Friday, December 18, 2009

Network effects in transit

A while back I wrote about the notion of consumer surplus. It's the economic idea that while there may be a price that brings in more money than any other single price, a seller can often make more money by charging different prices to different people. This is because some people will simply not buy if the price is too high.

Some sellers simply use the consumer surplus to maximize their profits on that one item. Others will use the profit on one item to sell another below cost. Sometimes this is done to get customers' attentions, as with free giveaways. This is also known as a loss leader.

A similar strategy is when sellers see themselves as offering a certain class or suite of products. They know that their customers value the fact that they offer the complete line, because of one-stop shopping. Even if they lose money on one product, they will profit overall.

This is one of the reasons that even profitable transit providers will run "empty buses" or train cars (they usually have at least one passenger). As many of the commenters on the recent Streetsblog thread point out, having reasonably frequent off-peak service - for return trips, shopping, transfers, or even just to provide that extra wiggle room in case the passenger is running late - increases the ridership during peak times. Even if they lose money on one bus run, they will profit overall. This is true of other cost-benefit calculations, like energy use and greenhouse gas emissions.

Well, except that most of them don't actually profit. I'm reminded of the old joke, "We lose money on every sale, but we make it up on volume!" If the average farebox recovery is less than 1 (or if the average greenhouse gas emissions are too high), then you need to do something else to achieve your goals. But the point is that the not-quite-empty buses sometimes don't have as bad an effect on the overall averages as you might think.

6 comments:

saosebastiao said...

Its an interesting take on network effects. I think though, the most significant network effects (where the value of one line increases with the addition of another) happen when you construct lines that connect with each other.

Of course, I don't have any data to prove that one type is better than the other, but I just can't imagine seeing the value of a system going up very much by having the flexibility of a bus line available when you don't need it 99% of the time. Taxis seem to do that pretty well, and at no cost to the transit provider.

JN said...

But taxis aren't part of a transit network. They serve entirely different people at entirely different prices.

A bus from my apartment to my city's downtown train station is $1.50. A taxi over the same distance is ~$15. Even more pointedly, I have a bus pass. The marginal cost of a bus ride for me is $0, but the cost of that cab ride is still $15.

I may be missing your point, saosebastio, but I don't see how cabs provide network effects to transit operations.

arcady said...

Taxis most certainly do provide network effects, the easiest example I can think of being the Guaranteed Ride Home program offered by Metro North and other commuter railroads. But in general, the availability of taxi service means that you'll be more willing to take transit than if a missing connection meant a 3 hour walk through the snow.

saosebastiao said...

Cap'n Transit's point was that having buses available when you don't need them increases the likelihood that someone will take the bus during normal peak hours, because it acts like an insurance against the volatility of life's circumstances: If you get out of work late, you can still take a bus home.

I can see this being a big deal for commuter buses, but I just can't see it being like that for intracity buses. Sure, taxis are more expensive, but they are available if you should happen to need them. Would you stop taking transit in the city if you knew that you might have to take a taxi once or twice a month?

JN said...

I know plenty of people who say that they would like to ride transit (most of the time we're talking about commuter rail), but that they couldn't because they sometimes leave work early or late and the train schedules simply aren't flexible enough.

I think this is more about when people are planning how they commute. People look at the bus schedule, see the inflexibility of it, think "I have to work early/late a few times a month, this won't work for me" and proceed to drive. I don't think people necessarily think "Hey, if something goes wrong, I could take a cab." (Of course, I'm in Southern California. Perhaps this possibility is much more salient in New York.) I'm a frequent transit rider, and even I rarely think about calling a taxi. For those who are considering switching to transit for their commute, I think off-peak transit service would do more to influence their decision-making than the availability of taxi service.

saosebastiao said...

I think you might be right but it would totally depend on the availability and costs of the taxi service. In New York, Boston, or San Francisco, I can get a taxi pretty easily just by looking around. If I were in Houston or LA, I might depend a little more on the flexibility of the transit system.