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Product Differentiation on Roads: Second-Best Congestion Pricing with Heterogeneity under Public and Private Ownership

Erik T. Verhoef () and Kenneth A. Small
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Erik T. Verhoef: Vrije Universiteit Amsterdam
Kenneth A. Small: University of Irvine at California

No 99-066/3, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: We explore the properties of various types of public and private pricing on acongested road network with heterogeneous users and allowing for elasticdemand. Heterogeneity is represented by a continuum of values of time. Thenetwork consists of both serial and parallel links, which allows us to modelsecond-best pricing restrictions on either complementary or substitute links,while still accounting for interaction between different groups on sharedlinks (e.g. in city centres). We find that private (revenue-maximizing)pricing is much less efficient than public pricing, whether on the partial orthe full network; but this difference is mitigated by the productdifferentiation made possible by heterogeneous users. Ignoring heterogeneitycauses the welfare benefits of second-best pricing of one parallel link, apolicy currently receiving favourable consideration, to be dramaticallyunderestimated. Product differentiation produces some unexpecteddistributional effects, including the possibility that first-best pricing canresult in one of the parallel routes being both more congested than withoutpricing.

Keywords: congestion; road pricing; networks; second-best (search for similar items in EconPapers)
JEL-codes: R41 R48 D62 (search for similar items in EconPapers)
Date: 1999-08-24
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