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Reversals in Peak and Offpeak Prices

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  • Elizabeth E. Bailey
  • Lawrence J. White

Abstract

This paper examines the pattern of peak and offpeak prices for several models of firm behavior beyond the standard welfare-maximizing models of Boiteux, Steiner, and Williamson. In the case where there is a profit objective or a breakeven constraint, we show that it can be rational for the firm to set a higher price in the offpeak than in the peak period; indeed, this occurs whenever offpeak demand is sufficiently more inelastic than peak demand so as to compensate at the margin for the attribution of capacity costs to the peak user. Under regulation the price reversal takes place because the regulated firm best serves its owners if it lowers prices only to peak users. Further, the paper demonstrates the possibility that rate-of-return regulation could induce peak capacity which is greater than the socially optimal level. This last point may have relevance for present and future debates over the amounts of new capacity in energy-generating industries that ought to be constructed to meet the "needs" of the economy.

Suggested Citation

  • Elizabeth E. Bailey & Lawrence J. White, 1974. "Reversals in Peak and Offpeak Prices," Bell Journal of Economics, The RAND Corporation, vol. 5(1), pages 75-92, Spring.
    • Handle: RePEc:rje:bellje:v:5:y:1974:i:spring:p:75-92
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    Cited by:

    1. Louis Alessi, 1974. "Aneconomic analysis of government ownership and reculation," Public Choice, Springer, vol. 19(1), pages 1-42, September.
    2. Alessandro Avenali & Tiziana D’Alfonso & Pierfrancesco Reverberi, 2022. "Optimal pricing and investment for resources with alternative uses and capacity limits," Journal of Regulatory Economics, Springer, vol. 61(3), pages 222-229, June.
    3. Peter Zweifel & Gregory Neugebauer, 1984. "Die Elektrizitätswerke und die Wärmekraftkopplung: Institutionelle Regelungen und Implikationen," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 120(III), pages 315-338, September.
    4. Lorenzo Rocco, 2002. "Pricing of an Endogenous Peak-Load," Working Papers 54, University of Milano-Bicocca, Department of Economics, revised Aug 2002.
    5. Antal-Pomázi, Krisztina, 2020. "A differenciált árazással kapcsolatos ösztönzőkről [Incentives related to differential pricing]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(3), pages 244-262.
    6. María Angeles García Valiñas, 2004. "Eficiencia y equidad en el diseño de precios óptimos para bienes y servicios públicos," Hacienda Pública Española / Review of Public Economics, IEF, vol. 168(1), pages 95-119, march.
    7. Ted Bergstrom & Jeff Mackie-Mason, "undated". "The Simple Analytics of Peak-Load Pricing," Papers _035, University of Michigan, Department of Economics.
    8. Kim, Jeong-Yoo & Lee, Myeong Ho & Berg, Nathan, 2016. "Peak-load pricing in duopoly," Economic Modelling, Elsevier, vol. 57(C), pages 47-54.
    9. Mark W. Gellerson & Shawna P. Grosskopf, 1980. "Public Utility Pricing, Investment, and Reliability under Uncertainty: A Review," Public Finance Review, , vol. 8(4), pages 477-492, October.
    10. Mirucki, Jean, 1980. "Vérification des conditions d'efficacité dans la production chez Bell Canada [Checking the conditions of efficient production in Bell Canada]," MPRA Paper 30147, University Library of Munich, Germany, revised Jun 1980.
    11. Frank Limehouse & Michael Maloney & Kurt Rotthoff, 2012. "Peak-Load Versus Discriminatory Pricing: Evidence from the Golf Industry," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 40(3), pages 151-165, May.
    12. Skiera, Bernd & Spann, Martin, 1999. "The ability to compensate for suboptimal capacity decisions by optimal pricing decisions," European Journal of Operational Research, Elsevier, vol. 118(3), pages 450-463, November.
    13. Mirucki, Jean, 1980. "Comportement de l'entreprise réglementée: étude de l'hypothèse Averch-Johnson [Behavior of the Regulated Firm: A Study of the Averch-Johnson Hypothesis]," MPRA Paper 27669, University Library of Munich, Germany, revised 1982.
    14. Roger Sherman & Michael Visscher, 1982. "Rate-of-Return Regulation and Two-Part Tariffs," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 97(1), pages 27-42.
    15. John G. Riley & Charles R. Scherer, 1976. "Optimal Water Pricing with Cyclical Supply and Demand," UCLA Economics Working Papers 077, UCLA Department of Economics.

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