Topic: Pricing tactics of Tunnels in Hong Kong Christie Amy Katherine Stephanie

TunnelsOperated byVehicles dailyToll range Cross-Harbour Tunnel (CHT) Cross Harbour Tunnel Company Limited 122,900 *$8-$30 Eastern Harbour Crossing (EHC) New Hong Kong Tunnel Company Limited 64,000 *$13-$75 Western Harbour Crossing (WHC) Western Harbour Tunnel Company Limited 48,800 *$22-$115 * data from 2007 Information about 3 tunnels

Traffic Volume - Cross Harbour Tunnel(CHT)

Traffic Volume - Eastern Harbour Tunnel(EHT)

Traffic Volume - Western Harbour Tunnel(WHT)

‧ Because EHC and CHT are substitutes EHC ↑toll  daily volume of CHT ↑3% EHC’s revenue ↑> $100,000,000 Inelastic demand of EHC ( % ↓in quantity < % ↑in toll) If ↑in fuel prices > ↑in toll  use EHC as before What is the effect of raising toll?

How can unequal distribution of cars be solved? (a). Extension of franchise *With low transaction cost  negotiate with the harbour crossings to reduce toll *Extended franchise help cover the decrease in revenue of harbour crossings *May reduce congestion in CHT

(b). Should Government purchase the three tunnels? Citizens: good idea Reason: * government can then freely regulate the toll fee. Government: may not be a good idea Reasons: * the purchasing cost is very high * change the private property right system into a communist system (with no exclusive use right, income right or transfer right). * High institutional cost Conclusion: Government should not purchase the three tunnels

Pricing of the Tunnels Without congestion  cost of serving extra car is zero ie. MR=MC=0 Ed=1 Toll: charge on average cost  consumer surplus will be extracted

Price discrimination Same cost → MC=0 cost for serving all the vehicles are the same Same Services/ Goods → same services provides by the tunnel company same tunnel Different prices → different vehicles will be charged different price

Price discrimination Market is separated Example: lower price for taxi, higher price for private cars Western Harbour Tunnel Eastern Harbour Tunnel Cross Harbour Tunnel Taxi$40$25/15$10 Private car$45$25$20

Argument It is common to see traffic congestion during business hours, so people claim that why the tunnel companies do not charge a peak-hour pricing. They can charge higher prices for users during peak hours in order to relieve traffic congestion. Why do they not charge different price in different period?

Explanation There is the existence of transaction costs : 1. Information cost The tunnel companies need to carry out several research to determine the peak hours 2. Enforcing cost They need to impose a series of regulations on the peak-hour pricing 3. Policing cost They need to execute the regulations

Autotoll Only (toll booth sign) Lane Sign (Autotoll only) Automatic Toll Collection Facility

What cost(s) can the facility save and raise? Saved: Time cost of the consumers Cost of defining and enforcing property right Labor cost Raised: (i)Monitoring cost (ii)Institution cost

Saved costs (i)Time cost - no need to spend time on paying money. (ii)Cost of defining and enforcing property right - the receiver no need to identify what type of the car is (iii) Labor cost - no need to hire workers for receiving toll

Raised costs (i) Monitoring cost -some people may not have right to use this facility -need to monitor the people who using the system (ii) Institution cost - when adding automatic toll collection facility, they may need to add many input, such as technical facility etc …