Second degree price discrimination and natural monopoly

This paper considers the efficiency of a contestable natural monopoly if consumers are heterogeneous and the monopolist can differentiate prices imperfectly. The paper shows that a “no-distortion-at-the-top” result, which is standard in models with restricted entry, may also appear in a contestable market. Depending on cost and demand structures, first best efficiency can also be a sustainable equilibrium. However, due to the existence of a continuum of equilibria, first best efficiency is not guaranteed. Most notably, even a stable “distortion-at-the-top” result is possible.