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Prices, capacities and service quality in a congestible Bertrand duopoly

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  • De Borger, Bruno
  • Van Dender, Kurt

Abstract

We study the duopolistic interaction between congestible facilities that supply perfect substitutes. Firms are assumed to make sequential decisions on capacities and prices. Since the outcomes directly affect consumers’ time cost of accessing or using a facility, the capacity sharing rule is endogenous. We study this two-stage game for different firm objectives and compare the duopoly outcomes with those under monopoly and at the social optimum. Our findings include the following. First, for profit maximizing firms both capacity provision and service quality, defined as the inverse of time costs of using the facility, are distorted under duopoly: they are below the socially optimal levels. This contrasts with the monopoly outcome, where pricing and capacity provision are such that the monopolist does provide the socially optimal level of service quality. Second, duopoly prices are lower than monopoly prices, but higher than in the social optimum. Hence, while price competition between duopolists yields benefits for consumer, capacity competition is harmful. Third, price-capacity competition implies that higher capacity costs may lead to higher profits for both facilities. Finally, if firms also care about output, this mainly affects pricing behavior; strategic interaction in capacities are much less affected. If duopolists attach a higher weight to output and a correspondingly lower weight to profits, this leads to a deterioration of the quality of service.

Suggested Citation

  • De Borger, Bruno & Van Dender, Kurt, 2005. "Prices, capacities and service quality in a congestible Bertrand duopoly," University of California Transportation Center, Working Papers qt1k51437c, University of California Transportation Center.
  • Handle: RePEc:cdl:uctcwp:qt1k51437c
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    Cited by:

    1. De Borger, B. & Dunkerley, F. & Proost, S., 2007. "Strategic investment and pricing decisions in a congested transport corridor," Journal of Urban Economics, Elsevier, vol. 62(2), pages 294-316, September.
    2. Liu, Tian-Liang & Chen, Jian & Huang, Hai-Jun, 2011. "Existence and efficiency of oligopoly equilibrium under toll and capacity competition," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 47(6), pages 908-919.
    3. Van Dender, Kurt, 2007. "Determinants of fares and operating revenues at US airports," Journal of Urban Economics, Elsevier, vol. 62(2), pages 317-336, September.
    4. Vincent Van Den Berg, 2011. "The effect of private road supply on the volume/capacity ratio when firms compete Stackelberg in Road Capacity," ERSA conference papers ersa11p1203, European Regional Science Association.
    5. Borger Bruno De & Dunkerley Fay & Proost Stef, 2008. "The Interaction between Tolls and Capacity Investment in Serial and Parallel Transport Networks," Review of Network Economics, De Gruyter, vol. 7(1), pages 1-23, March.
    6. de Palma, André & Kilani, Moez & Lindsey, Robin, 2007. "Maintenance, service quality and congestion pricing with competing roads," Transportation Research Part B: Methodological, Elsevier, vol. 41(5), pages 573-591, June.
    7. Chou, Yon-Chun & Chung, Hsien-Jung, 2009. "Service-based capacity strategy for manufacturing service duopoly of differentiated prices and lognormal random demand," International Journal of Production Economics, Elsevier, vol. 121(1), pages 162-175, September.
    8. van den Berg, Vincent A.C., 2012. "Auctions for private congestible infrastructures," MPRA Paper 40103, University Library of Munich, Germany.
    9. Xiao, Feng & Yang, Hai & Han, Deren, 2007. "Competition and efficiency of private toll roads," Transportation Research Part B: Methodological, Elsevier, vol. 41(3), pages 292-308, March.

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