Posted in Operations and Supply Chain Terms, Total Reads: 6945
Definition: Peak Load Pricing
It is an efficient means of pricing in which at the time of peak demand prices rise to balance to demand and supply. Most of our goods or services are limited in nature but its demand may vary depending upon various factors like season, income, price, etc.
During peak time demand for the goods or service would exceed available capacity. To rationalize this demand constraint in the form of increased price are imposed to streamline the demand supply gap. Also the pricing is lowered when limited capacity becomes plentiful which helps in avoiding under utilization when demand is low.
Thus peak load pricing helps to maximize capacity utilization where resources are scarce. When demand is low price is charged in such a way that at least one can recover his marginal cost. And when the demand is high, price is equal to marginal cost plus additional premium charged to bring down the demand equal to supply.
Eg: Electricity distribution companies use peak load pricing to maximize its revenue. During the day time when available electricity is more than the demand, the pricing is at its lowest point which will be enough to cover its marginal cost. At peak demand which is mostly at night, separate tariff is charged such that it will limit the excess demand for electricity.