  The Camassa-Holm equation (CH) is a well known integrable equation describing
the velocity dynamics of shallow water waves. This equation exhibits
spontaneous emergence of singular solutions (peakons) from smooth initial
conditions. The CH equation has been recently extended to a two-component
integrable system (CH2), which includes both velocity and density variables in
the dynamics. Although possessing peakon solutions in the velocity, the CH2
equation does not admit singular solutions in the density profile. We modify
the CH2 system to allow dependence on average density as well as pointwise
density. The modified CH2 system (MCH2) does admit peakon solutions in velocity
and average density. We analytically identify the steepening mechanism that
allows the singular solutions to emerge from smooth spatially-confined initial
data. Numerical results for MCH2 are given and compared with the pure CH2 case.
These numerics show that the modification in MCH2 to introduce average density
has little short-time effect on the emergent dynamical properties. However, an
analytical and numerical study of pairwise peakon interactions for MCH2 shows a
new asymptotic feature. Namely, besides the expected soliton scattering
behavior seen in overtaking and head-on peakon collisions, MCH2 also allows the
phase shift of the peakon collision to diverge in certain parameter regimes.
