Disutility and constrained quality choice in self-selection problems

This paper analyzes the self-selection problem in a monopoly market where (i) consumer types are characterized by both utility of service and disutility of interrupted service and (ii) qualities (reliabilities) are interdependent. We derive behavior of a profit-maximizing monopolist in offering self-selection menu of price and reliability and in choosing capacity investment. We further analyze welfare distortions of the monopolistic behavior. The major findings are: (i) depending on the magnitude of utility and disutility, either consumer type may end up with zero surplus, (ii) the possibility of inefficient production may lead to idle capacity, and (iii) depending on the consumer preference structure, the monopolist's investment is lower than, equal to, or higher than the socially optimal level.