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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