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Pricing Strategy of Indian Railways

PGPM 2014 – 16Secton C Group 9

Adig 14P125Dikshant 14P138

Nikhil14P152 Sakshi14P162

Sanchit14P164Vikramaditya14P178

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Overview

About IREconomics of IRMonopoly of IRPrice Discrimination

◦Peak Load Pricing & Off – Peak Pricing◦First Degree Price Discrimination◦Second Degree Price Discrimination◦Third Degree Price Discrimination◦Inter – Temporal Price Discrimination◦Dynamic Pricing

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Indian Railways

Indian Railways is a state owned enterprise, which is owned and operated by GOI through the Ministry of Railways.

It is world’s fourth largest rail network comprising of 115,000 km of track over a route of 65,436 km and 7,172 stations.

First introduced to India in 1853 from Bombay to Thane.

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Economics of Indian Railways

Size of the industry

Total contribution to the economy/sales

Employment Opportunities

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Size of the Industry

Indian Railways operates 7,566 locomotives, 50,000 coach vehicles and 222,147 freight wagons.

The IR registered a 15% growth in gross revenue to Rs. 140,485 crores over the last year.

The railways have over the years increased the freight revenue by increasing its axle loading, improving customer services and adopting an innovative pricing strategy.

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Total contribution to Economy

IR is the fourth largest rail network in the world.

It is second largest in terms of the freight it carries (2.65 mn tonnes daily) under a single management.

It contributes to the development of India’s industrial and economic landscape for over 160 years & accounts for around 1% to the GDP.

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Indian Railways – A monopoly

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Sources of Monopoly Power & its effects on Pricing Strategy

Capital Intensive Venture

Economies of Scale

Government Rules and Regulations

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Price discrimination exists when the sales of the identical goods or services are transacted at different prices from the same provider.

Indian railway enjoys some part of the consumer surplus by employing the different methods of price discrimination.

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Following are the few factors that enable Indian railways to engage in price discrimination:

It employs market segmentation, and achieves this based on various factors like age, sex, job type etc.

The product and services of IR are not resalable and hence restricts its discount customers to become resellers and benefit from arbitrage.

It has monopoly and hence is able to dictate the pricing terms and conditions in spite of being regulated by GOI.

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Peak Load Pricing

It is a form of price technique that is applied to public goods and is a particular case of Lindahl equilibrium.

Different prices are charged for the same facility which is used by the consumers.

Indian Railways uses the practice of charging higher prices during peak periods when there are capacity constraints cause marginal costs to be high. This is called Peak Load Pricing.

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Peak Load Pricing

Indian Railways employs this type of discrimination by differential discounts in peak and off-peak seasons.

IR launched ‘Empty Flow Direction Freight Discount Scheme’.

This was to ensure better utilization of empty wagons in the return direction, Railways introduced a freight discount of 30% during lean season and 20% during peak season on incremental loading in the empty flow direction.

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Peak Load Pricing

IR also launched ‘Two Leg Freight Discount Scheme’.

This is to ensure that If trainload traffic is offered in covered wagons for both up and down directions, then, a discount of 20% in lean season and 15% in peak season would be given for traffic in both directions.

There also exists an alternative to a peak load pricing strategy is an off-peak pricing strategy whereby discounts are offered to the standard commuter fare for travel outside of designated peak periods.

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First Degree Price Discrimination

Also known as Perfect Price Discrimination

The firm should be aware of every consumer’s willingness to pay and restrict resale of the product

Price variations will be based on ◦Customer Willingness to pay◦Ability to pay for the goods and services

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Firms will charge every consumer a different price

Complete transfer of Consumer Surplus to Producer

Profits increase and economic efficiency is improved (Removal of DWL)

Presently, Indian Railways does not engage this but plans to do so in future by having online auction of freight capacity.

First Degree Price Discrimination

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Price varies according to quantity sold

A monopolist sets the block prices

Prices are highest for first block of quantity bought

Prices are reduced for each successive quantity consumed by the same customer

Second Degree Price Discrimination

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Heavily employed by Indian Railways

Indian railways charge for every kilometer which is reduced as one travels longer.

From the above example it is very clear that the

more you consume, less will be the price per km

Second Degree Price Discrimination

Rajdhani’s IAC

Price (Rs)

Distance (km)

Price per km

Bangalore to Delhi

6690 2365 2.83

Bangalore to Nagpur

4600 1282 3.58

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IR provides special passes called ‘IndRail’ for foreign tourists and NRIs.

Second Degree Price Discrimination

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Variation in price based on location of purchase and customer segment

Segmentation based on age◦Child (5 – 12 yrs) – 50% discount◦Citizens (12 – 60 yrs) – At purchase price◦Senior Citizens (60 yrs for Male & 58 yrs for Female)

Males – 40% discount (Code – SRCTZN) Females – 50% discount (Code – SRCTNW)

Third Degree Price Discrimination

Train Child ( 5 – 12 yrs)

Citizen (12 – 60 yrs)

Senior Citizen (M, F)

Sampark Kranti 2690 5240 3200, 2690

Rajdhani 3710 6675 4300, 3710

Karnataka Express

2760 5380 3285, 2760* All discount codes applicable for 1ST AC from Bangalore to Delhi obtained from http://www.indianrail.gov.in

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Segmentation based on type of Passengers

Third Degree Price Discrimination

Discount Code Description Discount %

SPORTN Sports National Level 50% (1st Class)75% (2nd and SL)

STDNT Student Concession (General)

50%

TEACHR Teacher 25%

TLSMIU Thalassemia Patient plus one escort

50% (1AC & 2AC)75% (3AC, AC Chair

etc.)

KIDNEU Kidney Patient 50% (1AC & 2AC)75% (3AC, AC Chair

etc.)

YTH2SR Unemployed youth for interview

100% (2nd class)50% (SL)

* All discount codes applicable obtained from http://www.indianrail.gov.in

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Segmentation based on travel purpose:◦Target customers intent for sightseeing or

pilgrimage tour◦Provide incentives for Round Trips◦Issued on all journeys and all classes – starting

and ending on same train

Third Degree Price Discrimination

Route Fare (2nd AC)

New Delhi – Kanpur Central – Gaya – Howrah – Patna – Allahabad – Kanpur Central – New Delhi

(3112 km)

3214

Source: http://www.indianrail.gov.in/circular_Journey_Fares.html

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Individual Leg Fare Train Fare (3rd AC)

New Delhi – Kanpur Central

Sampark Kranti 735

Kanpur Central – Gaya

Purushottam Express 900

Gaya – Howrah Kolkata Mail 760

Howrah – Patna Akal Takht Express 880

Patna – Allahabad North East Express 655

Allahabad – Kanpur Central

Magadh Express 535

Kanpur Central – New Delhi

Prayag Raj Express 735

Total Fare 5200Third Degree Price Discrimination

Source:  https://www.irctc.co.in

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Railways used segmentation based on location by charging convenience charge ranging between INR 10 – 20 for those who books the ticket online

This charge commands premium from customers who are willing to pay extra to avoid queues

Railways also does segmentation based on destination:◦6% freight Concession for traffic booked from other states

for stations in North East

Third Degree Price Discrimination

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This is the practice of separating consumers with different demand functions into different groups by charging different prices at different points in time

Indian railway employs this type of discrimination through their Tatkal Seva

In Tatkal they charge higher prices as ticket is booked one day before the date of journey

Inter Temporal Price Discrimination

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• Tatkal Charges have been fixed as a percentage of fare at the rate of 10% of basic fare for second class and 30% of basic fare for all other classes subject to minimum and maximum as given in the table below.

Inter Temporal Price Discrimination

Class of Travel

Min. Tatkal Charges (in INR)

Max. Tatkal Charges (in INR)

Second (Sitting) 10.00 15.00

Sleeper 90.00 175.00

AC Chair Car 100.00 200.00

AC 3 Tier 250.00 350.00

AC 2 Tier 300.00 400.00

Executive 300.00 400.00Source: http://www.indianrail.gov.in/tatkal_Scheme.html

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• Additional Tatkal charges are levied on passengers for booking one day before.

• Let us take an example:

Inter Temporal Price Discrimination

Rajdhani’s III AC Fare

Normal Price Tatkal Price

Mumbai to Delhi 2030 2390

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Consider the railway reservation system

The train seats are a very perishable commodity

After the train moves on from a particular station, all the unsold seats lose their value which can never be recovered

At present Indian railways mostly employs fixed prices for seats based on various degrees of price discrimination.

Dynamic Pricing

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• But in past they have tried dynamic pricing on premium trains only having AC-II and AC-III coaches

The dynamic fare pattern used by railways is similar to the one used by airlines with it going up with rising demand

Encouraged by the overwhelming response to the experiment of running premium trains on dynamic fare pricing, railways has decided to run such trains on 36 new routes in a bid to cater to the rush during summers and also to generate extra revenue

Dynamic Pricing

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Dynamic Pricing

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In this Advance Reservation Period (ARP) of these trains will be a maximum of 15 days. As the journey date comes closer and seats get filled the price increases

Base price of the fares is increased and is at par with that of the Rajdhani tatkal tickets. But a higher limit is fixed.

By dynamic pricing Indian railways charging more to the customer who are willing to pay extra for urgent travel

Because of this producer is able to acquire consumer surplus as well.

Dynamic Pricing

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Dynamic Pricing

Pricing under railways without dynamic pricing

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Dynamic Pricing

Pricing under railways with dynamic pricing strategy

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Thank You

Have a Safe Journey