Private Roads: Auctions and Competition in Networks

Abstract

This paper studies the efficiency impacts of private toll roads in initially untolled networks. The analysis allows for capacity and toll choice by private operators, and endogenises entry and therewith the degree of competition, distinguishing and allowing for both parallel and serial competition. Two institutional arrangements are considered, namely one in which entry is free and one in which it is allowed only after winning an auction in which patronage is to be maximised. Both regimes have the second-best zero-profit equilibrium as the end-state of the equilibrium sequence of investments; but the auctions regime approaches this end-state more rapidly: tolls are set equal to their second-best zero-profit levels immediately, and capacity additions for the earlier investments are bigger. When discreteness of capacity is relevant and limits the number of investments that can be accommodated practically, the auctions regime may therefore still result in a more efficient end-state, with a higher social surplus, although the theoretical end-state is the same as under free entry.

Is the Service Quality of Private Roads too Low, too High, or Just Right When Firms Compete Stackelberg in Capacity?

“…Moreover, also with different network structures, strategic capacity setting might affect the outcome. An obvious follow-up are serial markets or combined serial-and-parallel markets such as in Verhoef (2008). While such stylised networks may provide interesting insights, complementary analyses using larger, more realistic, networks may give further insights that would be relevant for applied policy: notably, for the design of auctions for the right to build and operate a private infratructure.…”

“…Our last oligopolistic market structure follows Verhoef (2008) and is sequential entry. This set-up is in between the two-substages-Nash and Stackelberg set-ups.…”

“…The calibration of our model follows Verhoef (2007;2008). The model is simple, but it is calibrated to represent a realistic congested peak-hour highway.…”

“…The sequential-entry market structure follows Verhoef (2008). Firms again have separate capacity and toll decisions.…”

“…This perfect competition (PC) case is equivalent to welfare maximisation under a zero-profit constraint (see Verhoef, 2008). The corresponding Lagrangian is…”