Electric companies typically have 5–10 different rate schedules for their main

customer groups. The average price charged to large industrial users may

differ substantially from that charged to residences. Moreover, many consumers

pay a price for electricity based on the time of day they use it. For

example, the prices charged by Consolidated Edison, a large New York electric

utility, and Pacific Gas and Electric, a major California electric utility, are as

follows:

Electric utilities use their cheapest generators continuously and start up their

more costly ones as demand goes up. Consequently, at 3 a.m., a utility might

meet its requirements from a hydroelectric dam that produces electricity for

$0.02 per kilowatt-hour. However, on a hot day in August, when air conditioners

are running full blast, demand would be so great that the utility would

be forced to use its most costly generators—perhaps an oil-fi red plant where

electricity costs $0.07 per kilowatt-hour.

a. Does price discrimination occur in the market for electricity?

b. Why have some state regulatory commissions, including the Public

Service Commission of New York, ordered that time-of-day rates be

phased in for residential consumers?

c. In many areas, both residential and industrial consumers tend to pay a

lower price per kilowatt-hour if they use more rather than less electricity.

Is this price discrimination? If so, what kind of price discrimination is it?

d. Explain why price discrimination is used by managers of electric companies.

 

The managers of Roosevelt’s (a local yet upscale bar) are considering charging

an admission fee on Thursday nights. They contemplate how to charge.

Should they Option 1. Use just a beverage charge per beverage ordered or

Option 2. Use an admission charge (a fee to enter the establishment) and

a beverage charge per beverage ordered? There are two types of people who frequent Roosevelt’s: Over 21 Students (S) and Over 21 Student Wannabees (W). Each Student has a demand for beverages of P = 8 – QS where QS is the quantity of beverages demanded if the price of a beverage is P. Each Wannabee has a demand for beverages of P = 8 – 2QW

where QW is the quantity of beverages demanded if the price of a beverage is P.

The marginal cost of serving a beverage is a constant $2.

For simplicity, assume there is one demander of each type. Roosevelt’s

must (by law) charge all customers the same admission charge and the same

per beverage charge. Beverages do not have to be sold in integer amounts and

prices do not have to be in integer amounts.

a. Under option 1, what is the profit maximizing price per beverage?

b. Under option 2, what is the profit maximizing two-part tariff?

c. What is Roosevelt’s profit under Roosevelt’s best choice?