EFFICIENT PRICE AND CAPACITY CHOICES UNDER UNCERTAIN DEMAND - AN EMPIRICAL-ANALYSIS

Traditional economic analyses of the peak-load problem typically assum e an unrealistic degree of regularity in demand during well-defined pe ak and off-peak periods. This issue is addressed through a comprehensi ve statistical model that separates demand into its systematic and sto chastic components. This model is combined with a traditional economic model and applied to local telephone service, leading to substantive conclusions relevant for managerial decisions as well as further resea rch, among them: Neglecting the systematic and stochastic structure of demand may lead to inefficient tariffs. Efficient measured service st ructures typically price individual calls below incremental capacity c ost. Industry wide capacity decision rules that are exclusively driven by blockage probability targets during narrowly defined time periods may be economically inefficient. For telephone service, spot pricing, which sets high prices during periods of actual congestion, has the po tential to be considerably more efficient than traditional tariffs tha t set high prices during periods of expected congestion.