A consumer surplus, welfare and profit enhancing strategy for improving urban public transport networks

Abstract

We show that a novel pricing system can help resolve a series of perennial problems evident in the deregulated British urban public transport market that have impeded urban growth, access equality and environmental ambitions. A two-stage pricing system, with operators setting their multi-operator service ticket prices collusively in one stage and their single-operator ticket prices independently in the other, offers potential consumer surplus, profit and welfare gains over, what we characterise as, the free-market ‘Status Quo’. The proposed win–win pricing system can also support a larger number of operators and services with potential additional welfare gains. We also compare the proposed system against a multi-operator ticketing card ($MTC$) scheme, permitted in the UK under the Block Exemption. The Block Exemption allows collusive pricing on a limited basis but is due to expire and is under statutory review, making this is a timely contribution. We show, whilst the $MTC$ offers higher welfare when all regimes provide the same number of services, the proposed system can support a larger number of operators in the presence of fixed costs, which can reverse the welfare ranking in its favour. A calibration exercise indicates the market may be operating in the region where the proposed system can dominate the ‘Status Quo’ in profit, consumer surplus and welfare terms and support a larger network than the ‘Status Quo’ or $MTC$ with further welfare gains. The resulting higher public transport patronage may also offer further indirect benefits via reduced pollution, congestion and accidents. Improved transport efficiency may have urban density advantages, especially in Britain’s second-tier cities which do not tend to benefit from extensive public transit rail and underground networks, with associated agglomeration effects contributing to the current levelling-up priority. Given the salience amongst developed countries of the private aspect of urban public transport in Britain, along with an unresolved private vs public debate, this issue is of potential interest to urban planners and policymakers beyond the UK.