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Continuity of the equilibrium price density and its uses in peak-load pricing

  • Anthony Horsley

    ()

  • Andrew Wrobel

With $L^{\infty}$ as the commodity space, the equilibrium price density is shown to be a continuous function of the commodity characteristics. The result is based on symmetry ideas from the Hardy-Littlewood-Pólya theory of rearrangements. It includes, but is not limited to, the case of symmetric (rearrangement-invariant) production costs and additively separable consumer utility. Examples arise in continuous-time utility pricing, e.g., electricity pricing. In this context, a continuously varying price has two uses. First, it precludes demand jumps that would arise from discontinuous switches from one price rate to another. Second, in the problems of operating and valuing hydroelectric and pumped-storage plants (studied elsewhere), price continuity guarantees that their capacities (viz., the reservoir and the converter), the energy stocks, and in the case of hydro also the river flows, have well-defined marginal values. Copyright Springer-Verlag Berlin/Heidelberg 2005

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File URL: http://hdl.handle.net/10.1007/s00199-004-0568-3
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Article provided by Springer in its journal Economic Theory.

Volume (Year): 26 (2005)
Issue (Month): 4 (November)
Pages: 839-866

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Handle: RePEc:spr:joecth:v:26:y:2005:i:4:p:839-866
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  1. Anthony Horsley & Andrew J. Wrobel, 2000. "The short-run approach to LRMC pricing for multiple outputs with nondifferentiable costs," LSE Research Online Documents on Economics 19338, London School of Economics and Political Science, LSE Library.
  2. Anthony Horsley & Andrew J. Wrobel, 2002. "Boiteux's solution to the shifting-peak problem and the equilibrium price density in continuous time," Economic Theory, Springer, vol. 20(3), pages 503-537.
  3. Horsley, Anthony & Wrobel, Andrew J., 2002. "Efficiency rents of pumped-storage plants and their uses for operation and investment decisions," Journal of Economic Dynamics and Control, Elsevier, vol. 27(1), pages 109-142, November.
  4. Richard, Scott F., 1989. "A new approach to production equilibria in vector lattices," Journal of Mathematical Economics, Elsevier, vol. 18(1), pages 41-56, February.
  5. repec:cep:stitep:/1996/301 is not listed on IDEAS
  6. Anthony Horsley & Andrew J. Wrobel, 1999. "Efficiency rents of storage plants in peak-load pricing, ii: hydroelectricity," LSE Research Online Documents on Economics 19342, London School of Economics and Political Science, LSE Library.
  7. repec:cep:stitep:/1996/300 is not listed on IDEAS
  8. Jones, Larry E, 1984. "A Competitive Model of Commodity Differentiation," Econometrica, Econometric Society, vol. 52(2), pages 507-30, March.
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