Private Road Networks with Uncertain Demand

Tinbergen Institute Discussion Paper 15-092/VIII

54 Pages Posted: 4 Aug 2015 Last revised: 2 Dec 2017

See all articles by Xinying Fu

Xinying Fu

Vrije Universiteit Amsterdam, School of Business and Economics

Vincent A.C. van den Berg

VU University Amsterdam; Tinbergen Institute

Erik T. Verhoef

VU University Amsterdam - Department of Spatial Economics; Vrije Universiteit Amsterdam, School of Business and Economics; Tinbergen Institute

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Date Written: November 28, 2017

Abstract

We study the efficiency of private supply of roads under demand uncertainty and evaluate various regulatory policies. Due to demand uncertainty, capacity is decided before demand is known but tolls can be adjusted after demand is known. Policy implications can differ from those under deterministic demand. For instance, for serial links, the toll in the second-best zero-profit case is no longer equal to the marginal external congestion cost. In the first-best scenario, the capacity under uncertain demand is higher than that under the deterministic demand of the same expected value, though self-financing still holds in expected terms. Regulation by perfect competitive auction cannot replicate the second-best zero-profit result and thus leads to a lower welfare, whereas without uncertainty various forms of competitive auctions can attain this second-best optimum. For more complex networks, when private firms add capacity in turn, contrary to the case without demand uncertainty, some form of auction performs better than others with demand uncertainty.

Keywords: Traffic Congestion, Road Pricing, Uncertain Demand, Road Network, Private Supply, Auction

JEL Classification: D63, H23, R41, R42

Suggested Citation

Fu, Xinying and van den Berg, Vincent A.C. and Verhoef, Erik T., Private Road Networks with Uncertain Demand (November 28, 2017). Tinbergen Institute Discussion Paper 15-092/VIII, Available at SSRN: https://ssrn.com/abstract=2639555 or http://dx.doi.org/10.2139/ssrn.2639555

Xinying Fu (Contact Author)

Vrije Universiteit Amsterdam, School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

Vincent A.C. van den Berg

VU University Amsterdam ( email )

De Boelelaan 1105
Amsterdam, ND North Holland 1081 HV
Netherlands

HOME PAGE: http://www.feweb.vu.nl/nl/afdelingen-en-instituten/spatial-economics/staff/v-berg/index.asp

Tinbergen Institute ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

Erik T. Verhoef

VU University Amsterdam - Department of Spatial Economics ( email )

De Boelelaan 1105
1081HV Amsterdam
Netherlands
+31 020 4446094 (Phone)
+31 020 4446004 (Fax)

Vrije Universiteit Amsterdam, School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

Tinbergen Institute ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

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