Optimal Pricing for Natural Monopoly

• Marginal Cost pricing implies losses and the need for subsidy

• Optimal second-best pricing (Ramsey Pricing)

Ramsey Pricing

1 1 2 211 22

1 2

p mc p mcR

p p

Cross-Subsidization and Ramsey Pricing

• Stand-Alone Cost test (SAC)

( )i i ip q SAC q

The Incremental-Cost Test

( )i i i ip q IC q