Excessive Pricing: Towards A Workable And Objective Rule

By Eduardo Saavedra & Javier Tapia – 

In this short note, we aim to advance towards the creation of a workable and objective rule for determining when a price should be deemed excessive – minimizing, at the same time, the risk of damaging innovation or research and development. We propose and formalize a test that combines different benchmarks to set a threshold. In a nutshell, if the price a super-dominant firm actually charges is below the threshold, there should be no review of the price. Conversely, if the price a super-dominant firm charges is above the threshold, the firm must justify why it is charging a price that exceeds such a level. The threshold is the maximum between two alternative prices: the optimal price estimated from a utilitarian planner that maximizes total welfare, and the price the dominant firm actually charges in a static equilibrium considering a previously defined market share. Nevertheless, even if the actual price is above the threshold, the super-dominant firm may still claim that it is economically justified. We scrutinize some possible justifications.