Optimal transit fare structure and departure frequency under monopoly market regime

Abstract

This article investigates the optimal transit fare structure and departure frequency under monopoly market regime. The proposed model treats the interaction between transit operators and government in the market as a Stackelberg game. In this game, the transit operator determines the fare structure and departure frequency so as to maximize its profit, whereas government could only promulgate regulation to influence the transit operator's decision, so as to maximize social welfare. First, under anarchy, the monopoly transit operator's optimal fare and departure frequency is determined. Then, under government regulation, it is found that, compared with profit maximization, the optimal fare for social welfare maximization is lower and the one for passengers' welfare maximization is lowest. The departure frequency has similar properties but goes to the opposite direction. In the end, the contract ranges of fare and departure frequency are given. With the use of the proposed model, a numerical example is given to assess the impact of government regulation on the optimal transit fare structure and departure frequency.