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The Value of "Value Pricing" of Roads: Second-Best Pricing and Product Differentiation

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  • Small, Kenneth A.
  • Yan, Jia

Abstract

Some road-pricing demonstrations use an approach called "value pr icing", in which travelers can choose between a free but congested roadway and a priced roadway. Recent research has uncovered a potentially serious problem for such demonstrations: in certain models, second-best tolls are far lower than those typically charged, and the welfare gains from profit maximization are small or even negative. That research, however , assumes that all travelers are identical, and it therefore neglects the benefits of product differentiation, by which people with different values of time can choose a suitable cost/quality combination. Using a model with two user groups, we find that accounting for heterogeneity in value of time is important in evaluating constrained policies, and improves the relative performance of policies that offer differential prices. Nevertheless, for most of the reasonable range of heterogeneity, second-best pricing produces far fewer benefits than pricing both roadways optimally, and profit-maximizing tolls are so high that over all welfare is reduced from the no-toll baseline.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Urban Economics.

Volume (Year): 49 (2001)
Issue (Month): 2 (March)
Pages: 310-336

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Handle: RePEc:eee:juecon:v:49:y:2001:i:2:p:310-336

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Web page: http://www.elsevier.com/locate/inca/622905

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  2. Arnott, Richard & de Palma, Andre & Lindsey, Robin, 1992. "Route choice with heterogeneous drivers and group-specific congestion costs," Regional Science and Urban Economics, Elsevier, vol. 22(1), pages 71-102, March.
  3. Verhoef, Erik Teodoor & Small, Kenneth A., 1999. "Product Differentiation on Roads: Second-Best Congestion Pricing with Heterogeneity under Public and Private Ownership," ERSA conference papers ersa99pa358, European Regional Science Association.
  4. Bradford, Richard M., 1996. "Pricing, routing, and incentive compatibility in multiserver queues," European Journal of Operational Research, Elsevier, vol. 89(2), pages 226-236, March.
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  7. Verhoef, Erik & Nijkamp, Peter & Rietveld, Piet, 1996. "Second-Best Congestion Pricing: The Case of an Untolled Alternative," Journal of Urban Economics, Elsevier, vol. 40(3), pages 279-302, November.
  8. AndrÊ de Palma & Robin Lindsey, 2000. "Private toll roads: Competition under various ownership regimes," The Annals of Regional Science, Springer, vol. 34(1), pages 13-35.
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  10. Shmanske, Stephen, 1991. "Price Discrimination and Congestion," National Tax Journal, National Tax Association, vol. 44(4), pages 529-32, December .
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