A method for calculating the marginal cost of industrial power cuts is developed. Firms are assumed to hedge against outages by acquiring back-up generators. The marginal cost of back-up power enables us to infer the marginal cost of a power cut.

The model identifies the quality of a network product with the number of consumers using it. Hence, the producer cannot unilaterally control the quality of his product. Using the preference specification of vertical quality differentiation, it is shown that the largest network produced will be...