IS PERFECT PRICE DISCRIMINATION REALLY EFFICIENT?: WELFARE AND EXISTENCE IN GENERAL EQUILIBRIUM

The authors examine the welfare properties of surplus maximization by embedding a perfectly discriminating monopoly in an otherwise standard Arrow-Debreu economy. Although they discover an inefficient equilibrium, the authors validate partial equilibrium intuition by showing that equilibria are efficient provided that the monopoly goods are costly and that a natural monopoly can typically use personalized two-part tariffs in these equilibria. However, they find that Pareto optima are sometimes incompatible with surplus maximization, even when transfer payments are used. The authors provide insight into the source of this difficulty and give some instructive examples of economies where a second welfare theorem holds.

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