Social and Monopoly Optimization in Observable Queues

Abstract

Standard economic theory suggests that monopolies result in outputs lower and prices higher than socially desirable. In service systems, customers are often reluctant to join overly crowded systems because their service valuation decreases with system congestion. Thus a high service price is associated with better service through low congestion levels, that is, low system output. But can a monopolist profit more by providing lots of customers with poor service for a very low price? In our work, we introduce a unified approach, relying on the concept of observable queues, for studying the phenomena of monopoly overpricing in service systems. We explain why, in most observable queue models, the monopolist tends to underexploit capacity by overcharging its service. Yet we discuss cases in which the monopolist may prefer to attract demand by charging less than the socially optimal price.