Peak-Load Pricing Is When a Firm Charges a Different Price

Multiple Choice

Peak-load pricing is when a firm charges a different price during the peak (e.g., highest demand) period than during off-peak times, because the marginal cost of providing the good or service during the peak is higher. For example, an electricity producer builds generating capacity to serve peak-period demand but only needs to call on this full capacity during a handful of days of the year. Building capacity to meet peak demand means that there is a discrete change in the marginal cost of providing the good or service across a binding capacity constraint. Is this an example of price discrimination? If so, to which degree? If not, explain why not.

A) Yes; first-degree price discrimination
B) Yes; second-degree price discrimination
C) Yes; third-degree price discrimination
D) No; because the good or service is not the same (it has different marginal costs in peak versus nonpeak periods)