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Pricing Power in Whosesale Markets: A Risky Business

A Risky Business Utilities wrestle with how much to charge for their product.
Fortnightly Magazine - March 2004
  1. differences in pricing of risk. Company-specific differences with respect to efficiency in risk bearing of non-traded risk are difficult to diversify away.
  2. Haar, L. "Fallacies in the Stakeholding Debate," , Vol. 19, No.4, December 1999, pp. 44-48. Reference to an explanation of Fisher's Separation Theorem, which is how profit maximization at the firm level may be separated from the individual preferences of shareholders with regard to risk aversion. See Fisher, I. (1930), , New York, MacMillan, chapters 10 and 11.
  3. Drury, C. Costing: An Introduction, Third Edition, London: Chapman & Hall, 1995. pp. 195 - 212.
  4. Other examples include the company specific commodity price, given the load-shape/volume versus that of published indices, and the internal pricing for the use of risk capital.


Marginal-Cost Pricing Around the Globe

It is quite surprising that the case for marginal-cost pricing needs to be revisited. Notions such as embedded cost, a full- or absorption-cost/full-cost approach to pricing, practiced in the United States under rate of return regulation, were largely abandoned during the 1970s in favour of marginal-cost pricing. 1 The application of marginal cost methods to rate making gained ground because these were viewed as encouraging more efficient use of resources, especially given historical returns on fixed asset regulation. 2 In England and France, under state ownership, experiments with marginal-cost pricing were made as early as the 1950s. The UK pool system, adopted in the late 1980s revolved around the use of short-run marginal cost for dispatching the plants in their merit order, combined with a problematic use of capacity payments. 3 -L.H.

  1. Viscusi, W.K., J.M. Vernon, and J.E. Harrington, Jr. , London, MIT Press, 2000, pp. 361-388.
  2. Pacific Gas and Electric Co., , 2nd Edition, San Francisco: PG&E, 1992, pp. 275-276.
  3. Helm, D. , Oxford, Oxford University Press, 2003, pp.125-151.

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