Peak Load Pricing

Definition: The Peak Load Pricing is the pricing strategy wherein the high price is charged for the goods and services during times when their demand is at peak. In other words, the high price charged during the high demand period is called as the peak load pricing.

This type of price discrimination is based on the efficiency, i.e. a firm discriminates on the basis of high usage, high-traffic, high demand times and low demand times. The consumer who purchases the commodity during the high demand period has to pay more as compared to the one who buys during low demand periods.

The peak load pricing is widely used in the case of non-storable goods such as electricity, transport, telephone, security services, etc. These are the goods which cannot be stored and hence their production is required to be increased to meet the increased demand. Thus, the marginal cost is also high during the peak periods as the capacity to produce these goods is limited. And, hence, the price is set at its highest level with an aim to shift the demand or at least the consumption of goods and services to attain a balance between demand and supply.

For example, during summers, the electricity consumption is highest during the daytime as several offices and educational institutes are operational during the day time, called as a peak-load time. While the electricity consumption is lowest during the night as all the office establishments and educational institutes are closed by this time, called as off-peak time. Thus, a firm will charge a relatively higher price during the daytime as compared to the price charged at night.