Ramsey pricing

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A pricing policy that maximizes economic welfare subject to firms achieving given profit targets. If all firms produce with constant returns to scale and must break even then Ramsey pricing reduces to marginal cost pricing. If firms have increasing returns to scale and must break even then the mark-ups of the Ramsey prices over marginal cost are inversely related to the elasticity of demand. Ramsey pricing has been investigated in the context of public sector monopoly and regulated private sector natural monopoly. Ramsey pricing is closely related to the Ramsey rule for optimal taxation of commodities. See also inverse elasticity rule.

Subjects: Economics.

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