Consider a competitive highway/transit transportation system in which travelers either drive on the bottleneck-constrained highway or take scheduled trains from home to the workplace in the morning peak hours. This paper explores the impact of bottleneck capacity expansion on transit operating schemes (fleet size and fare) and travelers' departure time and mode choices. Due to the potential occurrence of the Downs-Thomson (D-T) Paradox after highway capacity expansion, the paper investigates whether the D-T Paradox can be circumvented by implementing transit subsidy policies. The effects of different transit subsidy schemes are explored: subsidizing the transit company (cost subsidy) or the passengers (passenger subsidy) with the financial support from either government funding or road pricing revenue. For each combination of subsidy method and financial sourcing, the condition for overcoming the D-T Paradox is established.

Summary This paper investigates public transit service (fare and frequency) operation strategies in a bi‐modal network with assumption of indifference thresholds‐based travelers' mode choice behavior. Under such behavior, users would switch to a new mode only if its utility is larger than the utility of current mode plus a threshold. The concept of indifference thresholds‐based bi‐modal equilibrium (ITBE) and the properties of the ITBE solution are explicitly proposed. Considering transit operator's different economic objectives (profit‐maximizing, no‐deficit and total system cost‐minimizing), the effect of indifference thresholds on transit fare and frequency schemes is studied. Some numerical experiments are accompanied to verify the theoretical results. Copyright © 2016 John Wiley & Sons, Ltd.