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Product Differentiation on Roads: Second-Best Congestion Pricing with Heterogeneity under Public and Private Ownership

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Author Info
Erik T. Verhoef () (Vrije Universiteit Amsterdam)
Kenneth A. Small (University of Irvine at California)

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Abstract

We explore the properties of various types of public and private pricing on a congested road network with heterogeneous users and allowing for elastic demand. Heterogeneity is represented by a continuum of values of time. The network consists of both serial and parallel links, which allows us to model second-best pricing restrictions on either complementary or substitute links, while still accounting for interaction between different groups on shared links (e.g. in city centres). We find that private (revenue-maximizing) pricing is much less efficient than public pricing, whether on the partial or the full network; but this difference is mitigated by the product differentiation made possible by heterogeneous users. Ignoring heterogeneity causes the welfare benefits of second-best pricing of one parallel link, a policy currently receiving favourable consideration, to be dramatically underestimated. Product differentiation produces some unexpected distributional effects, including the possibility that first-best pricing can result in one of the parallel routes being both more congested than without pricing.

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Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 99-066/3.

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Date of creation: 24 Aug 1999
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Handle: RePEc:dgr:uvatin:19990066

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Edelson, Noel M, 1971. "Congestion Tolls Under Monopoly," American Economic Review, American Economic Association, vol. 61(5), pages 873-82, December. [Downloadable!] (restricted)
  2. Train, Kenneth E & McFadden, Daniel L & Goett, Andrew A, 1987. "Consumer Attitudes and Voluntary Rate Schedules for Public Utilities," The Review of Economics and Statistics, MIT Press, vol. 69(3), pages 383-91, August. [Downloadable!] (restricted)
  3. 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. [Downloadable!] (restricted)
  4. Braid, Ralph M., 1996. "Peak-Load Pricing of a Transportation Route with an Unpriced Substitute," Journal of Urban Economics, Elsevier, vol. 40(2), pages 179-197, September. [Downloadable!] (restricted)
  5. Liu, Louie Nan & McDonald, John F., 1998. "Efficient Congestion Tolls in the Presence of Unpriced Congestion: A Peak and Off-Peak Simulation Model," Journal of Urban Economics, Elsevier, vol. 44(3), pages 352-366, November. [Downloadable!] (restricted)
  6. Small, Kenneth & Yan, Jia, 2000. "The Value of "Value Pricing" of Roads: Second-Best Pricing and Product Differentiation," Discussion Papers dp-00-08, Resources For the Future. [Downloadable!]
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  7. Hahn, Robert W, 1989. "Economic Prescriptions for Environmental Problems: How the Patient Followed the Doctor's Orders," Journal of Economic Perspectives, American Economic Association, vol. 3(2), pages 95-114, Spring. [Downloadable!] (restricted)
  8. Vickrey, William S, 1969. "Congestion Theory and Transport Investment," American Economic Review, American Economic Association, vol. 59(2), pages 251-60, May. [Downloadable!] (restricted)
  9. Train, Kenneth E & Ben-Akiva, Moshe & Atherton, Terry, 1989. "Consumption Patterns and Self-selecting Tariffs," The Review of Economics and Statistics, MIT Press, vol. 71(1), pages 62-73, February. [Downloadable!] (restricted)
  10. 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. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Parry, Ian & Bento, Antonio, 2000. "Estimating the Welfare Effect of Congestion Taxes: The Critical Importance of Other Distortions within the Transport System," Discussion Papers dp-00-51, Resources For the Future. [Downloadable!]
    Other versions:
  2. Hideo Konishi, 2001. "Uniqueness of User Equilibrium in Transportation Networks with Heterogeneous Commuters," Boston College Working Papers in Economics 494, Boston College Department of Economics, revised 14 Nov 2002. [Downloadable!]
  3. Safirova, Elena & Gillingham, Kenneth, 2003. "Measuring Marginal Congestion Costs of Urban Transportation: Do Networks Matter?," Discussion Papers dp-03-56, Resources For the Future. [Downloadable!]
    Other versions:
  4. Parry, Ian, 2000. "Comparing the Efficiency of Alternative Policies for Reducing Traffic Congestion," Discussion Papers dp-00-28, Resources For the Future. [Downloadable!]
    Other versions:
  5. C. Robin Lindsey & Erik T. Verhoef, 2000. "Traffic Congestion and Congestion Pricing," Tinbergen Institute Discussion Papers 00-101/3, Tinbergen Institute. [Downloadable!]
  6. Marvin Kraus, 2002. "A New Look at the Two-Mode Problem," Boston College Working Papers in Economics 551, Boston College Department of Economics. [Downloadable!] (restricted)
    Other versions:
  7. Lei Zhang & David Levinson & Shanjiang Zhu, 2007. "Agent-Based Model of Price Competition and Product Differentiation on Congested Networks," Working Papers 200809, University of Minnesota: Nexus Research Group. [Downloadable!]
  8. Pedro Cantos-Sanchez & Rafael Moner-Colonques & Jose J. Sempere-Monerris & Oscar Alvarez, 2008. "Viability of a New Road Infrastructure with Heterogeneous Users in Madrid Access," Working Papers 2008-06, FEDEA. [Downloadable!]
  9. Small, Kenneth & Yan, Jia, 2000. "The Value of "Value Pricing" of Roads: Second-Best Pricing and Product Differentiation," Discussion Papers dp-00-08, Resources For the Future. [Downloadable!]
    Other versions:
  10. Erik T. Verhoef, 2000. "Second-Best Congestion Pricing in General Static Transportation Networks with Elastic Demands," Tinbergen Institute Discussion Papers 00-078/3, Tinbergen Institute. [Downloadable!]
    Other versions:
  11. Verhoef, Erik Teodoor, 2000. "The Generalized Second-Best Network Congestion Pricing Problem," ERSA conference papers ersa00p336, European Regional Science Association. [Downloadable!]
  12. Erik T. Verhoef, 2007. "Private Roads," Tinbergen Institute Discussion Papers 07-093/3, Tinbergen Institute, revised 25 Jun 2008. [Downloadable!]
  13. Erik T. Verhoef, 2000. "Second-Best Congestion Pricing in General Networks - Algorithms for Finding Second-Best Optimal Toll Levels and Toll Points," Tinbergen Institute Discussion Papers 00-084/3, Tinbergen Institute. [Downloadable!]
  14. De Borger Bruno & Stef Proost, 2004. "Vertical and horizontal tax competition in the transport sector," Energy, Transport and Environment Working Papers Series ete0412, Katholieke Universiteit Leuven, Centrum voor Economische Studiën, Energy, Transport and Environment. [Downloadable!]
    Other versions:
  15. Erik T. Verhoef, 2005. "Second-best Road Pricing Through Highway Franchising," Tinbergen Institute Discussion Papers 05-082/3, Tinbergen Institute. [Downloadable!]
    Other versions:
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