PROJECT REPORT

On

PEAK LOAD PRICING

By

ABHINAV DHAWAN (23)

Angshuman Das (25)

Rajan Srivastava (26)
Prince Rawat (24)

MBA (M&S) Class of 2017 Section – A

Under the Supervision of

MISS.TAVISHI

In Partial Fulfilment of the Requirements for the Degree of

MBA(M&S)
At

AMITY BUSINESS SCHOOL

AMITY UNIVERSITY UTTAR PRADESH
SECTOR 125, NOIDA - 201303, UTTAR PRADESH, INDIA
2011
INTRODUCTION

PEAK LOAD PRICING

The Peak Load Pricing is the pricing strategy wherein the high price is charged for the goods
and services during times when their demand is at peak. In other words, the high price charged
during the high demand period is called as the peak load pricing.

This type of price discrimination is based on the efficiency, i.e. a firm discriminates on the basis
of high usage, high-traffic, high demand times and low demand times. The consumer who
purchases the commodity during the high demand period has to pay more as compared to the one
who buys during low demand periods.

The peak load pricing is widely used in the case of non-storable goods such as electricity,
transport, telephone, security services, etc. These are the goods which cannot be stored and hence
their production is required to be increased to meet the increased demand. Thus, the marginal
cost is also high during the peak periods as the capacity to produce these goods is limited. And,
hence, the price is set at its highest level with an aim to shift the demand or at least the
consumption of goods and services to attain a balance between demand and supply.

The reason for the higher prices charged at peak times has partly to do with elasticity of demand
(and in this sense, therefore, is price discrimination: i.e. charging different prices because of
different demand elasticities in different parts of the market). Demand is less elastic at peak
times. For example, many commuters have little option but to pay higher rail fares at peak times.
The theory of Peak Load Pricing has been a theme of wide discussion amongst economists for
many decades. It is considered a topic of great interest and controversial. The need for applying
different pricing strategy as PLP basically emerged in response to problems that face most public
utility, for instance non-storability, stochastic instability of demand and demand time varying
where capacity in public utilities is not uniformly utilized. Amongst economists, Peak Load
Pricing is known to be the golden solution for dealing with such problems. As it provides public
utilities with an indirect load management mechanism that meets the double objectives; which is
reducing growth in peak load, and decreasing the need for capacity expansion, through charging
customers in peak time a higher peak price, and hence shifting part of the load from the peak to
the base load plants which called valley filling and charging off peak customer a lower off peak
price, thus having some savings in used fuels during peak
time
Services where Peak-loading pricing is needed

1. Telecommunication
2. Electricity
3. Movie Halls
4. Transport and services
5. Fuel
6. Hotels , and many more

Some of the services explained-

1 Telecommunication

The telecommunications operator builds his network with the capacity to serve the peak demand,
which generally occurs during business hours. As a result, network costs are caused by
peak demand and not demand during off-peak hours. To facilitate marginal costpr icing,
the operator would maximize profit by charging higher prices during peak hours and
lower prices during off-peak hours. The prices at the peak reflect the marginal costs of capacity
and the lower-off peak prices reflect only the marginal costs of off-peak usage, which are
generally close to zero in telecommunications. Peak-load pricing requires sophisticated
measurement of customer usage. This is rarely a problem in telecommunications, but requires
advanced metering technologies in energy and water. As a result, the cost of implementing these
advanced measurement technologies must be weighed against the welfare gains of metering.
Electricity

Electricity consumption peaks in daytime because all business establishments, offices and
factories come into operation. Electricity consumption decreases during nights because
most business establishments are closed and household consumption falls to its basic minimum.
In terai, demand for electricity peaks during summer season due to use of fans, ACs and coolers,
and it declines to its minimum level during winters.

Pricing of goods like electricity is problematic. The nature of the problem in a short-run setting is
depicted in the figure. The ‘peak-load’ and ‘off-load’ demand curves are shown by Dp and
DL curves, respectively. The short-run supply curve is given by the short-run marginal cost
curve, SMC. The problem is ‘how to price electricity’.

Peak-Load Pricing of Electricity

As shown in fig, electricity price is fixed in accordance with peak load demand op3 will be the
price and if it is fixed according to off load demand, price will be OP1. If a peak load price OP3
is changed uniformly in all seasons, it will be unfair because consumer will be charged for what
they do no consume. Beside, it may affect business activities adversely. If electricity production
is a public monopoly, the government may not find it advisable to change a uniform peak load
price.
On the other hand, if a uniform off load price OP1 is changed, production will fall to OQ2 and
there will be acute shortage of electricity during peak hours. It leads to breakdown and load
shedding during the peak load period, which disrupt production and make life miserable.
Alternatively, if an average of two prices, say P2 is charged, it will have the demerit of both peak
load and off load prices. There will be an excess production to the extent of AB during the off
load period, which will go waste as it cannot be stored. If production is restricted to OQ1, price
P2 will be unfair. And, during the peak load period, there will be a shortage to the extent of BC,
which can be produced only at an extra marginal cost of CD.

Movie Halls
Movie halls often raise the price of the tickets during popular times and cut the price during off
time, The tickets for weekend evening shows are more compared to weekdays. Discounts are
offered on weekdays Monday, Tuesday and the price goes up as it reaches Friday, Saturday and
Sunday. Weekend are off days for many office goers and students so there is a price hike on
weekends.

Transport and services

Cab Services like Ola and Uber often follows peak load pricing. According to Uber and Ola
when the demand of taxi is higher than drivers around you then peak load pricing comes into
effect, Uber and Ola claims that peak load pricing helps them ply more taxi’s on the road and
help meet the increased demand. The increased fare acts as an Incentive for the drivers and act as
a motivation for them to stay on the road.
STRATEGIES RESPONSE TO PEAK LOAD PRICING.

 During peak time periods, when demand is high, managers should charge a higher price
(PP).
 During trough time periods, when demand is low, managers should charge a lower price
(PT)
 Marginal cost often follows a cyclical pattern in which MC is high during peak periods
and low during trough time periods.
 Firms should equate marginal cost and marginal revenue separately in the two time
periods to determine the appropriate prices.
NEED AND IMPORTANCE OF PEAK LOAD PRICING.
1. Peak load pricing would help balance capacity usage.
The peak load pricing strategy is to shift demand, or to make least consumption of the good or
services. The motive behind peak Load Pricing is that it will balance out the supply and demand
which will ensure there is no shortage a capacity will be balanced.

2. Decreasing the need for capacity expansion.

Charging customers in peak time a higher peak price than the usual price will ensure decreasing of need
for the capacity expansion. Eg: Electricity

3. Firms will be able to increase revenue.

When a firm offers any kind of goods and services during peak timing then they charge a higher price than
the usual price which helps the firm to increase the revenue from peak load pricing which leads to the
welfare and growth of the firm.

4. Enables firms to stay in business.

A Firm to survive in the long run and also earn profit and compete with its competitors needs to follow
peak load pricing or else it becomes difficult for a firm to survive in the long run so by offering different
prices in peak and off peak a firm can earn the desired amount of revenue.

5. Peak load pricing results into consumer welfare.

Peak Load Pricing results in Consumer Welfare by ensuring a more efficient distribution of the services
and the goods. Also keeping a margin between peak and off peak periods helps overcoming the problem
of shortage and surplus also ensures distribution as per demand.
CONCLUSION

The Peak Load Pricing is the pricing strategy wherein the high price is charged for the goods
and services during times when their demand is at peak. In other words, the high price charged
during the high demand period is called as the peak load pricing.

Use of peak load pricing is very important in our real life. It helps to meet the demand and
eliminates excess demand which cannot be met because of limited resources. Peak load pricing
can be witnessed in many places like- movie hall, electricity supply, petrol prices,
telecommunication hotels etc.

Price discrimination refers to the situation in which firms are charging different prices for the
same good. In one sense, peak-load pricing is not price discrimination because the marginal cost
will differ at different times. When the marginal cost differs you want to charge the marginal
cost.
In Peak load pricing, the price of goods and services changes with response to demand of that
good and services i.e. high price when demand is high and less price when demand is low.

What compels producers to impose a single price despite the periodicity of demand? One reason
might be the rules imposed by regulatory authorities. Another is that the producer lacks
information that allows differential pricing across periods of consumption. A third might be that
installing equipment that allows the producer to impose different prices depending on times of
consumption is itself an added investment cost.

Whatever the reason, when a producer imposes a single and common price, this policy generates
inefficiency. This single price falls between the peak period price (the price that can be charged
because of higher demand) and the off-peak period price (a lower price corresponding to lower
demand). This “average” price has the effect of encouraging higher consumption during peak
periods and lower consumption during off-peak periods -- which producers and consumers don’t
really want. The high demand at certain hours would compel the producers to install additional
capacity. Producers would have to pump in additional capital, and pass the cost on to consumers.
However, the increased capacity becomes even more under-utilized during the off-peak hours.
While peak load pricing would help balance capacity usage, some disadvantages may follow.
We’ve already mentioned the investment cost of installing time-sensitive measuring equipment.
The new technology may entail switching costs. Producers may also have to hire field personnel
and supervisors.

A more burdensome disadvantage would fall upon consumers unable to switch their time of
consumption despite the pricing changes, such as, factories unable to adjust their operating hours
because of workforce resistance, or inter-island ferries that cannot readily schedule more off-
peak trips because of weather conditions. Consumers such as these will have to suffer the burden
of higher prices during peak periods. The benefits of peak load pricing flow to those who adjust
consumption to coincide with off-peak hours.
 REFRENCES

1) W. Kip Viscusi John M. Vernon Joseph E. Harrington, Jr. : economics of regulation

and antitrust ,
2 ) H l ahuja – micro economics.
3 )Dynamic Peak-Load Pricing∗Oz Shy† University of Haifa and Stockholm School of
Economics
4 )Crew, M., and P. Kleindorfer, 1979, Public Utility Economics, New York: St. Martin’s
Press
http://www.ozshy.com/peak37.pdf ( dynamic model)
5 )http://www.dlsu.edu.ph/research/centers/cberd/pdf/bus_focus/Peak-load%20Pricing.pdf
6 )http://www.businessdictionary.com/definition/peak-load-pricing.html
 ACKNOWLEDGEMENTS

First and foremost I would like to express my gratitude to our revered teacher Miss. Tavishi.
Without whom this assignment would not be possible in the first place.
Her guidance and support was very crucial in making this assignment.
I would also like to extend my heartfelt thanks to our Head of Department Mr. Sanjeev Bansal sir
who has given the golden opportunity to work on this project.

At last but not the least I would like to thank my teammates for their continuous effort and
support in making this project.
Abhinav Dhawan (23)
Angshuman Das (25)
Rajan Srivastava (26)
Prince Rawat (24)
 INDEX

S NO. TOPIC PAGE NO.

1. ACKNOWLEDGEMENTS 1

2. INTRODUCTION 2

3. SERVICES WHERE IT IS 3-5

REQUIRED

4. STRATEGIES RESPONSE 6
TO PEAK OVERLOAD
PRICING

5. NEED AND IMPORTANCE 7

OF PEAK OVERLOAD
PRICING

6 CONCLUSION 8-9
7 REFRENCES 10