Continuity of the equilibrium price density and its uses in peak-load pricing

A. Horsley, A.J. Wrobel

    Research output: Contribution to journalArticleScientificpeer-review

    3 Citations (Scopus)

    Abstract

    With L∞ as the commodity space, the equilibrium price density is shown to be a continuous function of the commodity characteristics. The result is based on symmetry ideas from the Hardy-Littlewood-Pólya theory of rearrangements. It includes, but is not limited to, the case of symmetric (rearrangement-invariant) production costs and additively separable consumer utility. Examples arise in continuous-time utility pricing, e.g., electricity pricing. In this context, a continuously varying price has two uses. First, it precludes demand jumps that would arise from discontinuous switches from one price rate to another. Second, in the problems of operating and valuing hydroelectric and pumped-storage plants (studied elsewhere), price continuity guarantees that their capacities (viz., the reservoir and the converter), the energy stocks, and in the case of hydro also the river flows, have well-defined marginal values.
    Original languageEnglish
    Pages (from-to)839-866
    Number of pages27
    JournalEconomic Theory
    Volume26
    Issue number4
    DOIs
    Publication statusPublished - 2005

    Keywords

    • price continuity
    • equilibrium existence
    • efficiency rents

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