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Behavior of a Monopoly Offering Interruptible Service

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  • John Tschirhart
  • Frank Jen

Abstract

A monopoly offering service to its customers on an interruptible basis has the option of curtailing delivery of this service when available supply falls short of demand. Shortages occur because of the stochastic nature of demand. To do this the monopolist divides the customers into classes based on some observable characteristics, and then determines the order in which service to these classes is interrupted. The order is a decision variable that influences profits and is relevant only in the stochastic framework. In addition, the monopolist discriminates among the classes on the basis of price and reliability of service. These decision variables, in turn, influence demands. An optimum policy for any ordering is one where prices, capacity, and quoted reliabilities of service maximize expected profit, and at the same time are compatible with the actual reliabilities of service. We derive some conditions for which an ordering yields the greatest profit.

Suggested Citation

  • John Tschirhart & Frank Jen, 1979. "Behavior of a Monopoly Offering Interruptible Service," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 244-258, Spring.
    • Handle: RePEc:rje:bellje:v:10:y:1979:i:spring:p:244-258
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    Citations

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    Cited by:

    1. Charles Okeahalam, 2007. "Economics of access in a developing country: an analysis of firm‐conduct in financial services," International Journal of Social Economics, Emerald Group Publishing Limited, vol. 34(12), pages 923-942, October.
    2. Mark W. Gellerson & Shawna P. Grosskopf, 1980. "Public Utility Pricing, Investment, and Reliability under Uncertainty: A Review," Public Finance Review, , vol. 8(4), pages 477-492, October.
    3. Coate, Stephen & Panzar, John C, 1989. "Public Utility Pricing and Capacity Choice under Risk: A Rational Expectations Approach," Journal of Regulatory Economics, Springer, vol. 1(4), pages 305-317, December.
    4. Matsukawa, Isamu, 2006. "Regulating a Monopoly Offering Priority Service," MPRA Paper 991, University Library of Munich, Germany.
    5. Çağrı Latifoğlu & Pietro Belotti & Lawrence V. Snyder, 2013. "Models for production planning under power interruptions," Naval Research Logistics (NRL), John Wiley & Sons, vol. 60(5), pages 413-431, August.
    6. Isamu Matsukawa, 2009. "Regulatory effects on the market penetration and capacity of reliability differentiated service," Journal of Regulatory Economics, Springer, vol. 36(2), pages 199-217, October.
    7. Ross Baldick & Sergey Kolos & Stathis Tompaidis, 2006. "Interruptible Electricity Contracts from an Electricity Retailer's Point of View: Valuation and Optimal Interruption," Operations Research, INFORMS, vol. 54(4), pages 627-642, August.

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