Socially Optimal Pricing with Rivalry and Economies of Scale

This article examines the nature of economically efficient tariffs when there exists rivalry among firms that produce imperfectly substitutable outputs with economies of scale and that operate under a viability constraint. Pricing principles are derived and related to the rules developed in the literature for the regulated monopolist. For some firms excess profits may prevail at efficient prices, and the form of the inverse elasticity rule is altered in markets with rivalry. However, the standard efficient pricing rules and increased welfare results if regulators are empowered to implement lump-sum interfirm payments. A numerical example is provided.