Applied Study of Price Discrimination Implemented on a Two-Path Route Expressway

TSINGHUA SCIENCE AND TECHNOLOGY ISSN 1007-0214 02/15 pp632-639 Volume 11, Number 6, December 2006 Applied Study of Price Discrimination Implemented on a Two-Path Route Expressway SHI Jing (石京)** Institute of Transportation Engineering, Tsinghua University, Beijing 100084, China Abstract: This study aims at implementing price discrimination to get maximum revenue on a two-path route expressway, focusing on the problems which occur in traffic forecasting when applying a “profit-maximizing” toll designed to maximize revenue for a certain toll road in Japan. A break-even discussion is inevitable in the process of planning a certain toll road. According to the theory of transportation economics, market segmentation price discrimination is supposed to be efficient in the transportation market to increase the revenue of fixed facilities. In the model, a bypass and an adjacent expressway form a two-path route section. Two different toll levels are implemented for the bypass: one is for through traffic, and the other is for inside- inside and inside-outside traffics. This two-path route plus two-toll-level system thus causes difficulty in traffic assignment that is based on the minimum route searching method. In the study, a rational approach of adjusting the through traffic is implemented to predict the traffic flow as well as revenue on two parallel routes with different toll levels. The approximate calculation method that fixes the split rate of the passing through traffic flow is applied to solve the two-path route plus two-toll-level problem since passing through traffic is price elastic. Market segmentation pricing, which gives two toll levels in a toll road, is proved to be practical for increasing revenue. The results are also verified to be rational by using the survey data of Meishin Expressway. Key words: road planning; traffic forecast; two-toll-level problem; price discrimination expressway systems, and it is not necessary to break- Introduction even for each expressway line. The certain toll roads, where tolls are charged separately for each road, are In Japan, the Japan Highway Public Corporation (JH) planned, constructed, and managed by JH itself, based is in charge of construction, operation, and manage- on a beneficiary and repayment principle[1]. Each cer- ment of both certain toll roads and the inter-city ex- tain toll road must satisfy two constraints, namely, pressway system throughout the country. The certain road users must obtain benefit from the road, and the toll roads and inter-city expressway systems are man- toll revenue should be used to pay off the loan over a aged as two different kinds of toll roads. The inter-city 40-year period. expressway system is part of the national freeway net- In recent years, toll roads have mostly been con- work, which uses a distance-based toll system with a structed in heavy traffic areas to ease traffic congestion. basic interchange charge all around the country. A toll The Kinki area, with a population of 23 million, is the pooling system is implemented for the inter-city second biggest economic block in Japan. Moreover, the Received: 2005-07-11; revised: 2005-09-15 population is concentrated in urban areas, such as the ﹡﹡ E-mail: [email protected]; Tel: 86-10-62772300 Kyoto-Osaka area. In the study area, i.e., the Kinki SHI Jing (石京)：Applied Study of Price Discrimination Implemented on … 633 area, traffic congestion often occurs on both roadways the bypass of the Meishin Expressway, the expressway and expressways. A certain toll road, the Keiji Bypass, toll levels should be applied to through traffic; other- has been planned and constructed as a bypass of the wise, vehicles will avoid using the road. As a result, a Meishin Expressway. The bypass, which connects two-toll-level scheme is required. This causes difficul- Shiga Prefecture and Kyoto Prefecture, is expected to ties in using a minimum route searching based traffic ease the daily traffic congestion on the Meishin forecasting process. Expressway, as well as on the national arterial highway Many researchers have studied multi-toll-level prob- No. 1. When it is completely opened to traffic, a two- lems, or parallel routes problems, and many mathe- path expressway route will be formed between Setahi- matical models with simple assumed networks have gashi Junction and Oyamazaki Junction of the Meishin been proposed. However, in this study, traffic forecast Expressway (Fig. 1), which is also a part of the Kyoto and flow analyses have to be made on a more realistic city ring road. network level, and a practical model is, therefore, necessary. In this study, based on price elasticity of demand analysis, a rational approach is applied to forecasting the traffic flows on a two-path-route with two toll levels. Furthermore, the predictions are verified by an analysis of survey data obtained from two separate parallel path segments with the same toll level on the Meishin Expressway. 1 Economics Literature In Japan, all freeways are toll roads and are constructed beside existing highways. Travelers may choose between two adjacent roadways: one free but Fig. 1 Location of the certain toll road: Keiji Bypass slow or congested and the other with a fee but fast or This study was undertaken on the request of JH, the free-flowing, i.e., people are given the option to pay road administrator, who wishes to maximize revenue for a more highly valued service. This scheme is some- of the certain toll road. A profit maximizing criteria times called “value pricing”. Expressway planning should, therefore, be implemented to increase revenue needs a criterion to set the toll level. A value-pricing according to the repayment principle. program can be designed according to many criteria, As a matter of fact, it has been reported that traffic such as maximization of social welfare, control of flow flows surveyed on many certain toll roads are falling speed, or maximization of profit. far short of the predicted traffic flow for these roads[2]. One possible criterion is to apply the “second-best” Improving the precision of demand forecasts, including toll to the expressway, i.e., to maximize social welfare revenue prediction on the business level, is clearly an subject to a zero-toll constraint on the other roadway. important task. A break-even discussion and traffic According to the theory of transportation economics, flow analysis also should be conducted carefully on the marginal-cost pricing offers the best solution for opti- basis of a wide-area network, since consistency of mizing congested road traffic flows. However, several [4] forecast results is highly desirable. researchers, such as Yang et al. , have pointed out that In order to increase the revenue of the Keiji Bypass, if there are distortions in the economy, the first-best market segmentation pricing is assumed to take place, rules are in general no longer optimal. Recently in the [5-8] since the fixed facility is monopolistic[3]. The toll level literature , second-best tolls of road traffic conges- for the toll road of the Keiji Bypass should be high, tion in the presence of various technological and po- due to the high construction cost, and should ideally be litical impediments have been proposed. determined independently, depending on the forecasted Most recent research on value pricing has addressed traffic flow. However, since the certain toll road is also congestion pricing and road pricing, especially on “high occupancy/toll (HOT)” lanes. Road-pricing 634 Tsinghua Science and Technology, December 2006, 11(6): 632-639 concepts have moved to center stage in many transpor- parallel expressway routes besides zero-toll roadways, tation planning and policy-making venues. Recent re- and each may have different toll levels. It must be em- search, such as that by Braid[5], Verhoef et al.[6,7], and phasized that on a practical level, the traffic flow fore- Liu and McDonald[8], has uncovered a potential prob- cast and economical analysis must be implemented in a lem with current implementations of value pricing as a wide-area network. demonstration of road pricing. In this study, the revenue discussion includes two Another possible criterion is to set the toll just high parts. Firstly, we consider how to determine the enough to keep the traffic flowing at a minimum speci- amount of revenue that an operating corporation fied speed. However, this scheme is difficult to realize. should earn. Secondly, we consider how to distribute A third possible criterion is to apply a “profit- the revenue requirements among different categories of maximizing” toll which maximizes revenue, subject to users. the same zero-toll constraint. Market segmentation price discrimination is sup- This study focuses on the profit-maximizing version posed to be an efficient mechanism for increasing reve- of value pricing. The work of Kenneth et al.[9] is fo- nue. Charging different prices for the same product is cused on the profit-maximizing version of value pric- price discrimination. For most industrial products, ing, comparing its outcomes to those of the second- price discrimination is impractical due to the problem best version. Their study found that accounting for het- of resale. To make price discrimination successful, a erogeneity in the value of time is important in evaluat- seller must control its market. In the case of the trans- ing constrained policies using a model with two user portation field, transportation companies are in an es- groups, and improves the relative performance of poli- pecially good position to engage in price discrimina- cies that offer differential prices. They use a model to tion. It is generally possible to find a characteristic of explore the importance of heterogeneity in the value of customers that indicates their level of demand and, time for value-pricing demonstrations.

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