Toll Competition Among Congested Roads

Type:

SCID Working Paper 33

Author(s):

Published:

02/1/99

Region:

Latin America

Abstract:

A growing number of roads, particularly in developing countries, are currently financed by the private sector via Build-Operate-and-Transfer (BOT) schemes. When the franchised road has no close substitute, the government must regulate tolls. Yet when there are many ways of getting from one point to another, regulation may be avoided by allowing competition between several franchise owners. This paper studies toll competition among private roads with congestion.

The paper derives two main results. First, an equilibrium in pure strategies with strictly positive tolls obtains. Equilibrium congestion is less than optimal, which runs counter to what is expected from price competition. While a lower toll reduces the out-of-pocket cost paid by a user, it increases the congestion cost thereby reducing the drivers' willingness to pay for using the road. Franchise holders partially internalize congestion costs when setting tolls, which softens price competition. Second, when demand and the number of roads increase at the same rate, tolls converge to the socially optimal level—that is, in the limit equilibrium tolls are just enough to make each driver internalize the congestion externality.