Answer to Question #60567 in Microeconomics for Bob

Question

a) Graphically illustrate a firm engaging in intertemporal price discrimination.
b) Graphically illustrate a firm engaging in peak-load pricing.
c) Explain the underlying reasoning for a firm to adopt intertemporal price discrimination as compared to peak-load pricing. Provide an example of each.

Answer 1

a) Firms in durable good product markets face incentives to intertemporally price discriminate, by setting high initial prices to sell to consumers with the highest willingness to pay, and cutting prices thereafter to appeal to those with lower willingness to pay. A critical determinant of the profitability of such pricing policies is the extent to which consumers anticipate future price declines, and delay purchases.
b) Peak-load pricing is a pricing technique applied to public goods which is a particular case of a Lindahl equilibrium. Instead of different demands for the same public good, we consider the demands for a public good in different periods of the day, month or year, then finding the optimal capacity (quantity supplied) and, afterwards, the optimal peak-load prices.
c) Gas prices in the 1970's and Utility companies are good examples of peak load pricing. When a good or service is limited in availability, peak load pricing can effectively reduce consumer consumption because consumers are swayed by the high prices. On the other hand, when prices are lower, consumers are more likely to purchase more. Another example would be tourist pricing. In a tourist town, one might see prices of many goods rise during tourist season. Or another example would be pizza prices. On the weekend, there are a limited number of specials, however on Monday and Tuesday (slow days for pizza shops), many more low cost deals are available.