ld 2e the onl( /a( that the( co&ld ens&re .&alit( ser*ice.
A( aking s&ch a re.&ireent1 the hos#ital4s net/ork 2ecoes the tied good and the hoe
health care 2ecoes the t(ing good. S&ch a t(ing arrangeent a( force the hos#ital to s&##l( the
2&rden of #roof in an antitr&st case to sho/ ho/ their hoe health care /o&ld aintain .&alit( /hile
other hoe health ser*ices /o&ld not. 0n addition the( /o&ld ha*e the 2&rden to sho/ that the t(ing
arrangeent in*ol*es the least restricti*eness necessar( to aintain .&alit(.
$ECT!*" 4. C*"CL+$!*"
Price controls and inefficient #ricing contin&e to characteri3e an( arkets. Pri*ate firs
can 2e <&st as inefficient /ith centrali3ed #ricing as go*ernents can 2e /ith #rice controls.
=hene*er a rigid for&la or r&le6of6th&2 is a##lied to #ricing it ine*ita2l( ignores the changes
in &nderl(ing arket conditions /hich can lead to shortages or s&r#l&ses. %or e-a#le1 the Post6
office &ses one #rice for a first class sta#1 regardless of /here a #iece of ail is sent in the
,nited States. =hile it ight 2e ore efficient to charge on the 2asis of the distance that a letter
is sent1 s&ch a rigid for&la ight itself #ro*e inefficient. %or e-a#le1 for decades the steel
ind&str( #riced steel on the 2asis of the distance fro certain ke( steel centers. Cothing #oints
ore clearl( to the inefficiencies of s&ch #ricing schees than the co#etitors like %ede- and
,PS /ho coe into a arket and s&r*i*e #rofita2l( &nder ore fle-i2le #ricing schees.
=hile the last general #rice control #rogra ended in the decade of the 1!DEs1 #rice
controls are gro/ing in se*eral ind&stries. Most #roinentl( the( are a##earing in the )ealth
Care ind&str(. 0ronicall( it /as d&ring a conser*ati*e >e#&2lican adinistration /hen the first
ste#s to/ard #rice controls /ere &ndertaken in the health arket. >esearchers at Hale ,ni*ersit(
categori3ed diseases /ith a s(ste called Diagnostic >elated Gro&#s 7D>Gs8 /hich /ere a##lied
to hos#itals. These categories allo/ed the federal go*ernent to set liitations on
rei2&rseents thro&gh Medicare for #atients /ith different diseases. Then in 1!;! )ar*ard
researchers esta2lished a siilar s(ste1 the >eso&rce Aased >elati*e Nal&e S(ste 7>A>NS81 for
#h(sician rei2&rseent. Still ore recentl( researchers designed an ?APG@ s(ste to control
rei2&rseents for a2&lator(1 hoe health1 occ&#ational thera#(1 and #h(sical thera#( care.
S&ch categori3ation s(stes allo/ the go*ernent to control health care rei2&rseent.
)o/e*er1 as in an( #rice control1 inade.&ate rei2&rseent leads to shortages of ser*ices.
0ncreasingl(1 large gro&#s of the #o#&lation are finding shortages in health care co*erage or
.&alit( of health care as a res&lt. As s&ch s(#tos of dise.&ili2ri& /orsen1 the go*ernent
/ill again need to ste# in to refor the health care arket. =hile it is eas( to start a #rice control
#rogra1 #ast e-#eriences ha*e sho/n that it 2ecoes *er( diffic&lt to end s&ch #rogras. A&t if
#ri*ate arket #ricing is also inefficient1 there a( 2e little choice 2&t to rel( &#on go*ernent
in*ol*eent.
0CDEX
;tied< good.................................................15
A-erch./ohnson effect................................4
'&ack market...............................................0
'&ock (rice discrimination.......................19
consumer sur(&us......................................10
dise%ui&i'rium.............................................
e%ui&i'rium.................................................9
fair rate of return.......................................6
)irst degree (rice discrimination..............9
origina& cost................................................4
(eak &oad (ricing........................................>
(rice cei&ings................................................
(rice discrimination...................................>
(rice f&oors...................................................
rate 'ase......................................................6
re(&acement -a&ue.......................................4
re(roduction -a&ue.....................................4
$econd degree (rice discrimination..........9
shortage.......................................................9
sur(&us.........................................................9
target rate of return...................................6
Third degree (rice discrimination............9
t2ing< (roduct...........................................15
,hite market...............................................0