Topic: Pricing tactics of Tunnels in Hong Kong

Christie

Amy

Katherine

Stephanie

Tunnels Operated by Vehicles daily Toll range

Cross-Harbour Tunnel (CHT)

Cross Harbour Tunnel Company Limited

122,900 * $8-$30

Eastern Harbour Crossing (EHC)

New Hong Kong Tunnel Company Limited

64,000 * $13-$75

Western Harbour Crossing (WHC)

Western Harbour Tunnel Company Limited

48,800 * $22-$115

* data from 2007

Information about 3 tunnels

Traffic Volume - Cross Harbour Tunnel(CHT)

Traffic Volume - Eastern Harbour Tunnel(EHT)

Traffic Volume - Western Harbour Tunnel(WHT)

‧Because EHC and CHT are substitutes

• EHC ↑toll daily volume of CHT ↑3%

• EHC’s revenue ↑> $100,000,000

• Inelastic demand of EHC ( % ↓in quantity < % ↑in toll)

• If ↑in fuel prices > ↑in toll use EHC as before

What is the effect of raising toll?

How can unequal distribution of cars be solved?

(a). Extension of franchise

* With low transaction cost negotiate with the harbour crossings to reduce toll

* Extended franchise help cover the decrease in revenue of harbour crossings

* May reduce congestion in CHT

(b). Should Government purchase the three tunnels?

Citizens:

• good idea

• Reason: * government can then freely regulate the toll fee.

Government:

• may not be a good idea

• Reasons: * the purchasing cost is very high

　 　 　 　 　 　 * change the private property right system into a communist

system (with no exclusive use right, income right or transfer

right).

* High institutional costConclusion: Government should not purchase the three tunnels

Pricing of the Tunnels

• Without congestioncost of serving extra car is zero ie. MR=MC=0

• Ed=1

• Toll: charge on average cost consumer surplus will be extracted

Price discrimination

• Same cost→MC=0

cost for serving all the vehicles are the same

• Same Services/ Goods→ same services provides by the tunnel company

same tunnel

• Different prices→ different vehicles will be charged different price

Price discrimination• Market is separated

Example:lower price for taxi, higher price for private cars

Western Harbour

TunnelEastern Harbour

TunnelCross Harbour

Tunnel

Taxi $40 $25/15 $10

Private car $45 $25 $20

Argument

• It　is　common　to　see　traffic　congestion　during　business　hours,　so　people　claim　that　why　the　tunnel　companies　do　not　charge　a　peak-hour　pricing.　They　can　charge　higher　prices　for　users　during　peak　hours　in　order　to　relieve　traffic　congestion.

• Why　do　they　not　charge　different　price　in　different　period?

Explanation

There is the existence of transaction costs :

1. Information cost• The tunnel companies need to carry out several research to determine

the peak hours

2. Enforcing cost

• They need to impose a series of regulations on the peak-hour pricing

3. Policing cost• They need to execute the regulations

Autotoll Only (toll booth sign)

Lane Sign (Autotoll only)

Automatic Toll Collection Facility

What cost(s) can the facility save and raise?

Saved:

• Time cost of the consumers

• Cost of defining and enforcing property right

• Labor cost

Raised:

(i) Monitoring cost

(ii)Institution cost

Saved costs

(i)Time cost

- no need to spend time on paying money.

(ii)Cost of defining and enforcing property right

- the receiver no need to identify what type of the car is

(iii) Labor cost

- no need to hire workers for receiving toll

Raised costs(i) Monitoring cost

-some people may not have right to use this facility

-need to monitor the people who using the system

(ii) Institution cost

- when adding automatic toll collection facility, they may need to add many input, such as technical facility etc…