Question

1. What is peak-load pricing? What are the differences between peak-load pricing and Ramsey pricing?
2. Is it true that peak demanders pay all capacity costs and off-peak demanders pay none but the marginal costs? Explain.

Answer 1

Ans 1) 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 the peak-load pricing. This pricing depends on the demand for the product. Peak-load pricing is different from Ramsay pricing because in Ramsay pricing individual prices above marginal cost are raised in accordance with each customer's price elasticity of demand. In Ramsay pricing markups above marginal cost are lower for goods with more elastic demand, and conversely, mark-ups are greater for goods with more inelastic demand.

Ans 2) Yes, it is true that peak demanders pay all capacity costs and off-peak demanders pay only marginal cost. For example, 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 cost pricing, 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.