Constrained Monopoly Pricing with Random Participation

38 Pages Posted: 5 Jun 2008

See all articles by Gabriel Basaluzzo

Gabriel Basaluzzo

Centro de Investigacion Economica (ITAM)

Eugenio J. Miravete

University of Texas at Austin; Centre for Economic Policy Research (CEPR)

Date Written: December 2007


We present a flexible model of monopoly nonlinear pricing with endogenous participation decisions of heterogeneous consumers. We make use of the moments that define the few self-selecting tariff options that are commonly used to implement the optimal nonlinear tariff to estimate how demand and cost variables affect the pricing strategies offered by incumbent monopolists in several early U.S. local cellular telephone markets through the different elements of the theoretical model: marginal costs, average price sensitivity of demand, indexing parameters governing the distribution of the two-dimensional type components, support of the distribution of types, and costs associated to the commercialization of tariff options. The sources of identification are the position and shape of each tariff offered by monopolists, the actual number and features of the tariff options used to implement them, as well as a measure of market penetration in each cellular market during the first and last quarter of monopoly regime. We use our model and the structural estimates to provide a performance comparison (profit+welfare) of nonlinear tariffs relative to linear (uniform), optimal two-part, Coasian marginal cost-plus fixed fee, and flat tariffs. We furthermore evaluate the potential welfare gains of implementing universal service requirements.

Keywords: Nonlinear vs. Linear Pricing, Random Participation, Universal Service

JEL Classification: C63, D43, D82, L96

Suggested Citation

Basaluzzo, Gabriel A. and Miravete, Eugenio J., Constrained Monopoly Pricing with Random Participation (December 2007). CEPR Discussion Paper No. DP6620, Available at SSRN:

Gabriel A. Basaluzzo (Contact Author)

Centro de Investigacion Economica (ITAM) ( email )

Col. Heroes de Padierna
Mexico City, D.F. 10370
52-55-5628-4000 (2919) (Phone)


Eugenio J. Miravete

University of Texas at Austin ( email )

Department of Economics
1 University Station C3100
Austin, TX 78712-0301
United States
512-232-1718 (Phone)
512-471-3510 (Fax)


Centre for Economic Policy Research (CEPR)

United Kingdom

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