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Governmental competition in road charging and capacity choice

  • Ubbels, Barry
  • Verhoef, Erik T.

This paper studies policy interactions between an urban and a regional government, both controlling one link of a two-link serial road network, where regional drivers may use both roads and urban drivers use the urban road only. Both governments set capacity and toll on one link, in a two-stage game where tolls are set after capacities have been committed to, and try to maximize social surplus for their own population. We use a simulation model to investigate the welfare consequences of the various possible game-theoretical set-ups. We find that governmental competition may be rather harmful to aggregate social surplus, compared to first-best policies. The main determinant of social welfare is not which exact type of game is played between the two governments, but much more whether there is cooperation (leading to first-best) or competition between them. Only of secondary importance is the question who is leading in the price stage (if there is a leader). Sensitivity analysis suggests that the relative performance for most game situations improves when demand becomes more elastic, and remain insensitive with respect to the unit cost of capacity expansions.

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Article provided by Elsevier in its journal Regional Science and Urban Economics.

Volume (Year): 38 (2008)
Issue (Month): 2 (March)
Pages: 174-190

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Handle: RePEc:eee:regeco:v:38:y:2008:i:2:p:174-190
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  8. Verhoef, Erik T., 2002. "Second-best congestion pricing in general static transportation networks with elastic demands," Regional Science and Urban Economics, Elsevier, vol. 32(3), pages 281-310, May.
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  11. Bruno De Borger & Stef Proost & Kurt Van Dender, 2003. "Congestion and tax competition in a parallel network," Energy, Transport and Environment Working Papers Series ete0309, Katholieke Universiteit Leuven, Centrum voor Economische Studiën, Energy, Transport and Environment.
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  16. Economides, Nicholas & Salop, Steven C, 1992. "Competition and Integration among Complements, and Network Market Structure," Journal of Industrial Economics, Wiley Blackwell, vol. 40(1), pages 105-23, March.
  17. Verhoef, Erik T., 2007. "Second-best road pricing through highway franchising," Journal of Urban Economics, Elsevier, vol. 62(2), pages 337-361, September.
  18. Pels, Eric & Verhoef, Erik T., 2004. "The economics of airport congestion pricing," Journal of Urban Economics, Elsevier, vol. 55(2), pages 257-277, March.
  19. 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.
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  21. De Vany, Arthur & Saving, Thomas R, 1980. "Competition and Highway Pricing for Stochastic Traffic," The Journal of Business, University of Chicago Press, vol. 53(1), pages 45-60, January.
  22. 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.
  23. 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.
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