Pricing for Capacity Utilisation with Public Enterprises

Wayne Mayo

Australian Economic Review, 1989, vol. 22, issue 3, 16-24

Abstract: Pricing Individual services provided by public busines enterprises so that the use of available capacity is, where possible, maximised during peak as well as slack demand periods will for many enterprises correspond closely to ideal marginal cost pricing. Such a pricing strategy will usually result in excess profits when the level of capacity is deficient and in losses when capacity is excessive. Optimal long‐run capacity can thus be sought under this pricing strategy by increasing or reducing capacity over time with a view to achieving normal profits or a target rate of return. In the short run, before capacity can be changed, enterprise profits are driven by the pricing strategy, not by the target rate of return. For enterprises with large lumpy investments it is particularly important for the rate of return objective to be achieved over several years, allowing for reduced returns when new lumpy capacity is first introduced. For enterprises whose services involve significantly increasing congestion costs before full capacity is reached, pricing to achieve something less than full capacity utilisation is required but technological advancement is reducing the relevance of this complication.

Date: 1989
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