Peak-load pricing

The term peak load pricing refers to a pricing technique in which the costs of capacity are allocated to the demand side of the peak load period.

Peak load pricing is used in industries whose products or services can not be stored or storable and their demand in the daily, monthly or annual rhythm rises and falls again and again. These include telecommunications, aerospace, transportation and electricity industry. Thus, the energy demand, for example, during the day or at night higher than the capacity of the air traffic in the summer months and around the holiday season particularly strong. Companies in these sectors have specific strategies to deal with these peak periods.

The aim of pricing in terms of peak-load pricing is to find out which are the ideal prices for the respective performance and how high the capacity or production must be precisely this, to get the best results in terms of welfare optimization.

The most popular model of peak-load pricing comes from Peter O. Steiner and was published in The Quarterly Journal of Economics 1957. Steiner stated as an objective to maximize the welfare of the economy of an observed peak industry. The welfare W is composed of the sum of the revenue TR plus the consumer surplus S, minus the production costs TC (W = TR S - TC). Steiner continues to set two equally long periods, for example, day and night, preceded, in which the production or supply remains constant. The task now is to find the optimal production quantity and the corresponding prices for both periods. He assumes this is that the demand fluctuates greatly, the quantities are known and the demand in period two is higher at any price. Steiner's model, although often quoted is because of these facts, however, severely limited in its application.