Exploitative Priority Service

Alex Gershkov
Eyal Winter

We analyze the implications of introducing priority service on customers' welfare. In monopoly markets, introducing priority service decreases the customers' surplus despite increasing the assignment efficiency: the monopolist extracts from customers a total payment higher than the total efficiency gain generated by the service and hence leaves customers worse off compared with the situation where no priority is offered at all. In duopoly markets with homogeneous customers the equilibrium price and customers' welfare coincide with the monopoly outcome where this monopolist faces half of the market. With heterogeneous customers as well priority reduces the aggregated consumers' welfare. Our conclusion is that priority service erects barriers to competition that are embedded in the nature of the service provided, with the victims of these barriers primarily being agents with low willingness or low ability to pay for the priority.

August, 2020