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, who 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.

BREAKING DOWN 'Peak Pricing'

If periods of peak demand are not well managed, demand will far outstrip supply. In the case of utilities, this may cause brownouts. In the case of roads, it may cause 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.

Peak pricing is one element of a larger comprehensive pricing strategy called dynamic pricing. Under a dynamic pricing strategy, companies will set flexible prices for they products or services that change, according to current market demand. 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 and Transportation

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 ride-sharing services, such as Uber and Lyft, are also familiar with peak or "surge" pricing, which raises fares during periods of high demand for rides and lower supply of drivers. Airlines will also institute peak pricing during periods of high demand, such as holidays in which consumers travel more. Algorithms typically control the degree of these price increases.

RELATED TERMS
  1. Congestion Pricing

    Congestion pricing is a dynamic pricing strategy designed to ...
  2. Congestion

    1. A market situation whereby the demand of contract holders ...
  3. Demand

    Demand is an economic principle that describes consumer willingness ...
  4. Peak

    Peak refers to the pinnacle point of economic growth in a business ...
  5. Law of Supply and Demand

    The law of supply and demand explains the interaction between ...
  6. Peak Globalization

    Peak globalization is the point at which the movement toward ...
Related Articles
  1. Investing

    Peak Oil: Problems And Possibilities

    Learn a little more about the "non" part of this nonrenewable resource.
  2. Investing

    Peak Oil: What To Do When The Wells Run Dry

    Find out how to invest and protect your investments in this slippery sector.
  3. Investing

    Cloud Peak Stock Soars on Q3 Earnings Beat (CLD)

    With the company crushing Wall Street's third quarter earnings estimates and issuing solid guidance last Thursday, Cloud Peak answered the call.
  4. Personal Finance

    Consumer Spending on Travel Has Likely Peaked (PCLN, EXPE)

    While consumer spending on travel recovered quickly following the recession, it has been outpacing wage and GDP growth, and has thus likely maxed-out.
  5. Investing

    Was "Peak Oil" a Myth?

    We’ll look at what’s happened to the once-clear concept of finite oil reserves, and where it stands now.
  6. Tech

    6 Companies Using Blockchain To Change Travel

    Blockchain is emerging as a powerful technological force that promises to change the travel industry’s status quo.
  7. Personal Finance

    The Cheapest Times To Fly To Hawaii

    What's the best way to save money on flying to Hawaii?
  8. Personal Finance

    The Cheapest Times To Fly To New York City

    Summer is the costliest season to travel to the Big Apple from abroad. You'll save money in the colder months, as long as you avoid the holidays.
  9. Investing

    Why You Can't Influence Gas Prices

    Neither big oil companies nor consumers are responsible for oil prices: it's basic economics.
  10. Taxes

    Taxi Industry: Pros & Cons Of UBER And Other E-Hail Apps

    The use of E-Hail apps to arrange taxi pick-ups is reshaping the personal transportation industry, and creating a new set of industry players, and rules.
RELATED FAQS
  1. Is demand or supply more important to the economy?

    Learn more about the impact of supply and demand in an economy. Find out why companies study supply and demand as part of ... Read Answer >>
  2. How can I calculate a company's forward p/e in Excel?

    Discover why trading volume is higher when the price of a security changes. Supply and demand is the mechanism through which ... Read Answer >>
  3. How does the law of supply and demand affect the stock market?

    Find out how the law of supply and demand affects the stock market, and how it determines the prices of individual stocks ... Read Answer >>
  4. How Does Uber Make Money?

    Have you ever used Uber and wonder how did they set the price? Here is an inside look at how ridesharing companies like Uber ... Read Answer >>
  5. What are some examples of the law of demand in real markets?

    Find out how the price of a good or service affects the quantity demanded, and explore instances of consumption reflecting ... Read Answer >>
  6. What are some examples of inelastic goods and services that are not affected by the ...

    Find out how the laws of supply and demand function for goods and services considered highly inelastic, including goods not ... Read Answer >>
Hot Definitions
  1. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  2. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  3. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  4. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  5. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  6. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
Trading Center