Annie Barrow

Peak Load Pricing

Peak Load Pricing is a pricing strategy that implies price will be set at the highest level during times when demand is at a peak. The pricing strategy is an attempt to shift demand, or at least consumption of the good or service, to accomodate supply. The idea is that pricing higher when demand is at its peak will balance out the supply and demand so that there is no shortage on either end of the spectrum. If a good is priced at a high cost and many demand it, a capacity will be balanced. This is a type of price discrimination; a firm discriminates between high-traffic, high usage or high demand times and low usage time periods. The consumer that purchases during high usage times has to pay a higher price than that of the consumer that can delay his purchase or demand.

Graphically, Marginal Cost is constant until the quantity being produced is the maximum that the firm can produce. At this quantity, Marginal Cost becomes vertical. Since firms optimize profits when MC=MR, shifts in MR and MC effect the price. As demand shifts outward, Marginal Revenue increases. As a result, the point where MR=MC increases and higher prices result.

Real World Examples:

Gas prices in the 1970's and Utility companies are good examples of peak load pricing. When a good or service is limited in availability, peak load pricing can effectively reduce consumer consumption because consumers are swayed by the high prices. On the other hand, when prices are lower, consumers are more likely to purchase more. Another example would be tourist pricing. In a tourist town, one might see prices of many goods rise during tourist season. Or another example would be pizza prices. On the weekend, there are a limited number of specials, however on Monday and Tuesday (slow days for pizza shops), many more low cost deals are available.

Test Questions:

1. What objective does peak load pricing serve?
a. it increases demand
b. it increases supply
c. it balances supply and demand
d. it is a constant pricing strategy

1. Answer: C - it balances supply in demand by encouraging consumers to purchase at lower prices and still provides consumers wiling to pay the increased price the good or service.

2. True or False: Peak Load Pricing is a strategy that benefits only the supplier.

2. Answer: Peak Load Pricing allows the firm to supply enough of the good it produces to those that demand it; peak load pricing helps to avoid shortages during peak hours and times of high demand.