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Second-Best Pricing and Cooperation

Daniel F. Spulber
The RAND Journal of Economics
Vol. 17, No. 2 (Summer, 1986), pp. 239-250
Published by: Wiley on behalf of RAND Corporation
Stable URL: http://www.jstor.org/stable/2555387
Page Count: 12
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Second-Best Pricing and Cooperation
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Abstract

This article studies pricing for natural monopolies by using a cooperative game of joint production. Outputs are allocated by a price system. We introduce the concept of the second-best core, which is a subset of the set of zero-profit, second-best Pareto-optimal prices. Prices are such that no group of consumers subsidizes the purchase of another group. We consider the relations among the second-best core and sustainability, supportability, and natural monopoly. For specific preferences and technology we demonstrate the existence of the second-best core. We design a market mechanism for franchise allocation, which achieves second-best pricing without price regulation.

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