Strategic interactions of bilateral monopoly on a private highway

This paper investigates strategic interactions between a private highway operator and a private transit operator who uses the same highway for its services. Heterogeneity of travellers is taken into account by considering a continuous distribution of values of time. Demand elasticity arises from the inclusion of an outside virtual mode. Game theory is applied to model the possible moves taken by the operators in their interactions. Four games are formulated, representing different decision making processes, including Nash and Stackelberg (leader-follower) games. The different timings of long-run and short-run decisions are also modeled in a two-stage game. Our results indicate that the market equilibria in the four games formulated are quite different as a result of the different sequences of moves. The highway operator is considered to be in a better position in terms of profit making in most cases, while for the transit operator it will generally be more advantageous to be the follower rather than in the leader position.