Institute for Transport Studies FACULTY OF ENVIRONMENT Responses to Price Signals Peter Bonsall Prepared for workshop on What works in behavioural Change?, Edinburgh, 28 June 2010,

28 th June 2010 Introduction Pricing of goods and services is a well established method of influencing demand without imposing rules or regulations Increased prices generally lead to reduced demand But…. –this relationship may not hold at the individual level – it is an aggregate relationship –sensitivities vary depending on the substitutability of the good but, typically, a 10% increase in price leads to a 3% reduction in demand –the full response may take a considerable time to emerge –there are exceptions to the general rule (Babysham) –responses to complex pricing signals (e.g. via differentiated tariffs) are less well understood

28 th June 2010 Responses to complex price signals Suppliers introduce differentiated tariffs to –Manage demand (e.g. peak off-peak) –Maximise revenue (e.g. by capitalising on range of WTPs) –Increase overall demand by establishing variants (e.g. by pricing business class higher than economy class simply to establish its superiority) Plethora of tariffs designed to appeal to different market segments Individuals –Generally prefer simple price structures –Rarely understand complex tariffs –Rarely conduct rational assessment of the suitability of tariff (utilities) –Often ignore cost when choosing (mobile phone) –May act counter-intuitively (HOT lanes) –Even when cost is considered, factors other than overall cost may dominate: predictability of expenditure pattern v flexibility and control cash flow problems

28 th June 2010 Responses to Differentiated Road User Charges study in UK and Germany Simple charge structure –fairly accurate estimates of the charge –anticipated behavioural responses were consistent with the price signal. Highly differentiated charges (e.g. varying by distance, time of day, type of road) –frequent disengagement –numerous errors –many behavioural responses appearing to ignore the subtlety of the price signal

28 th June 2010 Responses to Emissions-based VED Freight and commercial sector respond rationally Individuals have lack of knowledge, MORI (2003) found: –34% thought VED was still based on engine size –45% did not know the basis of VED levels (even prior to the change) –51% were not even aware that VED is graduated MORI concluded that: –fuel consumption (as part of running costs) is a key factor in vehicle purchase decision –environmental performance (and VED) is less important than attributes such as colour and legroom –Behavioural impact is limited unless duty band differentials rise ( tho 28% said that they would not change even if the differential was £300) VEDs role as a behaviour change instrument is limited by: –lack of understanding –overlap with fuel consumption (and mixed message) –political difficulty of achieving large enough differential (equity issues)

28 th June 2010 Conclusions on the Use of Pricing Factors affecting engagement with price: –Personal characteristics (age, income, gender, education, NFC, ToA, NTE) –Situational factors –Visibility and simplicity of the pricing signal Design implications –If you want to affect demand… Keep the price signal clear and logical Publicise the prices Emphasise the price (e.g. via a meter) and the transaction (e.g. require cash) –If you want to maximise revenue… Introduce a complex price structure Minimise its visibility and make the transfer painless (e.g. electronic payment) Equity implications –A differential large enough to have an effect will seriously disadvantage some people Overall –can be effective in aggregate and can avoid use of coercion - but has equity implications and can produce unexpected effects