Skip to main content
SpringerLink
Log in

Public Utility Pricing and Capacity Choice with Stochastic Demand

  • Chapter
  • First Online:
Social Ethics and Normative Economics

Part of the book series: Studies in Choice and Welfare ((WELFARE))

Abstract

This article is a companion piece to David et al. (2011). In that article, we explored Serge Kolm’s contributions to theoretical public economics from an historical perspective, covering a rather general range of topics and specifications. Here, in contrast, we concentrate on the implications for pricing and capacity choice of a specific aspect of the economic environment often encountered by public sector managers and regulators: the uncertainty attached to the demand for the good(s) and service(s) produced by a public utility. Following an early article by Boiteux (see Boiteux 1951), Kolm (1970, 1971) has made important contributions to this issue.

This is a preview of subscription content, log in via an institution to check access.

Access this chapter

Log in via an institution
Chapter
USD 29.95
Price excludes VAT (USA)
  • Available as PDF
  • Read on any device
  • Instant download
  • Own it forever
eBook
USD 139.00
Price excludes VAT (USA)
  • Available as PDF
  • Read on any device
  • Instant download
  • Own it forever
Softcover Book
USD 179.99
Price excludes VAT (USA)
  • Compact, lightweight edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info
Hardcover Book
USD 179.99
Price excludes VAT (USA)
  • Durable hardcover edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info

Tax calculation will be finalised at checkout

Purchases are for personal use only

Institutional subscriptions

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  1. Berg, S. V., & Tschirhart, T. (1988). Natural monopoly regulation: Principles and practice. Cambridge University Press, Cambridge

    Google Scholar 

  2. Boiteux, M. (1951). La tarification au coût marginal et les demandes aléatoires. Cahiers du Séminaire d’Econométrie, 1, 56–69.

    Google Scholar 

  3. Brown, G. Jr., & Johnson, M. B. (1969). Public utility pricing and output under risk. American Economic Review, 59, 119–128

    Google Scholar 

  4. Callen, J. L. (1978). Production, efficiency, and welfare in the natural gas transmission industry. American Economic Review, 68, 311–323

    Google Scholar 

  5. Carlton, D. W. (1977). Peak load pricing with stochastic demand. American Economic Review, 67, 1006–1010

    Google Scholar 

  6. Carlton, D. W. (1978). Market behavior with demand uncertainty and price inflexibility. American Economic Review, 68, 571–587

    Google Scholar 

  7. Carlton, D. W. (1979). Contracts, price rigidity, and market equilibrium. Journal of Political Economy, 87, 1034–1062

    Article  Google Scholar 

  8. Carlton, D. W. (1991). The theory of market allocation and its implications for marketing and industrial organization: Why rationing is efficient. Journal of Law and Economics, 34, 231–262

    Article  Google Scholar 

  9. Chao, H.-P. (1983). Peak load pricing and capacity planning with demand and supply uncertainty. Bell Journal of Economics, 14, 179–190

    Article  Google Scholar 

  10. Chao, H.-P., & Wilson, R. (1987). Priority service: Pricing, investment, and market organization. American Economic Review, 77, 899–916.

    Google Scholar 

  11. Coate, S., & Panzar, J. (1989). Public utility pricing and capacity choice under risk: A rational expectations approach. Journal of Regulatory Economics, 1, 305–317

    Article  Google Scholar 

  12. Commission de Régulation de l’Energie (2006). La régulation du marché du gaz naturel. Rapport d’Activité of the French Commission de Régulation de l’Energie, June 2006

    Google Scholar 

  13. Crew, M. A., & Kleindorfer, P. R. (1978). Reliability and public utility pricing. American Economic Review, 68, 31–40

    Google Scholar 

  14. Dana, J. D. Jr. (1998). Advance-purchase discounts and price descrimination in competitive markets. Journal of Political Economy, 106, 395–422

    Article  Google Scholar 

  15. Dana, J. D. Jr. (1999). Equilibrium price dispersion under demand uncertainty: The roles of costly capacity and market structure. RAND Journal of Economics, 30, 632–660

    Article  Google Scholar 

  16. Dana, J. D. Jr. (2001). Monopoly price dispersion under demand uncertainty. International Economic Review, 42, 649–670

    Article  Google Scholar 

  17. David, L., Le Breton, M., & Merillon, O. (2007). Regulating the natural gas transportation industry: Optimal pricing policy of a monopolist with advance-purchase and spot markets. Working Paper No. 488, Institut d’Economie Industrielle, University of Toulouse 1

    Google Scholar 

  18. David, L., Le Breton, M., & Merillon, O. (2011). Kolm as a contributor to public utility pricing, second-best culture, and the theory of regulation. In M. Fleurbaey, M. Salles, & J. A. Weymark (Eds.), Social ethics and normative economics: Essays in honour of Serge-Christophe Kolm (pp. 000–000). Berlin: Springer

    Google Scholar 

  19. De la Vallée Poussin, D. (1968). Tarification de l’électricité selon la moyenne et la variance de la consommation individuelle. Recherches Economiques de Louvain, 34, 53–72

    Google Scholar 

  20. Deneckere, R., & Peck, J. (1995). Competition over price and service rate when demand is stochastic: A strategic analysis. RAND Journal of Economics, 26, 148–162

    Article  Google Scholar 

  21. Diamond, P. (1980). Efficiency and uncertain supply. Review of Economic Studies, 47, 645–651

    Article  Google Scholar 

  22. Doane, M. J., McAfee, R. P., & Williams, M. A. (2004). Evaluating and enhancing competition in the interstate natural gas transportation industry. Natural Resources Journal, 44, 761–808

    Google Scholar 

  23. Drèze, J. H. (1964). Some postwar contributions of French economists to theory and public policy: With special emphasis on problems of resource allocation. American Economic Review, Supplement, 54, 1–64

    Google Scholar 

  24. Drèze, J. H. (1995). Forty years of public economics: A personal perspective. Journal of Economic Perspectives, 9(2), 111–130

    Google Scholar 

  25. Eden, B. (1990). Marginal cost pricing when spot markets are complete. Journal of Political Economy, 98, 1293–1306

    Article  Google Scholar 

  26. Energy and Environmental Economics, Inc. (2006). A survey of time-of-use (TOU) pricing and demand-response (DR) programs. Report prepared for the United States Environmental Protection Agency by Energy and Environmental Economics, Inc., San Francisco, July 2006

    Google Scholar 

  27. Gale, I. L., & Holmes, T. J. (1992). The efficiency of advance-purchase discounts in the presence of aggregate demand uncertainty. International Journal of Industrial Organization, 10, 413–437

    Article  Google Scholar 

  28. Gale, I. L., & Holmes, T. J. (1993). Advance-purchase discounts and monopoly allocation of capacity. American Economic Review, 83, 135–146

    Google Scholar 

  29. Guesnerie, R. (1975). Production of the public sector and taxation in a simple second best model. Journal of Economic Theory, 10, 127–156

    Article  Google Scholar 

  30. Hopkinson, J. (1892). On the cost of electricity supply. Transactions of the Junior Engineering Society, 3, 1–14. Reprinted in B. Hopkinson (Ed.) Original Papers by the Late John Hopkinson, D.Sc., F.R.S. Volume I: Technical Papers (pp. 254–268). Cambridge: Cambridge University Press (1901)

    Google Scholar 

  31. Kolm, S.-C. (1970). Service optimal d’une demande variable et prix de l’incertitude. Revue Economique, 21, 243–271

    Google Scholar 

  32. Kolm, S.-C. (1971). Le Service des Masses. Paris: C.N.R.S. and Dunod

    Google Scholar 

  33. Marchand, M. G. (1974). Pricing power supplied on an interruptible basis. European Economic Review, 5, 263–274

    Article  Google Scholar 

  34. McAfee, R. P., & Reny, P. J. (2007). The role of excess capacity in determining market power in natural gas transportation markets. Journal of Regulatory Economics, 32, 209–223

    Article  Google Scholar 

  35. McAvoy, P. W., & Noll, R. (1973). Relative prices on regulated transactions of the natural gas pipelines. Bell Journal of Economics and Mangement Science, 4, 212–234

    Article  Google Scholar 

  36. Meyer, R. A. (1975). Monopoly pricing and capacity choice under uncertainty. American Economic Review, 65, 326–337

    Google Scholar 

  37. Oren, S., Smith, S., & Wilson, R. (1985). Capacity pricing. Econometrica, 53, 545–566

    Article  Google Scholar 

  38. Panzar, J. C., & Sibley, D. S. (1978). Public utility pricing under risk: The case of self-rationing. American Economic Review, 68, 888–895

    Google Scholar 

  39. Polemarchakis, H. M. (1979). Incomplete markets, price regulation, and welfare. American Economic Review, 69, 662–669

    Google Scholar 

  40. Prescott, E. C. (1976). Efficiency of the natural rate. Journal of Political Economy, 83, 1229–1236

    Article  Google Scholar 

  41. Rees, R. (1980). Consumer choice and non-price rationing in public utility pricing. In B. M. Mitchell & P. R. Kleindorfer (Eds.), Regulated industries and public enterprise: European and United States perspectives, (pp. 207–228). Lexington, MA: D. C. Heath

    Google Scholar 

  42. Seeto, D., Woo, C.-K., & Horowitz, I. (1997). Time-of-use rates vs. Hopkinson tariffs redux: An analysis of the choice of rate structures in a regulated electricity distribution company. Energy Economics, 19, 169–185

    Google Scholar 

  43. Sherman, R., & Visscher, M. (1978). Second best pricing with stochastic demand. American Economic Review, 68, 41–53

    Google Scholar 

  44. Spulber, D. F. (1992a). Capacity-contingent nonlinear pricing by regulated firms. Journal of Regulatory Economics, 4, 299–319

    Article  Google Scholar 

  45. Spulber, D. F. (1992b). Optimal nonlinear pricing and contingent contracts. International Economic Review, 33, 747–772

    Article  Google Scholar 

  46. Turvey, R. (1970). Public utility pricing and output under risk: Comment. American Economic Review, 60, 485–486

    Google Scholar 

  47. Veall, M. R. (1983). Industrial electricity demand and the Hopkinson rate: An application of the extreme value distribution. Bell Journal of Economics, 14, 427–440

    Article  Google Scholar 

  48. Visscher, M. L. (1973). Welfare-maximizing price and output with stochastic demand: Comment. American Economic Review, 63, 224–229

    Google Scholar 

  49. Wellisz, S. H. (1963). Regulation of natural gas pipeline companies: An economic analysis. Journal of Political Economy, 71, 30–43

    Article  Google Scholar 

  50. Wilson, C. A. (1988). On the optimal pricing policy of a monopolist. Journal of Political Economy, 96, 164–176.

    Article  Google Scholar 

  51. Wilson, R. (1993). Nonlinear pricing. New York: Oxford University Press

    Google Scholar 

  52. Woo, C.-K., Orans, R., Horii, B., & Chow, P. (1995). Pareto-superior time-of-use rate option for industrial firms. Economic Letters, 49, 267–272

    Article  Google Scholar 

  53. Woo, C.-K., Chow, P., & Horowitz, I. (1996). Optional real-time pricing of electricity for industrial firms. Pacific Economic Review, 1, 79–92.

    Article  Google Scholar 

  54. Woo, C.-K., Horii, B., & Horowitz, I. (2002). The Hopkinson tariff alternative to TOU rates in the Israel Electric Corporation. Managerial and Decision Economics, 23, 9–19

    Article  Google Scholar 

  55. Yakubovich, V., Granovetter, M., & McGuire, P. (2005). Electric charges: The social construction of rate systems. Theory and Society, 34, 579–612

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. GDF Suez, Direction de la Stratégie et du Développement Durable, Tour 1, 1 place Samuel de Champlain, 92930, Paris La Défense cedex, France

    Laurent David

  2. Toulouse School of Economics, GREMAQ, and IDEI, Manufacture des tabacs, Aile JJ Laffont, 21, Allée de Brienne, 31000, Toulouse, France

    Michel Le Breton

  3. GDF Suez E&P, Département Acquisitions, Tour 1, 1 place Samuel de Champlain, 92930, Paris La Défense, France

    Olivier Merillon

Authors
  1. Laurent David
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Michel Le Breton
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Olivier Merillon
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Laurent David .

Editor information

Editors and Affiliations

  1. , CERSES, University Paris Descartes, rue des Saints-Pères 45, Paris, 75006, France

    Marc Fleurbaey

  2. , CREM, UMR-CNRS 6211, University of Caen, rue Claude Bloch 17, Caen Cedex, 14032, France

    Maurice Salles

  3. , Department of Economics, Vanderbilt University, Vanderbilt Place 2301, Nashville, 37215-1819, Tennessee, USA

    John A. Weymark

Rights and permissions

Reprints and permissions

Copyright information

© 2011 Springer-Verlag Berlin Heidelberg

About this chapter

Cite this chapter

David, L., Le Breton, M., Merillon, O. (2011). Public Utility Pricing and Capacity Choice with Stochastic Demand. In: Fleurbaey, M., Salles, M., Weymark, J. (eds) Social Ethics and Normative Economics. Studies in Choice and Welfare. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-17807-8_3

Download citation

  • DOI: https://doi.org/10.1007/978-3-642-17807-8_3

  • Published:

  • Publisher Name: Springer, Berlin, Heidelberg

  • Print ISBN: 978-3-642-17806-1

  • Online ISBN: 978-3-642-17807-8

  • eBook Packages: Business and EconomicsEconomics and Finance (R0)

Publish with us

Policies and ethics

Search

Navigation