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Strategic investment and pricing decisions in a congested transport corridor

  • De Borger Bruno

    ()

    (University of Antwerp)

  • Dunkerley Fay

    ()

    (K.U.Leuven-Center for Economic Studies)

  • Proost Stef

    ()

    (K.U.Leuven-Center for Economic Studies; UCL - CORE)

This paper studies pricing and investment decisions on a congested transport corridor where the elements of the corridor are controlled by different governments. A corridor can be an interstate highway or railway line, or an inter-modal connection. We model the simplest corridor: two transport links in series, where each of the links is controlled by a different government. Each link is used by transit as well as by local traffic; both links are subject to congestion. We consider a two stage non-cooperative game where both governments strategically set capacity in the first stage and play a pricing game in the second stage. Three pricing regimes are distinguished: (i) differentiated tolls between local and transit transport, (ii) one uniform toll on local and transit traffic, and (iii) only the local users can be tolled. Numerical analysis illustrates all theoretical insights. A number of interesting results are obtained. First, transit tolls on the network will be inefficiently high. If only local traffic can be tolled, however, the Nash equilibrium tolls are inefficiently low. Second, raising the toll on transit through a given country by one euro raises the toll on the whole trajectory by less than one euro. Third, higher capacity investment in a given region not only reduces optimal tolls in this region under all pricing regimes but it also increases the transit tolls on the other link of the corridor. Fourth, capacities in the different regions are strategic complements: when one country on the corridor increases transport capacity, it forces the other country to do the same. Fifth, we find interesting interactions between optimal capacities and the set of pricing instruments used: capacity with differentiated tolls is substantially higher than in the case of uniform tolls but overall welfare is lower. Finally, if transit is sufficiently important, it may be welfare improving not to allow any tolling at all, or to only allow the tolling of locals.

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Paper provided by Katholieke Universiteit Leuven, Centrum voor Economische Studiën, Energy, Transport and Environment in its series Energy, Transport and Environment Working Papers Series with number ete0602.

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Length: 51 pages
Date of creation: Mar 2006
Date of revision:
Handle: RePEc:ete:etewps:ete0602
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Phone: +32-(0)16-32 67 25
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Web page: http://www.econ.kuleuven.be/ew/academic/energmil
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  1. Arnott, Richard & Grieson, Ronald E., 1981. "Optimal fiscal policy for a state or local government," Journal of Urban Economics, Elsevier, vol. 9(1), pages 23-48, January.
  2. David Levinson, 2001. "Why States Toll: An Empirical Model of Finance Choice," Working Papers 200102, University of Minnesota: Nexus Research Group.
  3. De Borger, B. & Proost, S. & Van Dender, K., 2005. "Congestion and tax competition in a parallel network," European Economic Review, Elsevier, vol. 49(8), pages 2013-2040, November.
  4. Van Dender, Kurt, 2005. "Duopoly Prices Under Congested Access," University of California Transportation Center, Working Papers qt7xw8c3fn, University of California Transportation Center.
  5. 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.
  6. Kurt Van Dender, 2005. "Duopoly prices under congested access," Journal of Regional Science, Wiley Blackwell, vol. 45(2), pages 343-362.
  7. 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.
  8. Bev Dahlby, 1996. "Fiscal externalities and the design of intergovernmental grants," International Tax and Public Finance, Springer, vol. 3(3), pages 397-412, July.
  9. Chris Nash, 2005. "Rail Infrastructure Charges in Europe," Journal of Transport Economics and Policy, London School of Economics and University of Bath, vol. 39(3), pages 259-278, September.
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