A Game Theoretic Approach to Peak Load Pricing

This paper deals with the problem of pricing in decreasing cost industries that exhibit the peak load phenomenon. Because of decreasing costs, welfare maximizing marginal cost pricing results in deficits. Consequently, other pricing methods such as two-part tariffs are necessary, if deficits are to be avoided. In a game theoretic framework, these other pricing methods are analyzed. The game developed is one of sharing the benefits from cooperation among consumers. It is proved that the core of the game exists, but that two-part tariffs may yield pricing arrangements which are not in the core unless further constraints are added. Then the possibility of moving from existing to new rate structures is discussed with particular emphasis on average cost pricing as an existing rate structure.