The average price is essentially set to ensure a fair rate of return to the regulated firm, but it is also the weighted average of the various prices faced by the various types of users. Which specific prices and which specific weight the average price reflects depends on the forms of price discrimination and price differentiation adopted by the firm. Full price discrimination is unrealistic under current consumption measurement technologies and political constraints. Most firms providing public services rely on second- and third-degree price discrimination or some combination of the two. From a regulated firm’s perspective, price discrimination is an effective way of maximizing its share of the surplus produced by its activities. From a social welfare perspective, price discrimination can have both positive and negative effects as it can improve or worsen both efficiency and equity: the net effect depends on the specific market analysed and the specific form of price discrimination adopted by the firm. Rapid improvements in the technologies available to measure consumption such as smart meters imply that firms can implement increasingly precise forms of price discrimination.

Pricing in the arts is peculiar and opaque. Pricing for works of art is very different from pricing for museum tickets and other interchangeable goods. We consider price elasticity of demand, meaning customer sensitivity to a change in price, especially considering a ticket-pricing change at the Indianapolis Museum of Art. We consider price discrimination, the strategy of charging different prices to different groups of people. We consider other variations on pricing structure including bundling, two-part tariffs, and versioning. For pricing works of art, the method of pricing is, following from Velthuis’s work, largely sociological and best modeled as a set of scripts.

This chapter introduces the three degrees of price discrimination as well as a discussion of the attendant arbitrage possibilities. The focus of the chapter is on second-degree price discrimination, which is illustrated with versioning and bundling. There is also an extensive discussion of two-part tariffs with application to the pricing of a system consisting of a consumable and a durable.