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Efficient Intertemporal Utility Pricing under Uncertainty
Author(s) -
Hiebert L. Dean
Publication year - 1997
Publication title -
managerial and decision economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.288
H-Index - 51
eISSN - 1099-1468
pISSN - 0143-6570
DOI - 10.1002/(sici)1099-1468(199706)18:4<329::aid-mde829>3.0.co;2-l
Subject(s) - economics , microeconomics , electric utility , competition (biology) , substitution (logic) , marginal cost , electricity , marginal utility , industrial organization , computer science , ecology , chemistry , electrical engineering , biology , programming language , engineering
Electric utilities today face increasing competition from substitutes for utility‐generated power. As a result, utilities are being forced to reevaluate their pricing policies to address competition from other fuels and potential customer ‘bypass’ of the utility. This paper extends the analysis of second‐best utility pricing to explicitly account for both the short‐ and long‐run price responses of customers with competitive alternatives to utility‐generated power. The presence of long‐run substitution opportunities reduces the optimal percentage mark‐up of price over marginal cost for noncore customers. Uncertainty concerning the substitution response of noncore electricity customers also tends to reduce the optimal price mark‐up. © 1997 John Wiley & Sons, Ltd.