To acquire or compete? Government intervention in transportation under different route structures

What is the ideal way for a government to regulate an existing transportation monopoly based on the structure of the transport market? We analyze the government’s regulatory problem from the perspective of two possible strategies: partially publicizing the existing monopolist, and entering the transport market directly as a competitor. In a model in which heterogeneous consumers are uniformly distributed in their valuation of transportation services while also considering both price and travel latency in their transport choice, we fully characterize the equilibrium under each of the two regulatory strategies under a serial or a parallel transport structure, respectively. The optimal policy depends on both the transport route structure and the government’s degree of intervention. Under a serial structure, the government can achieve the socially optimal traffic flow by entering the market as a competitor or fully acquiring the firm, while partial acquisition cannot achieve this goal. However, in a parallel structure, while direct duopoly competition cannot achieve a socially optimal result, direct competition can outperform partially publicizing the monopolist if the acquisition level is sufficiently low. We also consider asymmetric parallel route structures and joint design of both types of regulations. Our findings provide policy implications for governments interested in applying efficient regulatory policies under different transportation route structures.