Abstract
In The Wealth of Nations, Adam Smith refers to two instances of price discrimination. In Book V, Chapter I, Part III, he ruminates on the problem of finding the best set of levies for toll roads and commends the practice of charging for luxurious carriages more than for working men’s wagons even though the vehicles are of the same weight. He suggests that the rich can subsidize the poor by this tariff scheme. In Book IV, Chapter V, he notes that some groups of producers have sold their produce abroad at lower prices than at home. He views this as cross-subsidization and deplores the high prices which he sees as resulting in the domestic market. Smith’s first problem, how to set tolls, has occupied economists to this day, although the solution was laid out in principle by Dupuit (1844) and with considerable precision by Edgeworth (1910): let each user’s levy in excess of his or her marginal cost of usage (which may be zero on a toll bridge) be proportional to his or her intensity of preference as expressed by his or her elasticity of demand. Edgeworth in fact worked out details of two sorts of price discrimination – that practised by a private profit-maximizing monopolist and that practised by a ‘state monopoly’ interested in raising Z dollars of profit from the users of the monopoly while at the same time reducing welfare as little as possible. The solution to this state monopoly or public utility pricing problem we refer to today as Ramsey pricing (Ramsey 1927, who attributes the idea for his paper to Pigou).
This chapter was originally published in The New Palgrave: A Dictionary of Economics, 1st edition, 1987. Edited by John Eatwell, Murray Milgate and Peter Newman
Similar content being viewed by others
References
Barone, E. 1921. Les syndicats (cartels et trusts). Revue de Métaphysique et de Morale 28(2): 279–309.
Dupuit, J. 1844. On the measurement of the utility of public works. Reproduced in Readings in welfare economics, ed. K.J. Arrow, T. Scitovsky, and American Economic Association. Homewood: Irwin, 1969.
Edgeworth, F.Y. 1910. Applications of probabilities to economics. Economic Journal 20: 284–304, 441–465. Reprinted in F.Y. Edgeworth, Papers relating to political economy, vol. II. New York: Burt Franklin, 1925.
Hartwick, J.M. 1978. Optimal price discrimination. Journal of Public Economics 9(1): 83–89.
Oi, W.Y. 1971. A Disneyland dilemma: Two-part tariffs for a Mickey Mouse monopoly. Quarterly Journal of Economics 85(1): 77–96.
Pigou, A.C. 1904. Monopoly and consumers’ surplus. Economic Journal 14: 388–394.
Pigou, A.C. 1920. The economics of welfare. London: Macmillan.
Ramsey, F. 1927. A contribution to the theory of taxation. Economic Journal 37: 47–61.
Robinson, J. 1933. The economics of imperfect competition. London: Macmillan.
Schmalensee, R. 1981. Output and welfare implications of monopolistic third-degree price discrimination. American Economic Review 71(1): 242–247.
Smith, A. 1776. The wealth of nations. Ed. E. Cannan, reprinted, New York: Modern Library, 1937.
Varian, H. 1985. Price discrimination and social welfare. American Economic Review 75(4): 870–875.
Yntema, T. 1928. The influence of dumping on monopoly price. Journal of Political Economy 36(6): 686–698.
Author information
Authors and Affiliations
Editor information
Editors and Affiliations
Copyright information
© 1987 The Author(s)
About this entry
Cite this entry
Hartwick, J.M. (1987). Discriminating Monopoly. In: The New Palgrave Dictionary of Economics. Palgrave Macmillan, London. https://doi.org/10.1057/978-1-349-95121-5_36-1
Download citation
DOI: https://doi.org/10.1057/978-1-349-95121-5_36-1
Received:
Accepted:
Published:
Publisher Name: Palgrave Macmillan, London
Online ISBN: 978-1-349-95121-5
eBook Packages: Springer Reference Economics and FinanceReference Module Humanities and Social SciencesReference Module Business, Economics and Social Sciences