E-commerce and traffic congestion: An economic and policy analysis

• We develop a theoretic model to analyze interactions between a firm’s distribution strategy and traffic congestion.
• In an unregulated economy, we characterize the firm’s optimal strategy concerning e-commerce under the influence of traffic congestion.
• We show that the socially optimal distribution strategy depends on consumers’ acceptance of e-commerce and congestion parameters.
• We identify the private firm’s incentive distortions from the socially optimal decisions and underlying causes.
• We propose a differentiated tolls/rebates policy that aligns the firm’s incentives with the social objective and achieves maximum social welfare.

E-commerce, due to its ability to re-direct consumers from physical stores to online, can potentially alleviate traffic congestion. In this paper, we set up a theoretic model to analyze interactions between a firm’s distribution strategy and traffic congestion. In an unregulated economy, we first characterize the private firm’s optimal strategy concerning e-commerce under the influence of traffic congestion. We then examine a centralized economy where the firm is publicly owned and derive the distribution strategy that maximizes social welfare. Comparing the two cases, we show that the private firm’s incentives may deviate from the socially optimal decisions, which leads to inefficiency. We identify two effects, i.e., monopoly effect and congestion externality effect, which drive the private firm to deviate from the social optimum. Based on our analysis, we propose a differentiated tolls/rebates policy to achieve maximum social welfare. Under such a policy, the firm will not only adopt the socially optimal distribution strategy but offer the socially optimal quantities.