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Efficient pricing of urban public

transport with budget constraints

Nils FearnleyInstitute of Transport Economics, Oslo

E-mail: naf@toi.no

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Financing public transport in Norwegian city Trondheim

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Ticket revenues

SubsidiesOpe

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Efficient pricing with budget constraint• MC pricing not possible

Deficit

• Yield management Max profit

• Ramsey-prising Minimise welfare loss caused by budget constraint

Price differentiation

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Quality and quantity differentiation• Quantity:

– Number of trips: multi-journey coupons, group tickets, family tickets etc

– Distance: Zone systems, city centre ticket• Quality: Passengers’ WTP vary with

i.a.:– Means of public transport– Travel time– Departure time– Interchanges– Etc

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Differentiation of demand segments

• OAP, student, family, military etc• Niche markets

• Requires indisputable segmentation of passengers

• Pricing must reflect segment’s price elasticity/WTP

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Differentiation – disadvantages?• Rebates and surcharges: unfair?• Too complex fare structure?

Trade off between simple and “fair” systems and efficient cost recovery

Create goodwill with attractive rebates

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Patronage growth opportunities

Elastic demand:• Short and long trips• Leisure and off peak• Long term• Rail

Combine peak surcharges and off peak rebates

to maintain revenue

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Is efficient pricing possible?• Rigid fare scales and political

opposition?• Problems related to integrated fares

between cities, transport modes, operators?

• Practical implementation?

Some examples

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Time differentiation

• Sweden:Stockholm: Wild card, Monthly weekend cardGothenburg: Peak/off-peak season tickets

• England:Off-peak saver tickets in most of England

• US:Rebated off-peak day and season tickets

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Surcharge on higher standard modes

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Airportexpress

Airportbuses

Ordinarytrains

Oslo airport access:

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Surcharge on other quality

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New York Washington

Express bus: US

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Aircondition: Singapore

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Rebated presaleP

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Oslo Helsinki

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Hong Kong

• No season tickets!

Campaigns:• Go via selected metro stations and have

HK$2 paid back to you Octopus card• Make 10 trips within a week and get one

trip free• Rebates if you start your journey before

the morning peakSouvenir tickets

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Summary• Low subsidies necessitate price

differentiation to maintain service levels

• General fare increases are not efficient and cause unnecessary passenger loss

• Efficient cost recovery: Fares reflect MC and WTP/elasticities (=Ramsey pricing)

• It is possible! But need to know market and costs