Congestion and the market structure of fleets

Fleets are becoming increasingly prevalent in urban transport. Unlike traditional vehicles, fleet operators may be able to internalize, at least partly, the congestion cost they impose on other fleet vehicles, thereby reducing the level of congestion. We analyze the optimal market structure in the market for fleets by comparing welfare under a monopolistic and a competitive fleet. Our model exhibits a unit mass of heterogeneous travelers choosing between private vehicles, vehicles belonging to a fleet, and public transport. We assume that private and fleet vehicles create congestion, while public transport does not. We emphasize a stark trade-off: a monopolistic fleet may be better at internalizing the congestion cost, but, as standard, may inefficiently reduce the amount of fleet vehicles dispatched. We find that, when the cost of a private car is high (such as in the case of dense urban contexts), and travelers choose between fleet vehicles and public transport only, a monopolistic fleet may be welfare superior to a competitive fleet, due to its superior ability to internalize congestion costs. In situations where the cost of using a private car is low or public transport options are absent, travelers face a choice between private cars and fleet vehicles only. Under these conditions, a competitive fleet structure is welfare-superior to a monopolistic one, as cost-reflective pricing, fostered by competition, exerts a greater influence on welfare than the internalization of congestion externalities.