Business Logistics 420 Public Transportation Lecture 26: Transit Pricing

Lecture Objectives Understand the three components of transit pricing strategy -- fare level, structure, collection techniques Understand the role of transit pricing in marketing, and policy decisions Understand and be able to calculate simple transit price elasticity factors

Pricing Strategy -- Three Parts Fare Level Fare Structure Fare Collection Technique

Role of Pricing Strategy Directly increase ridership through fare reductions Indirectly increase ridership through higher fares and improved service Independent of marketing -- fares set to minimize deficit or meet other financial/political objective

Private Vs. Public Sector Pricing Strategy Private Sector -- profit maximization Public sector –Equity concerns (income transfer) –Maintain low fares to increase ridership to address other social objectives

Fare Level The absolute amount of the fare, e.g., a base fare of $1.00 Determined by: –Financial considerations -- maximize revenue –Marketing consideration -- increasing ridership –Political Considerations -- balance between public and rider contributions

Fare Structure Fare structure is often a better marketing tool than fare level Types of fare structures –distance-based Vs. flat fare –bulk purchase Vs. individual trip –peak Vs. off-peak fares –multi-stop fares –prepaid or “free” fare

Fare Collection On-vehicle –non-registering fareboxes –registering, electronic fareboxes, may accept credit or smart card Off-vehicle –ticket or token dispensers –farecard machine –honor system

Price Elasticity E = (% change in ridership)/% change in fare) Example –Fare is now $.75. Proposed fare is $ % increase –Elasticity is assumed to be -.4 –Therefore –.4 = (% change ridership)/.33 –solving for % change = -.4 x.33 = or ridership will go down 13.2%

Price Elasticity Measures the response of demand to change in price Several ways to calculate –Point elasticity –Arc Elasticity Estimating elasticity –Preference surveys –Shrinkage analysis (most common) –Econometric studies

Elasticity Varies significantly by: –quality of service (higher-quality service less price sensitive) –Location -- city to city variations –User category –Trip purpose -- work Vs social/shopping

Fare Elasticity - Bus Services (APTA Study) Cities/Areas with Population of >1 million <1 million All hour average Peak hour average Off-peak hour average Peak hours Off-peak hours

Price Discrimination Respond to different elasticity of demand for different groups by practicing price discrimination -- charging different amounts for the same service Examples –Peak-off peak price –Passes -- for regular users

“Free” Transit Many experts advocate “free” transit as a way to maximize the benefits of transit that depend on high levels of ridership No really “free” -- just prepaid

Benefits of “Free” or Prepaid Transit Increased ridership Reduced fare collection costs Faster boarding/alighting No need for transfers or other impediments to using multiple vehicles/modes Fewer distractions for bus drivers

Disadvantages of “Free” or Prepaid Transit Expense may exceed community’s ability to pay Encourages “unnecessary” trips, e.g., trips on the Campus Loop replace walking trips Requires major expansion of service that may be beyond provider “Undesirables” could ride all day Equity -- not all residents could use the service but would have to pay for it

Examples of Limited “Free” Transit CATA/PSU Campus Loops Apartment Passes PennDOT Free Transit for Senior Citizens Downtown Free Zones in a number of cities -- Seattle, Denver, Pasadena UPASS systems at a number of universities –U. of Washington, U. of Wisc - Milwaukee, Pitt, Carnegie Mellon, U. of Minn.

The Seattle Proposal Sound Transit, a regional transit system created to promote high-capacity transit, has proposed light rail lines Citizen proposal instead of light rail -- free bus service -- cheaper, faster to implement 400 more buses, 4 x the ridership gain as the light rail

The Clemson System Clemson, SC, home of Clemson University has region-wide free system Paid for by parking fees on campus, and state and federal transit funds Saves money on fare collection Increases ridership

Study Questions What are the three elements of a pricing strategy? Define price elasticity How does price elasticity vary by city size, trip purpose, time of day, quality of service? What are the pros and cons of “free” or prepaid transit?