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Toll competition among congested roads

  • Eduardo Engel

    ()

  • Ronald Fischer

    ()

  • Alexander Galetovic

    ()

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.

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File URL: http://www.dii.uchile.cl/~cea/sitedev/cea/www/download.php?file=documentos_trabajo/ASOCFILE120030402115612.pdf
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Paper provided by Centro de Economía Aplicada, Universidad de Chile in its series Documentos de Trabajo with number 54.

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Date of creation: 1999
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Handle: RePEc:edj:ceauch:54
Contact details of provider: Web page: http://www.dii.uchile.cl/cea/

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  1. Richard Arnott & Andre de Palma & Robin Lindsey, 1985. "Economics of a Bottleneck," Working Papers 636, Queen's University, Department of Economics.
  2. Eduardo Engel & Ronald Fischer & Alexander Galetovic, 1998. "Least-Present-Value-of-Revenue Auctions and Highway Franchising," Documentos de Trabajo 37, Centro de Economía Aplicada, Universidad de Chile.
  3. 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.
  4. David M. Kreps & Jose A. Scheinkman, 1983. "Quantity Precommitment and Bertrand Competition Yield Cournot Outcomes," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 326-337, Autumn.
  5. Richard Arnott & Andre de Palma & Robin Lindsey, 1993. "The Welfare Effects Of Congestion Tolls With Heterogeneous Commuters," Boston College Working Papers in Economics 231, Boston College Department of Economics.
  6. Boadway, Robin, 1980. "A note on the market provision of club goods," Journal of Public Economics, Elsevier, vol. 13(1), pages 131-137, February.
  7. Berglas, Eitan, 1981. "The market provision of club goods once again," Journal of Public Economics, Elsevier, vol. 15(3), pages 389-393, June.
  8. Arnott, Richard & de Palma, Andre & Lindsey, Robin, 1993. "A Structural Model of Peak-Period Congestion: A Traffic Bottleneck with Elastic Demand," American Economic Review, American Economic Association, vol. 83(1), pages 161-79, March.
  9. Eduardo Engel & Ronald Fischer & Alexander Galetovic, 1998. "Infraestructure Franchising and Government Guarantees," Documentos de Trabajo 29, Centro de Economía Aplicada, Universidad de Chile.
  10. Hau, Timothy D., 1992. "Economic fundamentals of road pricing : a diagrammatic analysis," Policy Research Working Paper Series 1070, The World Bank.
  11. Viton Philip A., 1995. "Private Roads," Journal of Urban Economics, Elsevier, vol. 37(3), pages 260-289, May.
  12. Berglas, Eitan, 1976. "On the Theory of Clubs," American Economic Review, American Economic Association, vol. 66(2), pages 116-21, May.
  13. Berglas, Eitan & Pines, David, 1981. "Clubs, local public goods and transportation models : A synthesis," Journal of Public Economics, Elsevier, vol. 15(2), pages 141-162, April.
  14. 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.
  15. Suzanne Scotchmer, 1985. "Two-Tier Pricing of Shared Facilities in a Free-Entry Equilibrium," RAND Journal of Economics, The RAND Corporation, vol. 16(4), pages 456-472, Winter.
  16. Richard Arnott & Marvin Kraus, 2003. "Transport Economics," Boston College Working Papers in Economics 553, Boston College Department of Economics.
  17. Scotchmer, Suzanne, 1985. "Profit-maximizing clubs," Journal of Public Economics, Elsevier, vol. 27(1), pages 25-45, June.
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