Abstract
We analyze the implications of introducing priority service on customers'welfare. In monopoly markets, introducing priority service can often decrease consumer surplus. This negative e¤ect exists despite an increase in e¢ ciency gains. In other words, the monopolist extracts from customers an aggregated payment higher than the total e¢ ciency gain generated by the service and hence leaves customers worse o¤ than when no priority is o¤ered at all. In duopoly markets with homogeneous customers the price competition over priority service is blocked, i.e., the equilibrium price and customers' welfare coincides with the monopoly outcome where this monopolist faces half of the market. With heterogeneous customers as well priority can reduce the aggregated consumer welfare. On the other hand, priority service can increase customers'surplus if it expands the consumption's coverage, i.e., if it introduces new customers who would not otherwise purchase the service. Furthermore, a market environment in which the dominant e¤ect of customers'indi-vidual preferences is on the value of the basic good and less on the disutility of waiting tends to be more conducive to welfare improvement due to priority service.