AN ECONOMIC ANALYSIS OF RELIABILITY-CONSTRAINED SERVICE SYSTEMS.

TL;DRAbstract

This dissertation considers the problem of a welfare-maximizing monopolist, which must set prices and service quality levels so as to maximize a social welfare function. Demand for the services in question is stochastic and service quality levels are defined in terms of meeting pre-specified service standards at a given level of reliability. The monopolist may face further constraints, including a minimum profit level constraint. General results derived have a close resemblance to received theory for other public service systems. In particular, optimal prices are based on marginal costs, but the marginal costs at issue here are those corresponding to the reliability-constrained expected minimum cost of the system. Optimal reliability levels are also characterized by the requirement that reliability for each service offered be set to equate the marginal benefits to consumers to the marginal cost of the monopolist. The general results are applied to two important areas of public service:

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