Theoretical Economics 20 (2025), 1081–1134

This paper examines the welfare implications of priority service in a frictional search environment with heterogeneous outside options. Priority search facilitates expedited matching with public options in the market by charging a service premium. Our main analysis demonstrates that a profit-maximizing priority search program always induces the efficient level of market participation. The key insight underpinning our results is the nonmonotonic relationship between the priority service premium and market participation, which is driven by the nonexclusivity of priority search. This finding extends to several market design details and elucidates how to simultaneously generate revenue and regulate congestion in the presence of matching frictions.

Keywords: Priority service, search friction, outside option, entry efficiency, market design

JEL classification: C70, D47, D60, D82, D83