UNET Seminar: Eyal Winter (Lancaster and Hebrew)

Title: Organizing negative externalities among consumers (with Alex Gershkov)

Abstract: In our JPE (2023) paper, we showed that priority services, where customers can pay to move ahead in line, reduce overall consumer welfare because the service provider extracts revenue exceeding the efficiency gains generated by such regimes. In this paper, we take a more general perspective by studying how a service provider organizes negative externalities among consumers. Unlike the extensive literature on consumer externalities, which typically assumes they are positive, we focus on negative externalities that mostly arise from competition or congestion. Assuming two consumption sites, we analyze the optimal organization of externalities with and without pricing. In the latter case, we also examine regimes in which part of the revenue earned from premium customers (who enjoy lower congestion) is redistributed to compensate non-premium customers.