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Ramsey Pricing Strategy, Peak Load Pricing

  Pricing in Non-Profit Organisations, Ramsey Pricing, Peak Load Pricing

Introduction

     Three optional pricing strategies have been recommended for non-profit organisations which may be operated by government or civic divisions:

  1. Marginal Cost Pricing
  2. Average Cost Pricing
  3. Ramsey Pricing

      Ramsey pricing has been projected when an organisation manufactures two or more commodities and services or sells its commodities in two or more markets and when usual costs are quite huge.

      In accumulation to the above there is peak load pricing which is frequently followed by power distribution companies.

  1. Marginal Cost Pricing

     Public wellbeing is optimum or economic efficacy in resource distribution is accomplished when price is set paritying to marginal cost. It has been advised that non-profit organisations must trail marginal cost pricing policy so as to accomplish economic efficacy in resource distribution.

     Let us presume the below diagram where BD is demand or average revenue curve for the commodity of the organisation. AC and MC are average and marginal costs curves correspondingly.

      If this organisation is functioned on profit optimisation doctrine it will manufacture Vo productivity and determine rate paritying to Ro. Nevertheless, this rate is much huge and productivity much lesser than those needed to accomplish maximum resource distribution.

      To make sure or optimum resource distribution, marginal cost pricing needs that price must be determined at R1 level of productivity at V1 level. It is to be noticed from the diagram that even with marginal cost pricing strategy industry is producing profits paritying to R1 CDA which could be reinvested for investment use.

       Nevertheless, marginal cost pricing does not make sure positive profits when the organisation is benefiting very large economies of scale and as a consequent AC and MC curves persists dropping down as in crate of natural monopolies.

       Marginal cost pricing in this crate, consequents to failures being made by the organisation. If marginal cost pricing is pursued in this crate, then failure should be met by financial support by the government.

      This is been illustrated in the diagram 2 where Ac and MC are dropping entirely due to the economies of scale. If marginal cost doctrine is adopted then V1 volume of productivity will be manufactured and rate R1 will be charged.

     In the diagram 2 to R1 EAB must be paid to the organisation or else the government must itself undertake the manufacturing of the commodity and face failures from the budgetary resources.

      Therefore, in such enterprises where huge economies of scale take place, marginal cost pricing is not feasible.

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