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Continuity of the Equilibrium Price Density and its Uses in Peak-Load Pricing

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  • Anthony Horsley
  • Andrew J Wrobel

Abstract

With L8 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; and it includes, but is not limited to, the case of symmetric (rearrangement-invariant) production costs and additively separable consumer utility. For continuous-time peak-load pricing of, e.g., electricity, this allows the inclusion of storage and of cross-price dependent demands. In this context a continuously varying price has two uses. First, it excludes the demand jumps that arise from discontinuous switches from one price rate to another. Second, in the operation and valuation of 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.

Suggested Citation

  • Anthony Horsley & Andrew J Wrobel, 2001. "Continuity of the Equilibrium Price Density and its Uses in Peak-Load Pricing," STICERD - Theoretical Economics Paper Series 417, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
    • Handle: RePEc:cep:stitep:417
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    References listed on IDEAS

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    1. Horsley, Anthony & Wrobel, Andrew J., 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. repec:cep:stitep:300 is not listed on IDEAS
    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. Jones, Larry E, 1984. "A Competitive Model of Commodity Differentiation," Econometrica, Econometric Society, vol. 52(2), pages 507-530, March.
    5. repec:cep:stitep:301 is not listed on IDEAS
    6. 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.
    7. 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;Society for the Advancement of Economic Theory (SAET), vol. 20(3), pages 503-537.
    8. Anthony Horsley & Andrew J Wrobel, 1999. "The Density Form of Equilibrium Prices in Continuous Time and Boiteuxs Solution to the Shifting-Peak Problem- (Now published as Boiteuxs solution to the shifting-peak problem and the equilibrium price," STICERD - Theoretical Economics Paper Series 371, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
    9. Anthony Horsley & Andrew J Wrobel, 1996. "Efficiency Rents of Storage Plants in Peak-Load Pricing, I: Pumped Storage," STICERD - Theoretical Economics Paper Series /1996/301, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
    10. Anthony Horsley & Andrew J Wrobel, 1996. "Uninterruptible Consumption, Concentrated Charges, and Equilibrium in the Commodity Space of Continuous Functions," STICERD - Theoretical Economics Paper Series /1996/300, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
    11. Horsley, Anthony & Wrobel, Andrew J., 1999. "The density form of equilibrium prices in continuous time and Boiteux's solution to the shifting-peak problem," LSE Research Online Documents on Economics 19344, London School of Economics and Political Science, LSE Library.
    12. Bewley, Truman F., 1972. "Existence of equilibria in economies with infinitely many commodities," Journal of Economic Theory, Elsevier, vol. 4(3), pages 514-540, June.
    13. Horsley, Anthony & Wrobel, Andrew J., 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.
    14. BEWLEY, Truman F., 1972. "Existence of equilibria in economies with infinitely many commodities," LIDAM Reprints CORE 122, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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    Cited by:

    1. Horsley, Anthony & Wrobel, Andrew J., 2007. "Profit-maximizing operation and valuation of hydroelectric plant: A new solution to the Koopmans problem," Journal of Economic Dynamics and Control, Elsevier, vol. 31(3), pages 938-970, March.
    2. 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.
    3. Anthony Horsley & Andrew J Wrobel, 2005. "Characterizations of long-run producer optima and the short-runapproach to long-run market equilibrium: a general theory withapplications to peak-load pricing," STICERD - Theoretical Economics Paper Series 490, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
    4. Tsitakis, D. & Xanthopoulos, S. & Yannacopoulos, A.N., 2006. "A closed-form solution for the price of cross-commodity electricity derivatives," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 371(2), pages 543-551.
    5. Anthony Horsley & Andrew J Wrobel, 2005. "The Wong-Viner Envelope Theorem for subdifferentiable functions," STICERD - Theoretical Economics Paper Series 489, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
    6. Horsley, Anthony & Wrobel, Andrew J., 2005. "A practical short-run approach to market equilibrium," LSE Research Online Documents on Economics 19313, London School of Economics and Political Science, LSE Library.

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    More about this item

    Keywords

    Price density; continuous-time peak-load pricing; pumped storage.;
    All these keywords.

    JEL classification:

    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies

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