Peak Load Pricing

Ah, Uber. You’re such an evil genius. Ever tried to book a ride at 5:30 after work on a rainy day? Yeah, good luck with that. And if the ride normally would have cost $18, be ready to pay $30.

The biggest Uber mover? 12:32 a.m. January 1. Yeah. Drunk New Year’s Eve post-partyers desperate to get home for the, um..., ensuing annual with The Porcelain Goddess. Liquor before beer, in the clear. Beer before liquor, never sicker. So peak load, or peak demand season, or peak demand hours… happen when demand uh…peaks. Like there’s lots of it.

And pricing to optimize profits derives from the fact that, at peak demand times, there is either just tons of demand. Or that the demand curve in this period is vertical. Like... people will pay almost anything for that New Year’s ride home, if it normally cost 20 bucks, it can cost 100, and people will pay.

Why? Because the marginal value of that 100 bucks is waaaay cheaper than:

Running your car into a tree;
Running your car into a human;
The DUI tickets and jail time that would ensue; and
Twenty years of psychoanalysis to help you deal with the fact that you ran over one of the young actors from Modern Family.

Peak load pricing used to be a huge thing in long distance calling. Like during business hours, when businesses that were more or less insensitive to the cost of a phone call, which was a rounding error in the course of their business, would do anything, or pay anything, for that call to New York, or Florida, or London, or wherever.

Two bucks a minute? Fine. Four bucks? Fine. It was such high pricing that a lot of consumers simply didn’t make the call, and the phone companies feared regulatory backlash, and also wanted to take advantage of the consumer demand at cheaper prices. So when Peak crested and the night set in, like between, say, 10 pm and 7 am, prices were cut for long distance phone calls by half or 2 thirds.

There was another reason for the peak load pricing as well. In those days, pre-Skype and Google Hangouts, phone companies were circuit switched, not packet switched. Meaning that there were, in fact, line capacity maximums that were hit when 8-ish percent of the country tried to use those lines.

So to scale up for 9 or 10 or 12 or 15 percent, it cost the phone companies a fortune, and they wanted to get paid back for their efforts. So the higher prices matched their higher marginal costs in providing that infrastructure. All that went away with internet telephony, but the scars still exist on the population who grew up under that iron fisted rule.

So where is peak load pricing today in olde worlde things?

Electricity.

The same physics that hit phone companies, hit electricity producers as well. Only so much power can be generated on the grid at once. And if demand exceeds it, bad things happen. Like, the whole system overheats and shuts down as a safety precaution to avoid a fire. Or the local power company has to buy power from others in some form.

So power companies charge big peak load prices and highly encourage laundry-doing after midnight, when very few people are sucking from the electric teat, and there is a ton of excess or slack capacity in the system. Remember that the next time there’s a brown-out from a hot day, when everyone’s A/C units are blasting on “high” and lemonade is on tap...