Topic: Pricing tactics of Tunnels in Hong Kong

1. Topic:Pricing tactics of Tunnels in Hong Kong Christie Amy Katherine Stephanie

2. Information about 3 tunnels * data from 2007

3. Traffic Volume - Cross Harbour Tunnel(CHT)

4. Traffic Volume - Eastern Harbour Tunnel(EHT)

5. Traffic Volume - Western Harbour Tunnel(WHT)

6. What is the effect of raising toll? ‧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

7. 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

8. (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 cost Conclusion: Government should not purchase the three tunnels

9. Pricing of the Tunnels • Without congestioncost of serving extra car is zero ie. MR=MC=0 • Ed=1 • Toll: charge on average cost consumer surplus will be extracted

10. 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

11. Price discrimination • Market is separatedExample:lower price for taxi, higher price for private cars

12. 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?

13. 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

14. Automatic Toll Collection Facility Autotoll Only (toll booth sign) Lane Sign (Autotoll only)

15. 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: • Monitoring cost • Institution cost

16. Saved costs • Time cost • - no need to spend time on paying money. • 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

17. 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…