Natural Monopoly Pricing

Natural monopoly products (Nmps) have two properties: natural monopoly and quasi-public goods. Therefore, there are kinds of difficulties in the pricing. High monopoly price will appear under market pricing and cause inadequate consumption. To solve this problem, many scholars before 1970s proposed that the government should regulate the price of Nmps, using the 'visible hand' to correct the welfare losses due to monopoly. But because there are costs for regulation and information asymmetry, the result of the government's price regulation practice is not satisfying. So after 1970s, more and more theories suggest the government loose its price regulation. It is a long-lived issue of whether and how the government should take part in the pricing of Nmps.In China, before 1980s, Nmps were priced directly by the government and the monopoly enterprises lost heavily. In the recent twenty years, the government bends itself to loose the price regulation of Nmps to solve this problem, but the result is that the price of Nmps is high while the quality is not satisfying. Now, it has become one of the most serious and difficult problems in our price system. According to the behavior-choosing of government in the pricing, this article summarizes the traditional and the latest theories in the pricing of Nmps. These theories will be helpful to our country's current reform of Nmps pricing.There are five parts in this article.The first part is introduction. We mainly introduce the theoretical and practical meaning of this article, some important concepts, the structure and the new ideas of this article.The second part is the analysis of the government behavior in Nmps pricing. Firstly, we begin with the three kinds of difficulties, and then analyze the duties and policy-choosing of government in the pricing, pointing out that reasonable price of Nmps should lies between the average cost pricing point d and the marginal pricing cost c(Chart 2.1) and the government's inferior choice is "to realize the largest welfare while guarantee the income compensation balance"; Secondly, we adopt themix-strategy-supervision-play model in the information economics to analyze the cost-information-play between natural monopoly enterprises and the government's price-managing departments and point out that the realization of Nash-Equilibrium is connected with the false report cost A, penalty F and the inspection cost C; Lastly, we introduce briefly the price-managing system of the Nmps in advanced countries through three aspects: organization, pricing process and price-managing legislation.The third part is the pricing mode of Nmps. We introduce the condition, the model construction, virtues and shortcomings of the following six pricing modes: Ramsey Pricing, Fair Rate of Return Pricing, Price Cap Pricing, Yardstick Competition Pricing, Two-part Pricing and Volume Restrict Pricing.The fourth part introduces the new evolvement—Prompting Regulation. The Theory of Contestable Markets proposed by the American economist Baumol in 1981 provides the theoretical basis for the Prompting Regulation theory. Under the prompting regulation theory, the government can give up the traditional pricing models and compel the natural monopoly enterprises to price according to the cost and therefore obtain the normal market profit through the management design of simulation market. This article introduces that there are two kinds of prompting regulation: the license-bidding system and the area-competing system.The last part is a case study. We analyze the pricing of urban water according to the general theory of Nmps pricing. Urban water is typically a kind of Nmps. On the basis of analyzing the properties of urban water, this article firstly proposes the rule of urban water pricing, that is: full cost recovery, fairness, economic efficiency and management feasibility and efficiency. Then we analyze the status of our country's urban water pricing using a large amount of data and point out there are five serious problems: the integration price is low; the composition is unreasonable; the pricing mode is single; the classification of user is jumbled and the pricing process is not canonical. At last, we give due propositions of how to reform our country's urban water pricing.