Fuly Distributed Cost Pricing, Ramsey Pricing, and Shapley Value Pricing: A Simulated Welfare Analysis for the Telephone Exchange

Economic theory has long been concerned with determining the optimal pricing scheme for a multiproduct monopoly, but it has been quite difficult to make use of developments in practice. Using LECOM, the Local Exchange Cost Optimization Model, over three stylized city maps, and assuming price elasticity values taken from the literature for four standard outputs of the local exchange, we demonstrate how fully distributed cost prices, Ramsey-optimal prices, Shapley prices, and standalone prices can be computed for a variety of baseline output levels. Analysis of consumer surplus changes relative to the marginal cost baseline shows that while Ramsey pricing maximizes social welfare over the set of schemes considered, only the Shapley approach results in subsidy-free prices.