Monopoly, subsidies and the mohring effect: a synthesis and an extension

Abstract

This paper discusses the recent literature concerning the Mohring effect and the need to subsidize public transport in order to provide optimal frequencies when there is a monopoly provider. We show that all of the results of this literature are special cases of Spence (1975), albeit with a small adjustment in order to take into account the cost structure of frequency provision in the case of public transport. Although in theory there are cases when a monopolist will offer optimal or above optimal levels of frequency without requiring subsidies, we argue that this result is not very relevant from a public policy perspective. Public transport is rarely provided by an unregulated monopolist. Rather, these services are usually provided either by an exclusive operator under regulated fares or by a group of competing operators, with or without fare regulation. We show that in the first case frequency will always be below social optimal level and in the second case frequency may be overprovided under certain conditions particularly if fares are high. The implications of these results are discussed in the conclusions.