Price-based regulation of oligopolistic markets under discrete choice models of demand

Stefano Bortolomiol (), Virginie Lurkin and Michel Bierlaire
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Stefano Bortolomiol: École Polytechnique Fédérale de Lausanne
Virginie Lurkin: Eindhoven University of Technology
Michel Bierlaire: École Polytechnique Fédérale de Lausanne

Transportation, 2022, vol. 49, issue 5, No 7, 1463 pages

Abstract: Abstract We propose a framework to find optimal price-based policies to regulate markets characterized by oligopolistic competition and in which consumers make a discrete choice among a finite set of alternatives. The framework accommodates general discrete choice models available in the literature in order to capture heterogeneous consumer behavior. In our work, consumers are utility maximizers and are modeled according to random utility theory. Suppliers are modeled as profit maximizers, according to the traditional microeconomic treatment. Market competition is modeled as a non-cooperative game, for which an approximate equilibrium solution is sought. Finally, the regulator can affect the behavior of all other agents by giving subsidies or imposing taxes to consumers. In transport markets, economic instruments might target specific alternatives, to reduce externalities such as congestion or emissions, or specific segments of the population, to achieve social welfare objectives. In public policy, different agents have different individual or social objectives, possibly conflicting, which must be taken into account within a social welfare function. We present a mixed integer optimization model to find optimal policies subject to supplier profit maximization and consumer utility maximization constraints. Then, we propose a model-based heuristic approach based on the fixed-point iteration algorithm that finds an approximate equilibrium solution for the market. Numerical experiments on an intercity travel case study show how the regulator can optimize its decisions under different scenarios.

Keywords: Equilibrium; Regulation; Discrete choice modeling (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/s11116-021-10217-0

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