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Pricing in Crisis

Author

Listed:
  • Gerlagh, Reyer
  • Liski, Matti
  • Vehviläinen, Iivo

Abstract

When demand aggregates both price-sensitive and price-insensitive behaviors, uniform pricing becomes a deficient market design that generates negative surplus during extreme-price events. We develop a price-control mechanism that efficiently resolves the tradeoff between protecting consumers and limiting rents. The mechanism implements a dynamic price cap that responds to demand adjustments and induces truthful supply through incentive payments. In a quantitative application to the French wholesale electricity market during the 2022–2023 energy crisis, the mechanism would have lowered expected procurement costs by roughly €200 billion, about two-thirds of total projected costs in this central scenario.

Suggested Citation

  • Gerlagh, Reyer & Liski, Matti & Vehviläinen, Iivo, 2025. "Pricing in Crisis," CEPR Discussion Papers 20971, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:20971
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    File URL: https://cepr.org/publications/DP20971
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    More about this item

    Keywords

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    JEL classification:

    • D45 - Microeconomics - - Market Structure, Pricing, and Design - - - Rationing; Licensing
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

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