ORIE Colloquium: Congestion Pricing for Service Industries
Tuesday, Jan 24, 2012 at 4:15 PM
253 Rhodes Hall
This joint work with Georgia Perakis has received 2nd Prize in INFORMS 2011 Service Science Section Best Student Paper Competition.
In this work, we consider congestion effects in the presence of oligopolistic competition. Our model consists of several service providers with differentiated services, competing for users who are sensitive to both prices and congestion costs. We study two types of congestion effects depending on whether one service provider’s congestion cost could be influenced by other providers’ service level. We show that when there is no influence, the welfare loss in the unregulated setting is limited to 25% of the social optimum. In addition, the efficiency of the unregulated setting improves as the competition among the service providers increases. On the other hand, when increasing one’s service level also increases congestion costs of other players, the performance of the unregulated setting depends on the relative magnitude between the uninternalized congestion cost and the marginal benefit to consumers when an additional user is enrolled. We quantify the welfare loss with parametric bounds and identify instances when the bounds are tight. We show that when the external congestion cost outweighs the marginal benefit, the welfare loss could be arbitrarily bad. The merger analysis reveals that mergers could lead to a welfare improvement, even in the absence of cost synergy. Lastly, we propose an alternative implementation of congestion pricing which ensures the social optimum, as well as guarantees a welfare increase for all participants.
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