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Competition and efficiency of private toll roads

  • Xiao, Feng
  • Yang, Hai
  • Han, Deren
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As the provision of roads has become market driven, many intriguing issues have emerged, such as the strategic interactions among private firms in determining road supply and pricing in a network and, more importantly, the resulting inefficiencies when competition substitutes for government regulation. This paper studies both toll and capacity competition among private asymmetric roads with congestion in a network with parallel links. We find that oligopolistic competition yields higher tolls but lower construction capacities than the socially optimal levels and, as a result, the level of traffic congestion does not decline. Based on some widely used assumptions, we show that the usage or the congestion level of each road controlled by each private firm, represented by the volume-capacity (v/c) ratio, is independent of the other competitors' choices of capacities and tolls in the oligopolistic market. To quantify the inefficiency of the oligopolistic equilibria via higher tolls and less realized traffic demand, we establish the upper bound of the ratio of the social welfare between the competitive equilibrium and the social optimum. The inefficiency bound depends mainly on the marginal benefit of trip-makers and the realized traffic demand at equilibrium on the private roads. Exact bounds are given by considering both the worst and symmetric cases. Naturally, our results show that the distortion disappears when the oligopoly changes to perfect competition.

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Article provided by Elsevier in its journal Transportation Research Part B: Methodological.

Volume (Year): 41 (2007)
Issue (Month): 3 (March)
Pages: 292-308

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Handle: RePEc:eee:transb:v:41:y:2007:i:3:p:292-308
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  1. Daron Acemoglu & Asuman E. Ozdaglar, 2005. "Competition and Efficiency in Congested Markets," Levine's Bibliography 172782000000000025, UCLA Department of Economics.
  2. Erik Teodoor Verhoef & Jan Rouwendal, 2003. "Pricing, Capacity Choice and Financing in Transportation Networks," ERSA conference papers ersa03p41, European Regional Science Association.
  3. Bruno De Borger & Kurt Van Dender, 2005. "Prices, capacities and service quality in a congestible Bertrand duopoly," ERSA conference papers ersa05p221, European Regional Science Association.
  4. 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.
  5. 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.
  6. de Palma, Andre, 1992. "A Game-Theoretic Approach to the Analysis of Simple Congested Networks," American Economic Review, American Economic Association, vol. 82(2), pages 494-500, May.
  7. Eduardo Engel & Ronald Fischer & Alexander Galetovic, 1999. "Toll Competition Among Congested Roads," NBER Technical Working Papers 0239, National Bureau of Economic Research, Inc.
  8. Yang, Hai & Tang, Wilson H. & Man Cheung, Wing & Meng, Qiang, 2002. "Profitability and welfare gain of private toll roads in a network with heterogeneous users," Transportation Research Part A: Policy and Practice, Elsevier, vol. 36(6), pages 537-554, July.
  9. de Palma, Andre & Lindsey, Robin, 2002. "Private roads, competition, and incentives to adopt time-based congestion tolling," Journal of Urban Economics, Elsevier, vol. 52(2), pages 217-241, September.
  10. Yang, Hai & Meng, Qiang, 2000. "Highway pricing and capacity choice in a road network under a build-operate-transfer scheme," Transportation Research Part A: Policy and Practice, Elsevier, vol. 34(3), pages 207-222, April.
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