Commuting between home and work place has been an indispensable issue in everyone’s daily life. Public transport such as MRT might be considered as the major way to commute. In my boyfriend’s hometown, Taipei, there is a new ticket policy for MRT this year. The government plan to sell a monthly ticket for the price NT 1280 (approximate equal to $44). People who have a monthly ticket do not need to buy any tickets from one station to another. Is it worth to buy? Let’s do a simple calculation here. Suppose one spends NT 64 every day for taking the MRT, and times 22 working days, we get NT 1408 in total, which is NT 128 higher than the new price. Does it really save the money? Why do the government make such profit-loss decision? Perhaps we should track back to a similar German case in 1990.
In the 90’s, Deutsche Bahn (German railway) had a financial crisis due to a fact that seldom people took the train. Many people chose to drive since the average oil price was $0.1 per km but the train ticket price was $0.16 per km. For example, if one wanted to go to the 500-km destination, he/she needed to pay $80 for the train ticket, but only $50 for the oil. That was a huge price gap between driving and taking the train. Moreover, Deutsche Bahn could not set the price under $0.1 in order to compete with the market.
Deutsche Bahn found solutions to this dilemma. First, they adopted the salience effect (Kahneman & Thaler, 2006) by playing a trick between variable cost and fixed cost (Simon, 2015). Take the driving for example, the oil price is the variable cost, and car insurance and service are the fixed costs. The salience effect states that individuals’ behaviour is strongly affected by what our attention is drawn to (Kahneman & Thaler, 2006). Deutsche Bahn invented the first BahnCard 50 and it allowed people to receive a 50% off (variable cost) every journey in weekdays by paying the annual fee of $140 (fixed cost). This leaded the variable cost of train decreased to $0.08 per km which was lower than the variable cost of driving a car ($0.1). Consumers were more attracted by the 50% discount, that was, the gap between original price $0.16 per km and the new price $0.08 per km. As the consequence, more people chose to take the train rather than driving.
Other techniques they used are sunk cost fallacy and loss aversion. Sunk cost fallacy (Arkes & Blumer, 1985) refers to people have a strong incentive to follow their decisions once the monetary investment has been made. In addition, people often fail to consider opportunity cost (i.e. tradeoffs) but are susceptible to sunk cost fallacy (Thaler, 1999). The reason why they are prone to sunk cost fallacy is based on loss aversion. According to Kahneman (2011), when humans make decisions about future, they often use the automatic and unconscious system for judging the probabilities of the potential loss occurs. They are more likely to avoid the threat of losses than maximise the probabilities of gains. As a result, the prospect of losses has become a more powerful incentive to human’s behaviours than the promise of gains. The experiment (Sokol-Hessner et al., 2009) demonstrated that participants were on average more aroused per dollar to losses relative to gains. In the case of Deutsche Bahn, people who have bought this BahnCard 50 had a strong incentive to cover the cost. They absolutely did not want to waste the “resources”. Comparing with those did not buy the annual ticket, they would take the train as many times as they could in the sense that more often the train taken more saving to the ticket price, and less loss of the cost of BahnCard 50.
To sum up, how did Deutsche Bahn make profit for their business? The survey in 2003 (Simon, 2015) investigated that most consumers thought they had saved 50% on every ticket. However, the fact was they were only saving 30% of the regular prices on average. Deutsche Bahn only scarified 30% of the profit to create the impression for their consumers that they have gained an advantage of 50% off. That is not a bad deal. The revenue has been increased, so that DB has overcome the financial crisis. It was win-win for the both parties.
Finally, we look back to the new ticket policy of Taipei MRT. In my opinion, the new policy will certainly work and decrease the transport congestion of the city, while one issue has to be addressed, that is the price setting of the monthly ticket. Policy makers should consider all variable factors which can influence individuals’ willingness of taking the MRT before the price be activated.
Arkes, H. R., & Blumer, C. (1985). The psychology of sunk cost. Organizational behavior and human decision processes, 35, 124-140.
Kahneman, D. (2011). Thinking, fast and slow. Macmillan.
Kahneman, D., & Thaler, R. (2006). Anomalies: Utility maximisation and experienced utility. Journal of Economic Perspectives, 20, 221–234.
Sokol-Hessner, P., Hsu, M., Curley, N. G., Delgado, M. R., Camerer, C. F., & Phelps, E. A. (2009). Thinking like a trader selectively reduces individuals' loss aversion. Proceedings of the National Academy of Sciences, 106, 5035-5040.
Simon, H. (2015). Confessions of the pricing man: How price affects everything. Springer.
Thaler, R. H. (1999). Mental accounting matters. Journal of Behavioral decision making, 12, 183.