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Business News/ Opinion / Opinion | Railways requires sophisticated dynamic pricing mechanisms
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Opinion | Railways requires sophisticated dynamic pricing mechanisms

A sophisticated 'dynamic pricing' model will help manage demand better while optimizing revenue

Scrapping of the flexi-fare system will help regain passengers from airlines. Photo: MintPremium
Scrapping of the flexi-fare system will help regain passengers from airlines. Photo: Mint

Indian Railways recently announced that they would scrap its “flexi-fare" system for trains with less than 50% occupancy and would reduce the maximum flexi-fare from 1.5 to 1.4 times of the base ticket fare. This is proposed to be discontinued in 15 premium trains and 32 others during their lean periods when the occupancy is in the range of 50-75%.

This scrapping is being claimed as a “win-win situation", which will help regain passengers from airlines. This is not surprising. The real issue is that this could have been anticipated.

The flexi-fare system was introduced on 9 September 2016 for 142 premium trains on a simple format of 10% increase over the base fare for every additional 10% of reservation, until a maximum of 50%, when 50% of the seats/berths were reserved. This was applicable in all classes except First AC and executive class where the fares were already close to airfares.

The above flip-flop raises the question as to whether Indian Railways should have a “flexi-fare" system. I would like to rephrase this as to whether Indian Railways should have “dynamic pricing" to optimize revenues while managing demand. In my view, the answer to this is in the strong affirmative.

What is important is to understand the essentials of dynamic pricing, which many service enterprises such as airlines, hotels and, even, buses and cabs follow. The fundamental principle in this is that there is an assessment of demand for each trip, based on which prices are modified from the base fare, keeping in view the price elasticity of demand.

In the current model adopted by Indian Railways, the only input used as an assessment of demand was the fact that a slab of 10% of the seats/berths had been reserved. This obviously is insufficient. The total expected demand would be a function of the route, price, the month and day of travel, the time until the day of travel, alternatives available, etc. Clearly, a more sophisticated demand model would be essential.

Through such a model, which should be applied dynamically, if the expected additional demand is different from the remaining capacity, then the fares could be modified to capture the willingness to pay. The fare modification would be based on price elasticity of demand of different customer segments until the demand naturally adjusts.

In the instance of railways’ flexi-fare system, the increase of up to 50% would be applicable even if the total demand just exceeded 50% of the capacity. Basic principles of price elasticity would require that we do not increase fares and possibly even reduce them to get full occupancy. It is not at all surprising that in many of the premium trains, the flexi-fare system has not really worked.

It is heartening to note that Indian Railways has realized this and is withdrawing the flexi-fares. This would require going back to the drawing board for introducing dynamic pricing concepts.

The essence is of developing a more sophisticated demand model, which would then yield a dynamic price. From a public benefit point of view, this will help manage demand in a manner where elective demand adjusts itself to slack periods, optimizing revenues and asset utilization for the railways. It is important to recognize when to introduce a premium train (not just on a political demand), how to vary supply of trains between peak seasons and off peak seasons (here the railways does have a lot of experience catering to the summer and festival rush).

G. Raghuram is a transport economist and director at IIM Bangalore.

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Updated: 13 Nov 2018, 11:44 PM IST
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