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Key Takeaways Pricing isn’t driven by averages; the highest-cost marginal customer sets market price.
Identify your “last unit” and price around scarcity, not typical user behavior.
Setting the price for your product is confusing, and many assume that averages set prices. If you want a clean mental model for why that’s not what’s happening, look at power.
I’m a former quant researcher on Citadel’s commodities team covering power, and one of the most important properties is that the market clears at the economically efficient price.
It’s supply, demand and various constraints. The price everyone pays is how much it costs to produce the last megawatt of power.
Once you internalize that, it changes how you think about pricing in your own business, because you stop talking about the “average user” and start asking what the marginal unit is.
The last megawatt sets the price
Here’s the simplified way I think about power pricing: the system takes the cheapest power first, which is solar or wind. Then it moves to more expensive sources, like natural gas and coal.
Sometimes it’s cheaper to make power somewhere else and send it over a power line. Sometimes you can’t, because the power lines are already full.
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