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Strategic Investment and pricing decisions in a Congested Transport Corridor

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Listed:
  • Bruno De Borger
  • Fay Dunkerley
  • Stef Proost

Abstract

This paper studies pricing and investment decisions on a congested transport corridor where the elements of the corridor are controlled by different governments. A corridor can be an interstate highway or railway line, or an inter-modal connection. We model the simplest corridor: two transport links in series, where each of the links is controlled by a different government. Each link is used by transit as well as by local traffic; both links are subject to congestion. We consider a two stage noncooperative game where both governments strategically set capacity in the first stage and play a pricing game in the second stage. Three pricing regimes are distinguished: (i) differentiated tolls between local and transit transport, (ii) one uniform toll on local and transit traffic, and (iii) only the local users can be tolled. Numerical analysis illustrates all theoretical insights. A number of interesting results are obtained. First, transit tolls on the network will be inefficiently high. If only local traffic can be tolled, however, the Nash equilibrium tolls are inefficiently low. Second, raising the toll on transit through a given country by one euro raises the toll on the whole trajectory by less than one euro. Third, higher capacity investment in a given region not only reduces optimal tolls in this region under all pricing regimes but it also increases the transit tolls on the other link of the corridor. Fourth, capacities in the different regions are strategic complements: when one country on the corridor increases transport capacity, it forces the other country to do the same. Fifth, we find interesting interactions between optimal capacities and the set of pricing instruments used: capacity with differentiated tolls is substantially higher than in the case of uniform tolls but overall welfare is lower. Finally, if transit is sufficiently important, it may be welfare improving not to allow any tolling at all, or to only allow the tolling of locals

Suggested Citation

  • Bruno De Borger & Fay Dunkerley & Stef Proost, 2006. "Strategic Investment and pricing decisions in a Congested Transport Corridor," Working Papers of Department of Economics, Leuven 543605, KU Leuven, Faculty of Economics and Business (FEB), Department of Economics, Leuven.
    • Handle: RePEc:ete:ceswps:543605
    Note: paper number ETE WP 2006-02
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    References listed on IDEAS

    as
    1. De Borger, B. & Proost, S. & Van Dender, K., 2005. "Congestion and tax competition in a parallel network," European Economic Review, Elsevier, vol. 49(8), pages 2013-2040, November.
    2. De Borger, Bruno & Van Dender, Kurt, 2006. "Prices, capacities and service levels in a congestible Bertrand duopoly," Journal of Urban Economics, Elsevier, vol. 60(2), pages 264-283, September.
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    More about this item

    Keywords

    congestion pricing; transport investment; transit traffic;
    All these keywords.

    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • R41 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Transportation Economics - - - Transportation: Demand, Supply, and Congestion; Travel Time; Safety and Accidents; Transportation Noise
    • R48 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Transportation Economics - - - Government Pricing and Policy

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