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Does Responsive Pricing Smooth Demand Shocks?

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  • Courty, Pascal
  • Pagliero, Mario

Abstract

Using data from a unique pricing experiment, we investigate Vickrey’s conjecture that responsive pricing can be used to smooth both predictable and unpredictable demand shocks. Our evidence shows that increasing the responsiveness of price to demand conditions reduces the magnitude of deviations in capacity utilization rates from a pre-determined target level. A 10 percent increase in price variability leads to a decrease in the variability of capacity utilization rates between 2 and 6 percent. We discuss implications for the use of demand-side incentives to deal with congestible resources.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6662.

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Date of creation: Jan 2008
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Handle: RePEc:cpr:ceprdp:6662

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Keywords: capacity utilization; Consumer demand; price variability; responsive pricing;

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  1. Courty, Pascal & Pagliero, Mario, 2010. "Price variation antagonism and firm pricing policies," Journal of Economic Behavior & Organization, Elsevier, vol. 75(2), pages 235-249, August.
  2. repec:dgr:uvatin:2000101 is not listed on IDEAS
  3. Courty, Pascal & Pagliero, Mario, 2003. "Responsive Pricing," CEPR Discussion Papers 4036, C.E.P.R. Discussion Papers.
  4. Kahneman, Daniel & Knetsch, Jack L & Thaler, Richard, 1986. "Fairness as a Constraint on Profit Seeking: Entitlements in the Market," American Economic Review, American Economic Association, vol. 76(4), pages 728-41, September.
  5. Borenstein, Severin & Rose, Nancy L, 1994. "Competition and Price Dispersion in the U.S. Airline Industry," Journal of Political Economy, University of Chicago Press, vol. 102(4), pages 653-83, August.
  6. Koenker, Roger W & Bassett, Gilbert, Jr, 1978. "Regression Quantiles," Econometrica, Econometric Society, vol. 46(1), pages 33-50, January.
  7. Thomas Taylor & Peter Schwarz, 2000. "Advance notice of real-time electricity prices," Atlantic Economic Journal, International Atlantic Economic Society, vol. 28(4), pages 478-488, December.
  8. Aubin, Christophe, et al, 1995. "Real-Time Pricing of Electricity for Residential Customers: Econometric Analysis of an Experiment," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 10(S), pages S171-91, Suppl. De.
  9. Eugenio J. Miravete, 2003. "Choosing the Wrong Calling Plan? Ignorance and Learning," American Economic Review, American Economic Association, vol. 93(1), pages 297-310, March.
  10. Crew, Michael A & Fernando, Chitru S & Kleindorfer, Paul R, 1995. "The Theory of Peak-Load Pricing: A Survey," Journal of Regulatory Economics, Springer, vol. 8(3), pages 215-48, November.
  11. Herriges, Joseph A. & Baladi, S. M. & Caves, Douglas W. & Neenan, B. F., 1993. "The Response of Industrial Customers to Electric Rates Based Upon Dynamic Marginal Costs," Staff General Research Papers 1497, Iowa State University, Department of Economics.
  12. Robert H. Patrick & Frank A. Wolak, 2001. "Estimating the Customer-Level Demand for Electricity Under Real-Time Market Prices," NBER Working Papers 8213, National Bureau of Economic Research, Inc.
  13. Peter M. Schwarz & Thomas N. Taylor & Matthew Birmingham & Shana L. Dardan, 2002. "Industrial Response to Electricity Real-Time Prices: Short Run and Long Run," Economic Inquiry, Western Economic Association International, vol. 40(4), pages 597-610, October.
  14. C. Robin Lindsey & Erik T. Verhoef, 2000. "Traffic Congestion and Congestion Pricing," Tinbergen Institute Discussion Papers 00-101/3, Tinbergen Institute.
  15. William Vickrey, 1971. "Responsive Pricing of Public Utility Services," Bell Journal of Economics, The RAND Corporation, vol. 2(1), pages 337-346, Spring.
  16. Harris, Milton & Raviv, Artur, 1981. "A Theory of Monopoly Pricing Schemes with Demand Uncertainty," American Economic Review, American Economic Association, vol. 71(3), pages 347-65, June.
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