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

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 compromised economic 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 ‘Status Quo’. The proposed win-win pricing regime can also support a larger number of operators and services with potential additional welfare gains. The Block Exemption in the UK allowing collusive pricing on a limited basis is due to expire and is under statutory review, making this is a timely contribution. We also compare the proposed regime against a multi-operator ticketing card (MTC) scheme, permitted under the Block Exemption, and show, whilst the MTC offers higher welfare when all regimes provide the same number of services, the proposed regime supports 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 in the region where the proposed regime can dominate the ‘Status Quo’ in profit, consumer surplus and welfare terms and supports 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. Furthermore, by improving transport efficiency it may help improve city density, 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 leveling-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.