Price Discrimination In The Urban Household Electricity Market In Ukraine

Price discrimination is a quite common phenomenon for the energy sector in a market economy. It is justified to avoid marginal cost pricing dilemma for energy providers who are considered to be natural monopolists. Ukraine has been implementing some elements of such discriminatory pricing for urban residents. Although economic theory requires that an efficient regulator follow the inverse elasticity rule, Ukraine practices direct discrimination. This paper analyzes reasons for such a distortion. The model to investigate how social constraints can affect price discrimination policy is developed. Though it does not imply the inverse elasticity rule to be violated its results are highly depended upon parameters of demand. In practice, cost approach prevails. The paper argues that there are no economic or social reasons for existing price differentials; they are simply a legacy from the past.