The value of "value pricing" of roads: Second-best pricing and product differentiation

Some road-pricing demonstrations use "value pricing," in which travelers can choose between a free but congested roadway and a priced roadway. Recent research has uncovered a potentially serious problem for such demonstrations: second-best tolls may be far lower than those typically charged, and from a welfare perspective, the latter map be worse than not pricing at all. That research, however, assumes that all travelers are identical and it therefore neglects the benefits of product differentiation. Using a model with two user groups, we find that accounting for heterogeneity in value of time is important in evaluating constrained policies, and improves the relative performance of policies that offer differential prices. (C) 2000 Academic Press.