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Cost Recovery of Congested Infrastructure under Market Power

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  • Erik T. Verhoef

    ()
    (VU University Amsterdam)

Abstract

The famous Mohring-Harwitz theorem states that, under certain technical conditions, the degree of self-financing of congested infrastructure is equal to the elasticity of the capacity cost function in the optimum, so that under neutral scale economies exact self-financing applies. Although the theorem has been proven to remain valid for various extensions of the basic set-up for which it was originally derived, it breaks down when the infrastructure is used by operators with market power when competing in Cournot fashion, the case in point often being oligopolistic airlines at a congested airport. This paper proposes a regulatory scheme, not involving lump-sum payments or budget constraints in the optimal pricing problem, that restores self-financing for congested infrastructure for this market form. What is more, under the proposed scheme, exact self-financing applies independent of the elasticity of the capacity cost function. The result remains true both for the case where operators treat the tolls parametrically, and for 'manipulable' tolls, designed to account for the fact that operators with market power can be expected to be aware of, and exploit, the fact that toll are not truly parametric, but instead depend on their own behaviour.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 12-064/3.

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Date of creation: 06 Jul 2012
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Handle: RePEc:dgr:uvatin:20120064

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Web page: http://www.tinbergen.nl

Related research

Keywords: Congestion pricing; capacity choice; self-financing infrastructure; market power; airport congestion;

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References

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  1. Eric Pels & Erik Verhoef, 2003. "The Economics of Airport Congestion Pricing," Tinbergen Institute Discussion Papers 03-083/3, Tinbergen Institute.
  2. Arnott, Richard & Kraus, Marvin, 1998. "When are anonymous congestion charges consistent with marginal cost pricing?," Journal of Public Economics, Elsevier, vol. 67(1), pages 45-64, January.
  3. Yang, Hai & Meng, Qiang, 2002. "A note on "highway pricing and capacity choice in a road network under a build-operate-transfer scheme"," Transportation Research Part A: Policy and Practice, Elsevier, vol. 36(7), pages 659-663, August.
  4. Eric Pels & Erik T. Verhoef, 2002. "Airport Pricing," Tinbergen Institute Discussion Papers 02-078/3, Tinbergen Institute.
  5. Richard Arnott & Marvin Kraus, 1995. "Self-Financing of Congestible Facilities in a Growing Economy," Boston College Working Papers in Economics 304., Boston College Department of Economics.
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