PEAK-LOAD PRICING
By Marvin Castell and Joel Tanchuco*
A developing country needs, among other things, access to telecommunications, rail-bad mass transport, water and electricity. Consumption of the rvices is marked by significant periodicity. That is to say, consumption is high during peak periods, and lower in off-peak periods. More electricity, for instance, is consumed in the daytime, when offices and factories operate.朝鲜
可爱发型The pricing of the rvices, coupled with the fact that they have to be provided when needed, regardless of high or low demand, can lead to inefficiency in the markets. This is becau efficiency happens when producers follow normal profit maximizing behaviour, i.e., when they charge higher prices for consumption during peak periods, and lower prices during off-peak hours.
The effect of peak-load pricing is to induce some consumption to shift, away from the times of peak demand, and toward times of lower demand. Consumers are rewarded -- in the n that they pay less -- for using the rvice when there is ample unutilid capacity, rather than when demand takes up or even exceeds all the capacity. This makes for more efficient u of existing capacity.
Among the rvices listed at the beginning of this article, telecommunications rvices firms practice a limited form of peak load pricing. Globe Telecoms, for instance, charges a lower call rate from 10:01 pm to 6:59 am. Long distance calls made during off-peak periods also cost less. Some “decongestion” results from this practice. The same outcome happens when airlines charge higher fares during the tourist ason, and when the theatres of Broadway charge more for evening performances than matinees -- the producers maximize profits and make better u of capacity. This shifting of consumption creates what economists call “efficiency gains.” If airfares were kept uniform, airlines would forego profits becau they have to turn away pasngers when flights are fully booked, while other flights take off with a lot of empty ats.莲花湖风景区
What compels producers to impo a single price despite the periodicity of demand? One reason might be the rules impod by regulatory authorities. Another is that the producer lacks information that allows differential pricing across periods of consumption. A third might be that installing equipment that allows the producer to impo different prices depending on times of consumption is itlf an added investment cost.
Whatever the reason, when a producer impos a single and common price, this policy generates inefficiency. This single price falls between the peak period price (the price that can be charged beca
u of higher demand) and the off-peak period price (a lower price corresponding to lower
暑期demand). This “average” price has the effect of encouraging higher consumption during peak periods and lower consumption during off-peak periods -- which producers and consumers don’t really want. The high demand at certain hours would compel the producers to install additional capacity. Producers would have to pump in additional capital, and pass the cost on to consumers. However, the incread capacity becomes even more under-utilized during the off-peak hours.信用卡利息
While peak load pricing would help balance capacity usage, some disadvantages may follow. We’ve already mentioned the investment cost of installing time-nsitive measuring equipment. The new technology may entail switching costs. Producers may also have to hire field personnel and supervisors.
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A more burdensome disadvantage would fall upon consumers unable to switch their time of consumption despite the pricing changes, such as, factories unable to adjust their operating hours becau of workforce resistance, or inter-island ferries that cannot readily schedule more off-peak trips becau of weather conditions. Consumers such as the will have to suffer the burden of higher prices during peak periods. The benefits of peak load pricing flow to tho who adjust consumption to coincide with off-peak hours.
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Mr. Marvin Castell and Mr. Joel Tanchuco, are assistant professors of the Economics Department, College of Business and Economics, De La Salle University
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Keywords: peak-load, pricing practices
The article are contributed by the CBE Faculty in the column of Business Focus of Manila Bulletin published October 11, 2002.
