We live in a congested world and the trend of urbanization is only making it worse. Given limited real estate and financial resources, governments and municipalities use various allocation strategies to combat congestion and accommodate growing populations and vehicle use. Dedicated public transportation lanes, toll roads and HOV lanes are all means to encourage use of public transportation, increase vehicle utilization (i.e. carpooling) and tax vehicle use, while increasing productivity and reducing GHG emissions. In that sense, and as discussed in class, toll roads are an efficient means to capture time benefits via tariffs.
But what better way to force drivers to internalize the externalities associated with vehicle use than through dynamic pricing mechanisms? With advancements in technology and increased information collection, toll lanes with truly dynamic pricing – determined real-time based on current traffic in order to maintain a desired minimum speed – are now a viable, and quite attractive, option.
Dynamic pricing is not a new concept, yet still needs to be used with care. Consumers tend to be dissatisfied with what may be viewed as a cynical abuse of one’s needs. Coca-Cola, for example, learned this firsthand when it tried to introduce temperature-based pricing in its vending machines. Immediate consumer and media backlash led them to quickly stop the initiative . Nevertheless, in some industries consumers have become adapt to such pricing schemes. Airlines, hotels and car rental companies all price based on real-time supply and demand, as do more and more online services and retailers. So when is dynamic pricing appropriate? INSEAD prof. W.J.Reinartz identified 5 conditions required for price customization to work:
- Customers must be heterogeneous in their willingness-to-pay
- The market must be segmentable
- There is limited potential for arbitrage
- The cost of segmenting and policing must not exceed revenue increases
- It must not breed violations of perceived fairness
Though his research is focused on online services, it seems appropriate for other industries as well and transit in particular. Clearly, the main contention point is that of perceived fairness. In the context of toll roads, there is obvious concern that the imposed fee for using a road excludes the service from certain consumers who are not willing, or just unable, to pay for it. The counter-argument is that such arrangements can fund expansion of existing roads and transit infrastructure in a manner that alleviates some of the congestion burden in other parts of the system. Moreover, such routes don’t have to be restrictive for all vehicles. Such is the case in the Israeli “Fast Lane” project – an expansion of the road from Jerusalem to Tel-Aviv – in which public transportation and HOVs can ride free of charge. The dynamic pricing mechanism can then be viewed as revenue-maximizing which in turn allows for a greater cross-subsidy.
Whether you find it fair or not, it is clear that the increasing convergence of information technology and infrastructure services (e.g. water and electricity) will lead to increased use of dynamic pricing as a means to manage scarce resources in our daily life.
 NY Times, “Why Variable Pricing Fails at the Vending Machine”, June 27th 2005: http://www.nytimes.com/2005/06/27/business/27consuming.html
 Information Age, “Liquid Commerce”, May 12th 2007:
 “Setting Prices in an Online World: When Price Customization Works (… And When it Doesn’t)”, Werner J. Reinartz, April 2001,
 Tel-Aviv Fast Lane, accessed 2/10/2013: http://www.shapir.co.il/en/content/tel-aviv-fast-lane