The Marginal Cost of Travel: Pricing Mechanisms, Perceptions, and Implications



The Marginal Cost of Travel: Pricing Mechanisms, Perceptions, and Implications

Authors

J Hawthorne, SKM, UK

Description

The marginal cost of car travel is often cheaper than public transport. What are the user perceptions, operator implications and policy issues of a different balance between sunk and marginal costs, and are these affected by smart card ticketing?

Abstract

Mode choice modelling typically assumes that the decision between modes is made on a trip by trip basis. For most public transport modes, the monetary cost is equivalent to the specific fare or price for the trip being considered. However, it is recognised that for trips by private vehicle, car availability is a sunk cost, and thus that the actual monetary cost for a car trip is only equivalent to the marginal cost, which may be little, if any, more than fuel. To reflect this, the calculation of mode split may be made after taking into account the proportion of travellers known or assumed to have access to a car for the trip in question.

Yet the concept of sunk cost is also applicable to other modes. Regular travellers by public transport have long enjoyed the benefits of season tickets. These require careful consideration of value for money prior to purchase, but once the decision to purchase has been made, all subsequent journeys within the geographic and time period validity of the ticket have an effective marginal cost of zero.

Pre-purchase discount cards, though generally positioned in the marketplace as a concession to specific passenger groups such as senior citizens, young people or military personnel, are actually a mechanism which introduces an up-front decision to purchase the card, but then reduces the marginal cost of travel at the point of purchase, which may thus influence subsequent mode choice.

Pre-payment carnet tickets are also becoming more widely offered beyond their traditional use on flat fare urban systems.
The increasing use of smart-card ticketing has introduced further variations on the pre-pay versus per trip payment theme. In their simplest form, loading a season ticket onto a smart card offers no financial benefits or incentives to the traveller, and some travellers may also regard "stored fares" applications as financially neutral, especially if the credit balance can potentially be refunded if the card is no longer required for use.
Yet as soon as the pre-pay fare is different from the "cash" fare, or a daily "price cap" is in operation, the decision to add credit to the smart card can become a balance between what may effectively be regarded as "sunk cost" and the subsequent per trip cost of travel. The availability of "auto top-up" where funds are transferred direct from the traveller's bank to ensure a minimum credit balance on the smart card adds a further dimension to the perception of the marginal cost of travel.

Transport operators have long recognised the value of pre-payment both in terms of cash flow and to retain passengers to their mode(s). Smart cards offer new and attractive opportunities for differential pricing, traffic monitoring, division of receipts and recovery of concessionary fares. But care must be taken not to lose the "lock in" offered by season tickets, especially when sold for longer periods.

Adjustment of the marginal cost of travel also raises important policy issues. If the effect is to encourage mode shift it may be regarded as beneficial; but if the effect is simply to stimulate overall demand within constrained income streams it raises important questions regarding effective provision of capacity and appropriate remuneration of operators.

This paper considers how users may perceive the trade off between sunk and marginal costs for various ticket types, the impact this may have on mode choice and mode loyalty, and how this may recognised by modellers.

It considers the possible implications for operators of pricing and ticketing initiatives which may affect the perception of the marginal cost of travel. And it considers the wider policy implications of changing the balance between the sunk and marginal costs of travel at the point of journey and mode choice.

Publisher

Association for European Transport