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Should competing firms cooperate to reduce congestion?

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  • Jacob, Jagan

Abstract

Consider two profit-maximizing service firms in the presence of congestion-sensitive customers. Firms set their prices and compete to capture market share. We compare cases where the firms can invest either independently (competition) or jointly (co-opetition) in congestion-reduction (CR) activities. Using a stylized analytical model, we find that when the market is covered (that is when everyone buys a product), the firm with a lower marginal CR cost earns more profit under competition than under co-opetition. When the market is uncovered, co-opetition is more profitable if the joint marginal CR cost is less than a threshold. We find that when the market is covered, neither firm makes any CR investment but when the market is uncovered, there will be a CR investment provided the marginal CR cost is lower than a threshold. Our analysis shows that when prices are regulated, firms under competition make CR investments but firms under co-opetition do not. The impact of proximity on each firm’s choice of location under competition and co-opetition are different. We find that if the marginal CR cost under joint investment is larger than a cutoff, then social welfare is also higher under competition than under co-opetition.

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  • Jacob, Jagan, 2020. "Should competing firms cooperate to reduce congestion?," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 142(C).
    • Handle: RePEc:eee:transe:v:142:y:2020:i:c:s1366554519314371
    DOI: 10.1016/j.tre.2020.101929
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