Reversals in Peak and Off-Peak Prices

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Abstract
This paper examines the pattern of peak and offpeak prices for several models of firm behavior beyond the standard welfare-maximizing models of Boiteux, Steiner, and Williamson. In the case where there is a profit objective or a breakeven constraint, we show that it can be rational for the firm to set a higher price in the offpeak than in the peak period; indeed, this occurs whenever offpeak demand is sufficiently more inelastic than peak demand so as to compensate at the margin for the attribution of capacity costs to the peak user. Under regulation the price reversal takes place because the regulated firm best serves its owners if it lowers prices only to peak users. Further, the paper demonstrates the possibility that rate-of-return regulation could induce peak capacity which is greater than the socially optimal level. This last point may have relevance for present and future debates over the amounts of new capacity in energy-generating industries that ought to be constructed to meet the "needs" of the economy. (This abstract was borrowed from another version of this item.)
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