Should competing firms cooperate to reduce congestion?

Abstract

Consider two profit-maximizing service firms in the presence of congestion-sensitive customers. Firms set their prices and compete to capture market share. We compare cases where the firms can invest either independently (competition) or jointly (co-opetition) in congestion-reduction (CR) activities. Using a stylized analytical model, we find that when the market is covered (that is when everyone buys a product), the firm with a lower marginal CR cost earns more profit under competition than under co-opetition. When the market is uncovered, co-opetition is more profitable if the joint marginal CR cost is less than a threshold. We find that when the market is covered, neither firm makes any CR investment but when the market is uncovered, there will be a CR investment provided the marginal CR cost is lower than a threshold. Our analysis shows that when prices are regulated, firms under competition make CR investments but firms under co-opetition do not. The impact of proximity on each firm’s choice of location under competition and co-opetition are different. We find that if the marginal CR cost under joint investment is larger than a cutoff, then social welfare is also higher under competition than under co-opetition.