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Toll competition among congested roads

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  • Eduardo Engel

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  • Ronald Fischer

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  • Alexander Galetovic

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Abstract

A growing number of roads are currently financed by the private sector via Build-Operate-and-Transfer (BOT) schemes. When the franchised road has no close substitute, the government must regulate tolls. Yet when there are many ways of getting from one point to another, regulation may be avoided by allowing competition between several franchise owners. This paper studies toll competition among private roads with congestion. The paper derives two main results. First, we find sufficient conditions for the existence of an equilibrium in pure strategies with strictly positive tolls. Equilibrium congestion is less than optimal, which runs counter to what is expected from price competition. While a lower toll reduces the out-of-pocket cost paid by a user, it increases the congestion cost thereby reducing the drivers' willingness to pay for using the road. Franchise holders partially internalize congestion costs when setting tolls, which softens price competition. Second, when demand and the number of roads increase at the same rate, tolls converge to the socially optimal level - that is, in the limit equilibrium tolls are just enough to make each driver internalize the congestion externality.

Suggested Citation

  • Eduardo Engel & Ronald Fischer & Alexander Galetovic, 1999. "Toll competition among congested roads," Documentos de Trabajo 54, Centro de Economía Aplicada, Universidad de Chile.
  • Handle: RePEc:edj:ceauch:54
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Engel, Eduardo & Fischer, Ronald & Galetovic, Alexander, 2005. "Highway franchising and real estate values," Journal of Urban Economics, Elsevier, vol. 57(3), pages 432-448, May.
    2. Ubbels, Barry & Verhoef, Erik T., 2008. "Governmental competition in road charging and capacity choice," Regional Science and Urban Economics, Elsevier, vol. 38(2), pages 174-190, March.
    3. 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.
    4. Tan, Zhijia, 2012. "Capacity and toll choice of an add-on toll road under various ownership regimes," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 48(6), pages 1080-1092.
    5. José R. Correa & Nicolás Figueroa & Nicolás E. Stier-Moses, 2008. "Pricing with markups in industries with increasing marginal costs," Documentos de Trabajo 256, Centro de Economía Aplicada, Universidad de Chile.
    6. Paul Calcott & Shuntian Yao, 2005. "Competition between highway operators: can we expect toll differentiation?," Economic Growth Centre Working Paper Series 0504, Nanyang Technological University, School of Social Sciences, Economic Growth Centre.
    7. repec:eee:transa:v:100:y:2017:i:c:p:1-15 is not listed on IDEAS
    8. Daniel Albalate & Jordi Perdiguero, 2012. "“Entry Regulation Asymmetries and Gasoline Competition in a Mixed Motorway Network”," IREA Working Papers 201218, University of Barcelona, Research Institute of Applied Economics, revised Nov 2012.
    9. Watling, D.P. & Shepherd, S.P. & Koh, A., 2015. "Cordon toll competition in a network of two cities: Formulation and sensitivity to traveller route and demand responses," Transportation Research Part B: Methodological, Elsevier, vol. 76(C), pages 93-116.
    10. van den Berg, Vincent A.C. & Verhoef, Erik T., 2012. "Is the travel time of private roads too short, too long, or just right?," Transportation Research Part B: Methodological, Elsevier, vol. 46(8), pages 971-983.
    11. 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.
    12. Andrés Pereira, 2001. "Teoría de subastas y concesiones de carreteras," Documentos de Trabajo (working papers) 1701, Department of Economics - dECON.
    13. Daniel Albalate & Germa Bel, 2008. "Motorways, tolls and road safety.Evidence from European Panel Data," IREA Working Papers 200802, University of Barcelona, Research Institute of Applied Economics, revised Feb 2008.
    14. Pio Baake & Kay Mitusch, 2007. "Competition with Congestible Networks," Journal of Economics, Springer, vol. 91(2), pages 151-176, June.
    15. Melo, Emerson, 2014. "Price competition, free entry, and welfare in congested markets," Games and Economic Behavior, Elsevier, vol. 83(C), pages 53-72.
    16. Alain Fayard & David Meunier & Emile Quinet, 2012. "Motorway Provision and Management in France: Analyses and Policy Issues," Networks and Spatial Economics, Springer, vol. 12(2), pages 299-319, June.
    17. Dementyeva, Maria & Koster, Paul R. & Verhoef, Erik T., 2015. "Regulation of road accident externalities when insurance companies have market power," Journal of Urban Economics, Elsevier, vol. 86(C), pages 1-8.
    18. Daniel Albalate & Germà Bel, 2012. "Motorways, tolls and road safety: evidence from Europe," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 3(4), pages 457-473, December.
    19. Lindsey, Robin, 2012. "Road pricing and investment," Economics of Transportation, Elsevier, vol. 1(1), pages 49-63.
    20. 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.
    21. Aigner, Rafael & Weber, Katharina, 2017. "The Fehmarn Belt duopoly – Can the ferry compete with a tunnel?," Transportation Research Part A: Policy and Practice, Elsevier, vol. 100(C), pages 1-15.
    22. Meunier, David & Quinet, Emile, 2007. "Chapter 4 The contracting of investment and operation, and the management of infrastructure funding bodies," Research in Transportation Economics, Elsevier, vol. 19(1), pages 81-109, January.
    23. repec:eee:transb:v:102:y:2017:i:c:p:105-123 is not listed on IDEAS

    More about this item

    JEL classification:

    • R41 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Transportation Economics - - - Transportation: Demand, Supply, and Congestion; Travel Time; Safety and Accidents; Transportation Noise

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