Peak Pricing: and Example

What Is Peak Pricing?

Peak pricing is a form of congestion pricing where customers pay an additional fee during periods of high demand. Peak pricing is most frequently implemented by utility companies, which charge higher rates during times of the year when demand is the highest. The purpose of peak pricing is to regulate demand so that it stays within a manageable level of what can be supplied.

Peak pricing is also used among ride-sharing services and other transportation providers, where it is known as "surge pricing."

How Peak Pricing Works

Peak pricing is a mechanism where the price of some good or service is not firmly set; instead, it fluctuates based on changing circumstances — such as increases in demand at certain times, the type of customers being targeted, or evolving market conditions. If periods of peak demand are not well managed, demand can far outstrip supply.

In the case of utilities, this may cause brownouts. In the case of roads, it may cause traffic congestion. Brownouts and congestion are costly for all users. Using peak pricing is a way of directly charging customers for these negative effects.

The alternative is for municipalities to build up more infrastructure in order to accommodate peak demand. However, this option is often costly and is less efficient as it leaves a large amount of wasted capacity during non-peak demand. Under a dynamic pricing strategy, companies will set flexible prices for their products or services that change, according to current market demand.

Peak pricing is one element of a larger comprehensive pricing strategy called dynamic pricing.

Businesses are able to change prices based on algorithms that take into account competitor pricing, supply, and demand, and other external factors in the market. Dynamic pricing is a common practice in several industries such as hospitality, travel, entertainment, retail, electricity, and public transport. Each industry takes a slightly different approach to repricing based on its needs and the demand for the product.

Peak Pricing Examples

In public transportation and road networks, peak pricing is used to encourage more efficient use of resources or time-shifting to cheaper or free off-peak travel. For example, the San Francisco Bay Bridge charges a higher toll during rush hour and on the weekend, when drivers are more likely to be traveling. This is an effective way to boost revenue when demand is high, while also managing demand since drivers unwilling to pay the premium will avoid those times.

The London congestion charge discourages automobile travel to Central London during peak periods. The Washington Metro and Long Island Rail Road charge higher fares at peak times.

Users of home-sharing services, like Airbnb or VRBO.com, usually see prices go up during certain months of the year or during the holidays. For example, renting a home on Cape Cod via a home-share service in August is likely to be more expensive than renting the same house in the dead of winter.