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15.7: Peak-load Pricing
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- How do monopolies respond to predictable cost fluctuation as it arises in electricity and hotel markets?
- Fluctuations in demand often require holding capacity, which is used only a fraction of the time. Peak-load pricing allocates the cost of capacity across several time periods when demand systematically fluctuates.
- Important industries with peak-load problems include pipelines, airlines, telephone networks, construction, electricity, highways, and the Internet.
- Under efficient peak-load pricing, either the prices equalize the quantity demanded, or the prices impose the entire cost of capacity only on one peak period. Moreover, the markup over marginal cost is proportional to the inverse of the elasticity.
- For each of the following items, state whether you would expect peak-load pricing to equalize the quantity demanded across periods or impose the entire cost of capacity on the peak period. Explain why.
- Hotels in Miami