Priority Service: Pricing, Investment, and Market Organization

Abstract

Priority service offers a menu of contingent contracts for distribution of scarce supplies. Prices inducing customers' efficient self-selection are expectations of spot prices for comparable service. Customers' selections reveal the benefit of capacity expansion. Priority service can be implemented via sale of "priority points" or via provision of compensatory insurance. Sever al priority classes suffice to obtain most of the efficiency gains. P riority service Pareto dominates random rationing if excess revenue i s refunded equally to customers. Copyright 1987 by American Economic Association.

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