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

Abstract

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-Polya 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.