Heterogeneity in Demand and Oprimal Price Conditioning for Local Rail Transportation Evgeniy M. Ozhegov∗ National Research University Higher School of Economics. Research Group for Applied Markets and Enterprises Studies. Research fellow
[email protected] Alina Ozhegova National Research University Higher School of Economics. Research Group for Applied Markets and Enterprises Studies. Junior research fellow
[email protected] May 31, 2019 Abstract This paper describes the results of research project on optimal pricing for LLC "Perm Local Rail Company". In this study we propose a regression tree based approach for estimation of demand function for local rail tickets considering high degree of demand heterogeneity by various trip directions and the goals of travel. Employing detailed data on ticket sales for 5 years we estimate the parameters of demand function and reveal the significant variation in price elasticity of demand. While in average the demand is elastic by price, near a quarter of trips is characterized by weakly elastic demand. Lower elasticity of demand is correlated with lower degree of competition with other transport and inflexible frequency of travel. I. Introduction Local rail transportation in Russia is an important part of public transport system, as it is often the only way for people to move between locations. At the same time, due to the large length of the arXiv:1905.12859v1 [econ.EM] 30 May 2019 tracks and the distance between large settlements, regional passenger companies cannot cover the costs of operating local rail transport by the revenue from ticket sales. For instance, the revenue of LLC Perm Local Rail Company (PPK) in 2017 amounted to 596 million rubles (near 1 mln.