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Cost Accounting: What is Peak Load Pricing? 0 Views


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What is Peak Load Pricing? Peak load pricing happens when companies increase the price of goods during times of high demand. So, a simple example would be increasing the price of Christmas lights during Christmas time.

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Transcript

00:00

And finance Allah shmoop What is peak load pricing Ah

00:09

uber you're such an evil genius Ever tried to book

00:12

a ride at five thirty after work on a rainy

00:14

day Yeah good luck with that And if the ride

00:17

normally would have cost eighteen bucks well be ready to

00:20

pay thirty or forty or fifty The biggest uber mover

00:23

twelve thirty two a M January one Yeah drunk New

00:27

Year's Eve Post partiers desperate to get home for the

00:31

ensuing annual with you know porcelain Goddess So peak load

00:35

or peak demand season or peak demand Ours happen when

00:40

demand you know peaks like there's lots of it Lots

00:43

of demand and pricing toe optimize profits derived from the

00:47

fact that at peak demand times there is either just

00:50

tons of demand or that the demand curve in this

00:53

period is vertical like people will pay almost anything for

00:57

that New Year's ride home If it normally cost twenty

00:59

bucks it can cost one hundred and people will pay

01:02

Why Well because the marginal value of that hundred bucks

01:05

is way cheaper than a running your car into a

01:08

tree Be running your car into a human see having

01:13

do I tickets and jail time that would ensue and

01:16

d twenty years of psycho analysis to help you deal

01:20

with the fact that you ran over one of the

01:22

young actors from modern family So peak load pricing used

01:25

to be a huge thing in long distance calling like

01:28

during business hours when businesses that were well more or

01:32

less price insensitive to the cost of a phone call

01:34

it was a rounding error in the course of doing

01:36

their business would do anything or pay anything for that

01:39

call from New York to Florida or London or wherever

01:43

they were calling two bucks a minute Find four bucks

01:46

Fine just make the call It was such high pricing

01:48

that a lot of consumers simply did not make the

01:51

call and the phone companies feared regulatory backlash and also

01:54

wanted to take advantage of the consumer demand at cheaper

01:57

prices So when Peak crest sted and the night set

02:01

in like between say ten P M and seven A

02:04

M prices were cut massively for long distance phone calls

02:07

like by half or by two thirds There was another

02:10

reason for the peak load pricing as well In those

02:13

days Priest Skype and Google Hangout phone companies were circuit

02:17

switch not packet switch which meant that there were in

02:20

fact line capacity Maximums that were hit went like eight

02:24

percent of the country tried to use the phone lines

02:26

all of the same time So to scale up for

02:29

nine or ten or twelve or fifteen percent of the

02:31

country using the phone lines all at the same time

02:34

it cost the phone companies of Fortune and they wanted

02:36

to get paid back for their efforts So the higher

02:39

prices matched their higher marginal costs in providing that infrastructure

02:43

Well all that went away with Internet telephony But the

02:45

scar still exist on the population who grew up under

02:49

that iron fisted telephony rule So where is peak load

02:52

pricing today In oldie worldly things electricity will the same

02:57

physics that hit phone companies hit electricity producers as well

03:01

On ly so much power can be generated at cheap

03:04

fish prices on the grid at once And if demand

03:06

exceeds their maximum who bad things happen like the whole

03:10

system overheat and shut down as a safety precaution avoids

03:14

fires or the local power company's has toe by power

03:18

from others in some form and then ship that power

03:21

locally and it's a whole mess So power companies charge

03:24

big peak load prices and highly encourage laundry doing after

03:29

midnight when very few people are sucking from the electric

03:32

teet And there is a ton of excess or slack

03:35

capacity in the system to remember all that the next

03:38

time there's a brownout from a hot day when everyone's

03:41

blasting a C units on high and eliminate is on

03:44

tap and they only their doors open and it's just 00:03:47.868 --> [endTime] very cranky

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