Peak-load Pricing

Abstract

Services constitute what economists call nonstorable goods . Electricity, telephone, transportation, banking, and most other services are consumed at the time of purchase. This nonstorability characteristic of services may lead to congestion of service systems when the demand for the service is unevenly distributed among different periods or seasons. The demand for telephone services is at the highest level during daytime, during weekdays, and tends to be lower during nights, weekends, and some holidays. The demand for air travel for most places tends to be relatively high during the summer, whereas the demand for transportation to ski resorts is greatly enhanced during the winter. Electricity use follows a daily cycle related partly to the use of appliances and lighting devices. In addition, it also follows a yearly cycle because of climatic changes. Thus, the demand follows several, sometimes overlapping, periodic cycles. Peak-load pricing techniques are commonly observed in vacation-related services (airline, restaurant, and hotel industries) as well as in utility services (phone and electricity). The utilization of peak-load pricing techniques is profitable in industries with the following main characteristics: (a) Demand varies significantly among the different seasons. (b) Services are time-related and perishable in the sense that they cannot be postponed or delivered earlier than the scheduled time of delivery. (c) Service providers must acquire a significant amount of costly capital. (d) The acquired capital cannot be easily liquidated and cannot be easily rented out or sold to other firms.