Competition and Highway Pricing for Stochastic Traffic

Abstract

This paper models the competitive supply and pricing of highways with random traffic. It adds the missing theory, of the firm to Knight's highway problem and shows that competition delivers efficient prices. The classic efficient-pricing results of Knight and Walters are shown to be valid in a world with uncertain traffic flows. Competitive prices exceed marginal cost by an amount equal to expected marginal congestion cost. The mean throughput of each highway firm is less than maximum throughput. Even though the expectation of excess capacity is positive, random traffic jams will occur on an efficiently priced highway. Pricing of mixed traffic is also analyzed. (Authors)

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