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Asymmetric duopoly in space - what policies work?

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  • Fay Dunkerley
  • André de Palma
  • Stef Proost

Abstract

In this paper we study the problem of a city with access to two subcentres selling a differentiated product. The first subcentre has low free flow transport costs but is easily congested (near city centre, access by road). The second one has higher free flow transport costs but is less prone to congestion (ample public transport capacity, parking etc.). Both subcentres need to attract customers and employees by offering prices and wages that are sufficiently attractive to cover their fixed costs. In the absence of any government regulation, there will be an asymmetric duopoly game that can be solved for a Nash equilibrium in prices and wages offered by the two subcentres. This solution is typically characterised by excessive congestion for the nearby subcentre. We study the welfare effects of a number of stylised policies by setting up a general model and illustrating the model using competition between airports as an example. The first stylised policy is to extend the congested road to subcentre 1. This policy will not necessarily lead to less congestion as more customers will be attracted by the lower transport costs. The second policy option is to add congestion pricing (or parking pricing (etc.) for the congested subcentre. This will decrease its profit margin and attract more customers. The third policy is acceptable for politicians: providing a direct subsidy to the remote subcentre, reducing its marginal costs. This policy will again ease the congestion problem for the nearby subcentre but will do this in a very costly way.

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Bibliographic Info

Paper provided by Katholieke Universiteit Leuven, Centrum voor Economische Studiën in its series Center for Economic Studies - Discussion papers with number ces0610.

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Date of creation: Mar 2006
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Handle: RePEc:ete:ceswps:ces0610

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Keywords: duopoly; imperfect competition; congestion; general equilibrium; airport competition;

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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. Pels, Eric & Nijkamp, Peter & Rietveld, Piet, 2003. "Access to and competition between airports: a case study for the San Francisco Bay area," Transportation Research Part A: Policy and Practice, Elsevier, vol. 37(1), pages 71-83, January.
  3. Arnott, Richard & de Palma, Andre & Lindsey, Robin, 1993. "A Structural Model of Peak-Period Congestion: A Traffic Bottleneck with Elastic Demand," American Economic Review, American Economic Association, vol. 83(1), pages 161-79, March.
  4. André De Palma & Fay Dunkerley & Stef Proost, 2005. "Trip chaining - who wins, who loses?," ERSA conference papers ersa05p496, European Regional Science Association.
  5. Lambertini, Luca, 1997. "Optimal Fiscal Regime in a Spatial Duopoly," Journal of Urban Economics, Elsevier, vol. 41(3), pages 407-420, May.
  6. Hansen, Mark M. & Gillen, David & Djafarian-Tehrani, Reza, 2001. "Aviation infrastructure performance and airline cost: a statistical cost estimation approach," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 37(1), pages 1-23, March.
  7. Barrett, Sean D., 2004. "How do the demands for airport services differ between full-service carriers and low-cost carriers?," Journal of Air Transport Management, Elsevier, vol. 10(1), pages 33-39.
  8. Thorsten Fischer & David R. Kamerschen, 2003. "Price-Cost Margins in the US Airline Industry using a Conjectural Variation Approach," Journal of Transport Economics and Policy, London School of Economics and University of Bath, vol. 37(2), pages 227-259, May.
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