Service-Differentiated Pricing during Busy Periods with Partial Competition from the Private Sector

Abstract

We discuss the problem of pricing during busy periods for a public sector industry facing a transition from a monopolistic environment to a partially service-competitive environment when limited deferrability of service is possible. We first explain the characteristics of service-differentiated pricing. The preferential service and the deferrable service are priced differently in order to utilize the capacity of the industry. Not only the own price elasticity and the cross elasticity between two services and between two mail-processing operations (preferential and deferrable service) but also the cross elasticity between services from competing private sectors affect the general second-best pricing of a public sector industry. The second-best pricing would be under-estimated if competition between public and private sectors is ignored. If cross elasticity of demand between two services is zero, and if cross elasticity of preferential and deferrable service is zero, then the deferrable processing service should pay the ”day shift”(off-peak)cost and the preferential service processed during nonpremium hours (the ”day shift”) should pay part of the ”night shift” cost (peak, processing in the premium period). If the objective is to maximize social welfare, and if the private sector is a competitive market, the price of the preferential service might not equal its marginal cost.