Adjustment to Private Monopolistic Pricing

This chapter discusses the concept of adjustment to private monopolistic pricing. Monopolistic pricing in the private sector refers to all enterprises whose prices exceed marginal costs. Generally, there exist many cases of politically acceptable positive Lerner indices. The chosen structure of public prices only implies the best possible way to restore price relations that indicate the relative scarcity of goods. Therefore, publicly priced substitutes have to be more expensive to restore at least partly the price relations that would have prevailed in the absence of private monopolistic pricing. On the other hand, publicly priced complements have to be cheaper; if public prices remained at marginal costs, the composite price for both complements would be farther from the price relations that would have prevailed in the absence of private monopolistic pricing. Objections to adjusting public pricing to private monopolistic pricing can be criticized for another reason. It is true that this approach assumes private Lerner indices to be exogenously given and public ones to be endogenously adjusted. However, this does not imply that the public sector has no influence on the private economy.