sirbu@GAUSS.ECE.CMU.EDU (Marvin Sirbu) (07/28/86)
Rolla Edward Park and Bridger Mitchell of the Rand Corporation have just published a VERY interesting study on the economics of Usage Sensitive Pricing. (Rand Report R-3404-RC, "Optimal Peak-Load Pricing for Local Telephone Calls, June 1986") They conclude that, in most cases, usage sensitive pricing for telephone calls does very little to improve economic efficiency, and may actually REDUCE total welfare. The essence of their argument is as follows: The idea of usage sensitive pricing is to shift usage away from the peak hours so you don't have to build as much peak capacity, thus saving money. In practice however, there may be twenty hours a year that account for the real peak demand. Yet a practical usage sensitive pricing scheme will set some charge for the same hours of the day (say 10 am to 4 pm) during every business day of the year. For most of those days, traffic is below the peak anyway and the charge serves only to reduce welfare by discouraging calls which could have been handled easily. Ideally, if you could just set a usage sensitive charge differently for every hour of the year (8736 separate rates) you could get some improvement; in practice you can't so you don't. This type of argument could slow the move to USP in State rate cases. Well worth reading if you are thinking of filing comments. Marvin Sirbu Carnegie Mellon