Managerial Economics and Strategy, 2/e

10.7 Peak-Load Pricing

Rooms in Florida’s resort hotels that can be rented for $100 or $200 per night in the hot, humid summer months often rent for twice as much in the winter months of January and February when snowbirds from northern states and Canada flock to Florida’s warm, sunny beaches. Similarly, in many areas, electricity costs more during business hours than at night. Such pricing strategies are examples of peak-load pricing: charging higher prices during periods of peak demand than in other periods.

Peak-load pricing is commonly used when firms face a production capacity constraint. For example, a hotel’s capacity constraint is the maximum number of rooms, $\overline{Q},$ [&*obar*{Q},&] that it can rent. As Figure 10.7 illustrates, the ...