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Executive Summary

Our report compares TTC pricing models to different pricing models followed by
international Subway systems. This report helps in evaluating the points of
difference between different pricing models and understand the effects they
have on the overall user satisfaction. We are majorly focusing on the subway
systems followed in UK and Singapore as we feel that they are the best
representative of TTCs operational and strategic structure. A majority of our
focus is on devising an appropriate pricing strategy for TTC to alleviate it from
its current situation and boost its bottom line.
TTC is currently facing huge losses to maintain its one price policy and is
heavily relying on the subsidies from state govt to run its operations smoothly.
Their motive of giving a comfortable ride to its customers is being defied by the
growing congestion in their network. This is causing overall dissatisfaction
among its users despite TTC bearing huge losses in terms of revenue and
brand.
After an extensive study of international subway models, we realised that these
problems can be done away with a simple concept of a 2 nd degree price
discrimination. We propose that TC increase the prices to its peak hour
customer by $X and subsidize the off peak travel. This strategy would have two
pronged effect. Along with the significant reduction in the readership and hence
congestion during peak hours, it would also boost the firms bottom line. It is an
embedded assumption that the customers traveling at peak hours have a
higher willingness to pay. The other solution that can be implemented to the

TTC model the smart card model. It uses the concept of 3 rd Degree price
discrimination and charges different commuters as per the distance covered
and therefore match the pricing structure in proportion to the utility of using
the system.

Situational Analysis of Pricing


The current TTC fare structure is simple and easy to understand (refer Exhibit
1). It charges $3 for a single ride irrespective of the distance travelled.
Although, it uses third degree price discrimination based on the passenger age
but thats where its complexity ends.
TTC follows a cost based pricing structure. One important thing to keep in mind
while understanding the TTC pricing is that TTC is a not for profit organization
and one of its major objectives is to provide good connectivity to people, who
belong to low income group and live in the outskirts of Toronto. To meet this
objective TTC receives subsidy from both the Ontario provincial government
and Toronto Municipal Corporation. The subsidy helps TTC to manage costs and
the remaining is recovered from the passengers. This is one of the main
reasons why TTC charges a flat fare of $3 to all its customers irrespective of the
distance and the time of travel.
On one hand this might look as a smart strategy because of the following
reasons:

1. TTC is subsidizing the low income passengers who live in the outskirts of
Toronto and have lower willingness to pay (WTP) and compensating it
with short distance travellers who have higher WTP. This also serves the
mandate of TTC of providing transportation to all segments of society.
2. TTC is encouraging long distance commuters, who travel by car, to switch
to public transportation thus reducing the congestion on road.
However, we felt that this pricing strategy is incompetent due to the following
reasons:
1. Short distance travellers are discouraged to travel by TTC as they are
charged heavily for their journey.
2. TTC is not extracting the consumer surplus of long distance high income
commuters, who have a higher WTP.
3. There is no price discrimination between passengers travelling during
peak and off peak hours.
Explanation why there should be price discrimination between peak
and non-peak hours passengers
In a competitive market, we set the price equal to the marginal cost (MC).
However in the case of TTC, we cannot afford to follow this pricing structure.
Firstly, TTC has to keep the social welfare of people in mind. Secondly, the
operating cost of TTC varies throughout the day and so does the marginal cost.
The marginal cost during peak hours is high as the high demand requires
investment in increased capacity, thus leading to increase in fixed cost such as
rail cars, street cars and other infrastructure related developments. However,
TTC spreads this cost over its entire customer base when it should actually be

allocating this cost to small number of passengers who use TTC during peak
hours.
During non-peak hours marginal cost is low and relatively stable. Under the
current circumstance, we feel that there is limited room for TTC to increase its
capacity as it is already operating at a frequency of 1 minute during peak
demands. Also, the marginal cost has increased dramatically since the demand
has exceeded capacity. This even hurts the social welfare aspect of TTC as
passengers satisfaction deteriorates due to crowding. In the long run, TTC can
increase its capacity by increasing the number of lines. However, there should
also be a proportional increase in ridership for TTC leading to optimal utilization
of the new facilities.
To summarize, peak passengers are associated with higher marginal cost than
off peak passengers. Currently, the TTC fare pricing does not take this into
consideration.

(4) Comparison of Alternatives


Based on our market study of public transports of other major metropolitans
across the world, we found 2 befitting comparison with the TTC pricing model.
(i) Singapore Mass Rapid Transport (SMRT): One of the most accredited public
transport systems in the world, which serves as an excellent benchmark for
variable pricing model.

(ii) Transport for London (TFL): Which serves as an excellent example for an
efficient zone based pricing model for public transport.
(i) Comparison with Singapore Mass Rapid Transport- A model plan for
decreasing

congestion

SMRT is spread across 153 km with 113 stations and have an average daily
ridership of 2.7 million. One of the key aspects of SMRT is that fares are
calculated in increments based on approximate distances between stations, in
contrast

to

the

use

of

fare

zones

or

standard

fixed

fares.

In order to address the challenge of congestion, from June 2013, riders could
travel free if they exited at one of 16 heavily used MRT stations in the city core
by 7:45am (starting 5.30AM).
As a result 7% of riders shifted from peak hours to non-peak hours with
complementary services. This reduced congestion and also increased the utility
for both set of people; people who shifted to free use and people who still used
the peak hours of service but now had a better experience, and thus would
continue

to

use

this

service.

In comparison Toronto TTC uses the standard pricing model and has no Pricing
measure to regulate the even distribution of commuters and reduce congestion
in peak hours from:
6.30AM 10.00 AM and 3.30PM- 7.00PM. This would make the ride of peak
hour commuters more comfortable and would increase their willingness to pay
for travel in the peak hours. This in turn offset the cost associated with free
rides and thus create more utility and a better experience for both group of

users. In addition, off-peak hours services cost lest to operate and would also
create a positive feedback loop, which would benefit the entire system. Less
congestion on the TTC, as well on the road.
This is a classic example for unlocking more value through 2 nd Degree price
discrimination, where consumers are self-selecting their preference to choose
an offering, which provides a higher utility to them personally. People who do
not wish to spend, would use the early hour complementary service and those
who do not mind sending more, would use the peak hour service, but enjoy a
more comfortable ride. As of now in Toronto Subway is increasingly facing the
challenge of ever increasing congestion in the peak hours, because of which
many

consumers

are

switching

over

to

their

personal

vehicles

for

transportation. So in the non-peak hours TTCs service is highly underutilized


and in peak hours again, there is no price discrimination and everyone pays the
same price and get the same underwhelming experience.

(ii) Comparison with Transport of London: An improved model of generating


more profitability & providing a better- On demand pricing model for every
unique commuter.
The London Underground (also known as the Tube) is a public rapid transit
system under Transport for London. The system is spread across 402 kilometers
serving 270 stations and commanding a daily ridership of 3.5 million
commuters (approx.). TFL use differential pricing model and use different fares

spread across the use of length of travel by the commuter spread across 11
zones. The system, is based on 3 rd Degree price discrimination and charges
different commuters as per the distance covered and therefore match the
pricing structure in proportion to the utility of using the system. Fares are
calculated
Rail service fares by TFL is calculated by a zonal fare system. London is divided
into eleven fare zones. The zones are mostly concentric rings of increasing size
emanating from the centre of London and increase in fare per user is directly
proportional to the number of zones traveled. Within the zones there is
standard pricing, which provides flexibility to the commuters.
Smart Pricing on Londons Transit System
In comparison to the TTC Londons transit system uses variable fair system.
Single-trip fares are high and are paid mostly by occasional riders. Like Toronto,
there is no free transfer with a single fare. The current bar is set to 4.50 per if
paid in cash, but varies from 2.10 to 3.00 ($3.30 to $4.80) with the Oyster
smartcard depending on whether one, two, or three zones are crossed.
However the daily fare is capped, with unlimited free travel after a certain
number of trips each day.
For users of the rail system, the cap depends upon when they travel, and how
many zones they cross. The daily cap for a passenger travelling in the peak,
across 3 zones, is 11.00. This is more than the TTC day pass, currently $11
(CAD) but more cost effective if GO travel commute is also included in the daily
commute, in addition to the TTC channel. Once the smart cars (Oyster card)

notices that that usage has hit the limit, all additional commute of bus and
subway travel are free. This ensures that the commuters do not have to
overpay and still find the public transport lucrative.
Using this pricing strategy, the management of TFL believe that that this
strategy increase both ridership and income by 10% to 20%.

Recommendation: We recommend three different approaches that would help TTC increase its
ridership and the user experience. The new model will be a hybrid of Singapore
and London transit systems. This model is completely different from the current
TTC model. In our first recommendation we are proposing an introduction of
zonal pricing model, taken from London transit model and is based on the
concept of 3rd degree pricing. In this model the customers will be charged
proportional to the utility of using the system. After its implementation, we are
expecting a decrease in consumer surplus and an increase overall profitability
of TTC. The zonal pricing would be applicable everywhere with a subsidy given
to the ones whose income level falls below $25000 per annum.
The second part of the recommendation focuses on fare increase at peak hours.
This recommendation has been adopted from Singapore Transit system, which
allows user a free of charge travel before 7: 45 am. This model has proved
helpful in reducing the congestion during peak hours and increasing utility for
both set of people. We are expecting a similar effect on TTC. We believe that
after the implementation of this model there would be a substantial decrease in
eth ridership at TTC during its peak hours of 6:30 am 10:00 am.

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