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Product Differentiation on Roads

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  • Erik T. Verhoef
  • Kenneth A. Small

Abstract

The authors explore the properties of various types of public and private pricing on a congested road network, with heterogeneous users, and allowing for elastic demand. The network allows them to model certain features of real-world significance: pricing restrictions on either complementary or substitute links, as well as interactions between different user groups on shared links. They find that revenue-maximising pricing is much less efficient than welfare-maximising pricing, but this difference is mitigated by the product differentiation made possible with heterogeneous users. Ignoring heterogeneity causes the welfare benefits of a policy of current interest, namely second-best pricing of one of two parallel links, to be dramatically underestimated. Unlike first-best policies, secondbest policies are in danger of losing much of their potential effectiveness if heterogeneity is ignored when setting toll levels. © The London School of Economics and the University of Bath 2004

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Bibliographic Info

Article provided by London School of Economics and University of Bath in its journal Journal of Transport Economics and Policy.

Volume (Year): 38 (2004)
Issue (Month): 1 (January)
Pages: 127-156

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Handle: RePEc:tpe:jtecpo:v:38:y:2004:i:1:p:127-156

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Web page: http://www.bath.ac.uk/e-journals/jtep

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