Ramsey pricing

The implication of economic theory for price regulation is clear in this case policies that tend to force international prices to converge (price regulation based on comparisons between countries or parallel imports) are hkely to reduce welfare in the long run. The level of R D that can be financed would be lower with uniform prices than with Ramsey prices.613... 

The production efficiency properties of PCR are complemented by its allocation efficiency, as under certain restrictive conditions, the resulting price structure can in the long term converge with that of Ramsey prices, that is, it provides a solution to a problem of consumer surplus maximization... 

PRICE DISCRIMINATION, RAMSEY PRICING AND EQUITY PRICING... 

A similar model is provided by what is called Ramsey pricing, after the economist Frank Ramsey.1213 This author showed that if the above conditions for market segmentation are fulfilled, social welfare is maximized in a particular market when the profit margin that is added to the marginal cost of production in order to determine the ex-factory price is inversely proportional to the price elasticity of demand. In other words, the price is always fixed above the marginal cost in order to recover the sunk costs, but this margin is inversely proportional to the sensitivity of demand in that market. Formally, this can be expressed as follows ... 

Table 5.2 Comparison of the results of the hypothetical application of a single price or Ramsey prices in a two-country model...

Figure 5.1 Result of establishing a single price and Ramsey prices...

The main difference between price discrimination and Ramsey pricing is that the former model results in the highest potential profit for the monopolist, whereas Ramsey pricing, as a prescriptive tool for regulating a public monopoly, only aims at recovering the sunk cost of the investment. 

Ramsey prices The theory on price structures in a monopoly developed by Ramsey affects those monopolies that produce more than one type of product. Ramsey showed that the best way to share fixed costs and cause minimal welfare losses was not the non-linear pricing system described above instead, the rule he proposed consisted in increasing prices above the marginal cost in an inverse proportion to demand elasticities. Ramsey prices are therefore linear prices that fulfil the condition that total revenue equals total costs, and moreover minimize welfare losses. 

Through Ramsey pricing the industry endeavors to recover the high costs of R D, while adjusting prices across national markets to maximize consumer welfare. Although this helps to enhance access to medicines, it does not help to bring drugs to market... 

---