Oversupply or Undersupply in a Public Transport Monopoly? A Rejoinder and Generalisation

Abstract

A monopolist in public transport may oversupply frequency relative to the social optimum, as van Reeven (2008) demonstrates with homogeneous consumers. This paper shows that oversupply may also occur if this assumption is relaxed. Whether a monopolist oversupplies or undersupplies frequency depends on the degree of consumers' heterogeneity as reflected in the distribution of consumers' reservation prices. Oversupply is likely to occur when consumers' reservation prices are concentrated around the entry costs of the private car, being the main alternative to public transport.

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