Monopolistic Provision of Congested Service with Incentive-Based Allocation of Priorities

Nagarathnam Viswanathan and Edison T S Tse

International Economic Review, 1989, vol. 30, issue 1, 153-74

Abstract: Quality of service in a congested service system is dependent on the capacity level, as well as demand. With heterogeneity in consumer preferences for quality, an incentive-based priority service can increase the surplus to the consumer, as well as to the producer, and can reduce the capacity reserve requirement. Introduction of priorities essentially internalizes the negative externality due to congestion and thus leads to the above beneficial effects. Electric power supply is used as the illustrative application and reliability of service becomes the service-quality attribute in that context. Copyright 1989 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Date: 1989
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