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Since passenger demand in urban transit systems is asymmetrically distributed across different periods in a day and different geographic locations across the cities, the tradeoff between vehicle operating costs and service quality has been a persistent problem in transit operational design. The emerging modular vehicle technology offers us a new perspective to solve this problem. Based on this concept, we propose a variable-capacity operation approach with modular transits for shared-use corridors, in which both dispatch headway and vehicle capacity are decision variables. This problem is rigorously formulated as a mixed integer linear programming model that aims to minimize the overall system cost, including passenger waiting time costs and vehicle operating costs. Because the proposed model is linear, the state-of-the-art commercial solvers (e.g., Gurobi) can be used to obtain the optimal solution of the investigated problem. With numerical experiments, we demonstrate the feasibility of the mathematical model, verify the effectiveness of the proposed model in reducing overall system costs in transit systems, as well as the robustness of the proposed model with different parameter settings.