Behavior of a monopoly offering interruptible service

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.