Define peak load pricing. How does it differ from third degree price discrimination? Analyse graphically

Peak load pricing is a pricing strategy used by service providers and utilities to charge customers based on the time of day and whether demand is being placed on the system. It is designed to reflect the cost of providing services during peak demand periods, when the cost of production is often higher.

In peak load pricing, prices are higher during periods of peak demand and lower during off-peak periods. This is done to encourage consumers to shift their consumption to off-peak periods, thereby helping to balance demand throughout the day and reduce the need for additional capacity.

On the other hand, third degree price discrimination is a pricing strategy where a company divides its market into different segments and charges a different price to each segment. This is based on the elasticity of demand in each segment, not on the time of day or the level of demand.

To illustrate this graphically, imagine a graph with price on the y-axis and quantity on the x-axis.

For peak load pricing, the demand curve would shift to the right during peak periods, reflecting higher demand. The supply curve would also shift to the left, reflecting the higher cost of production. The intersection of the supply and demand curves would be at a higher price during peak periods.

For third degree price discrimination, there would be multiple demand curves on the same graph, each representing a different market segment. The company would charge a higher price to the segment with a more inelastic demand curve and a lower price to the segment with a more elastic demand curve. The intersection of the supply curve and each demand curve would determine the price for each segment.