Targeted policy design in transportation: the case of the ferry market

We model a ferry market where passengers are heterogeneous in their valuation of waiting time and, unlike in previous studies, can take services from all operators. Analyzing their behavior when two operators are active, each providing one service, we find that complex patterns of product differentiation emerge between two goods that (i) do not exactly correspond to the available services and (ii) display service frequencies as quality attributes. A (low-quality) basic good, coinciding with the cheaper service, attracts low-time-value passengers. A (high-quality) composite good, which is a bundle of the two available services, appeals to high-time-value passengers. Consequently, demand is positive for either operator so that an inefficient operator is not crowded out. In the specific case of a mixed duopoly, a price-aggressive public operator spans discipline over (but does not monopolize) the whole market; a soft one boosts "quality" (i.e., frequency) vis-à-vis fraction of the population only, that is yet larger than under classical vertical differentiation. Policy-makers pursuing redistribution objectives should target the cheaper service, in general, privileging either a raise in its frequency (when it is low) or a cut in its price (when frequency is high), depending upon the group of passengers they wish to support.