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Price Discrimination and British Railways

What are the benefits of price discrimination to UK railway passengers? 

 

Price discrimination is where the same service is sold at different prices to the same or different consumers. It is divided into first-, second-, or third-degree discrimination.  


For price discrimination to work, companies must have knowledge of demand, the ability to stop purchasers re-selling items or services at cheap prices to others, and the company should have market power to be able to set prices. Ideally, they should also be able to stop customer comparing prices and informing each other of significant differences. 

 

In first degree discrimination, the price is tailored to the customer and their elasticity. All consumer surplus is captured. Such a system involves charging whatever a particular consumer can pay for a seat and is built into the way in which seats become more expensive the nearer to the time of travel a consumer seeks to purchase them. For railway companies, the system also allows planning in terms of capacity which can influence decisions about how many services or carriages they put on routes at specific times.  

 

Second degree price discrimination involves charging different prices for different amounts of the good or service. For instance, in many wholesale industries, bulk buying discounts prevail for those who are willing to purchase a lot or all the stock of a good or amount of a service at once. This can benefit companies by guaranteeing their sales, a quick turnover of items, and planning, which can in turn benefit customers by making sure that a company can offer marginal items to individual purchasers.  

 

In the transport industry, second degree price discrimination might occur where people are offered different prices for using larger amounts of the service. A season ticket holder, for instance, might have a slightly lower price for their ticket than a person undertaking one journey. A first-class ticket is based on the presumption that the holder gets more legroom, table space, or service, than someone in economy class despite being otherwise on the same train at the same speed.  

It should be remembered that first class ticketing takes advantage of differences between customers using their own money and customers paying with company accounts, which slightly counters the second-degree process. Bulk incentives also apply for rail freight users, but these do not in the normal sense qualify as ‘passengers.’ 

 

Third degree price discrimination occurs when specific demographic groups with different elasticities get different pricing. Such discrimination could occur in the form of pricing based on age, for instance, with youth and senior citizen rail travel offered at prices which are lower than the norm. Peak and off-peak pricing also function as third degree discrimination.  

Companies pursue these forms of discrimination because the revenue from their activities is greater than if they simply offered one price or price incentives such as coupons, loyalty cards, or discounts. There are some substantial benefits to consumers too.  

 

In the railway industry, groups such as young people or the elderly can access services that they might otherwise be unable to afford. The existence of direct age-based discounts, and, of off-peak pricing, is geared towards such groups. Off-peak pricing also benefits those on lower incomes. In addition, the existence of peak prices makes the provision of the service at off-peak times possible, which widens choices and opportunities for travel for those on such incomes.  

 

The existence of time-sensitive pricing means that those who book in advance can make great savings. Companies, by maximizing the number of those who can use their services, without slashing prices significantly can also raise revenue and put it into investment. This allows for safe travel and the expansion of the system in the future, as well as for steady profits rather than declining ones.  

The disadvantages of such a system are that pricing, and ticketing can become confused. Equally, in order to make sure that re-sale and fraud are not taking place, so that all customers are paying the correct prices and not lower ones, an expensive network of conductors and ticket barriers must be put in place. This can raise prices in general.  

 

The confusion arising from many different tickets, allied to the existence of competitive alternatives in terms of road, bus, river, or air travel, might discourage people from travelling on railways at all. Customers who have the most contact with the railways in the form of season ticket holders may also feel aggrieved that their tickets, though representing a lower individual cost of journeys, are still expensive as one-off purchases in terms of average incomes.  

 

These problems may in turn encourage government regulators to consider price-capping or the restriction of price discrimination, or in some cases, the nationalization of the whole industry and the introduction of fourth degree price discrimination. This occurs where prices to all consumers are the same, but producers face different costs (also known as reverse discrimination.) Although superficially attractive, this usually means that rail operators would be reduced to low profits or even losses, unless it was accompanied by vast growth in the service.  

 

There is substantial pre-covid evidence that the British rail system could not cope with such growth unless there was a great expansion of track, carriages, station platforms, car parks at stations, and ticketing staff. This situation may, however, be forced upon governments and regulators by the creation of Great British Railways in the face of the collapse of some rail franchises or the departure of others from the market during the covid crisis. 

 

 


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