Gertrude Stein once wrote that “a rose is a rose is a rose”. In most states, a kilowatt hour is a kilowatt hour is a kilowatt hour. But nor in Florida, Pennsylvania, Washington and Wisconsin. These states allow electric utilities to practice time-of-day pricing to residential customers if the customer opts to be charged in this way. Otherwise, consumers can stick with their traditional plan, where they pay the same flat rate per kilowatt hour at all the time for power. In these pricing schemes, prices of kilowatt hour can change every several hours. ( A Pennsylvania utility, Allegheny power is experimenting with rates that change every hour.) Not surprisingly, in these states, it cost more to consume a kilowatt hour in the peak periods, when demand is the lowest. In many states, a time-of-day pricing has been allowed for commercial and industrial customers for quite some time.

In Florida, Gulf Power of Pensacola charges 4.2 cents per kilowatt hour at night, on weekends, and on holidays. Demand is less during these periods because the 9 to 5 workday, workweek crowd is not at work. Gulf charges 10 cents per kilowatt hour on Weekday afternoons when residential and commercial power demand peaks because of air conditioning use. A third rate is a ‘critical rate’ of 30.9 cents when supply of kilowatt hours go extremely short (less than 1 percent of the time). These rates compare to the alternative residential plan of flat 6.3 cents per kilowatt house regardless of time. A customer utilizing the plan estimates that he saved $600 off his annual power bill by shifting a third of his power consumption to the off peak periods. In Washington, Puget Sound Energy estimates that running the same dishwasher in the off-peak time saves the 25 percent off of the peak rate. With about one third of the customers participating in the off-peak plan, Puget Energy Inc (the biggest residential time-of-use provider) estimates that peak demand has been cut by 5 percent. This saves the energy company big money. If it cannot handle peak loads, it enters the power grid market to buy required power at spot market rates (which are usually expensive) or bring its least efficient (hence, most expensive) capacity in line. By restricting the quantity demanded in the peak via pricing, it need not resort to these expensive alternatives.

In addition, by bolstering through demand, it gets to utilize its capital plants better.

 

What is the market structure where price discrimination is usually prevalent? Explain the feature of such a market structure?            (6 marks)

In the case study it is stated that ‘A Pennsylvania utility, Allegheny power is experimenting with rates that change every hour’. State what type of pricing strategy is being used, and if firms practice pricing strategy what is the impact on consumer surplus? 

 

Explain why firms in this market structure are able to price discriminate?        (4 marks)

Firms are able to price discriminate mainly for three reasons;

In the long run, firms in this market structure are able to earn economic profit unlike a competitive market structure? Why do you think firms are able to do so?        (5 marks)

Answer rating: 100% (QA)

1 Price discrimination usually happens when there is a monopoly situation Another scenario when price discrimination can happen is that it happens in ... View the full answer