Abstract

Roads are being franchised to private firms in many countries, raising the issue of regulating the tolls they charge. When there is more than one road to get from one point to another, regulation need not be necessary, since competition may substitute for toll regulation. This paper studies toll competition among private asymmetric roads subject to congestion. We obtain two main results. First, in equilibrium tolls are higher than optimal, that is, there is too little congestion. This happens because road owners internalize the reduction in drivers’ willingness to pay due to congestion, thereby softening competition. It follows that the drawback of private competition is exercise of market power, not excessive congestion as is sometimes conjectured. Second, the distortion becomes smaller as market size and the number of roads grow, even if the density of drivers does not change. In the limit tolls converge to the socially optimal level and are just enough to make each driver internalize the congestion externality. This suggests that the scope for competition is better in larger networks.