Optimal Peak-Load Pricing for Local Telephone Calls

Technical Appendixes

by Rolla Edward Park, Bridger M. Mitchell

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This report contains five technical appendixes that supports an analysis that shows how to find optimal time-of-day measured-rate prices for local telephone calls. This analysis uses a simulation model based on actual telephone traffic data for each hour for a full year. The model calculates capacity cost savings, measurement costs, losses in consumer benefit due to price rationing, and losses due to quantity rationing, to assess the net welfare effects of alternative tariffs. It is the first application of peak-load pricing theory to recognize and account for variation in demand within feasible pricing periods. Feasible tariffs are limited to perhaps three price periods that repeat from day to day, and local telephone demand varies markedly within such periods, sharply limiting the efficiency gains that price rationing can achieve. The findings suggest that, contrary to conventional wisdom, measured-rate pricing of local telephone calls is likely to be less efficient than traditional flat-rate pricing. If local measured service is desirable public policy, it must be justified on grounds other than economic efficiency.

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