Dynamic Pricing for a Dynamic World

By Yonatan

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 [1]. 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[2]. So when is dynamic pricing appropriate? INSEAD prof. W.J.Reinartz identified 5 conditions required for price customization to work[3]:

  • 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[4]. 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.

[1] NY Times, “Why Variable Pricing Fails at the Vending Machine”, June 27th 2005: http://www.nytimes.com/2005/06/27/business/27consuming.html

[2] Information Age, “Liquid Commerce”, May 12th 2007:

http://www.information-age.com/channels/information-management/features/272211/liquid-commerce.thtml

[3] “Setting Prices in an Online World: When Price Customization Works (… And When it Doesn’t)”, Werner J. Reinartz, April 2001,

http://www.information-age.com/channels/information-management/features/272211/liquid-commerce.thtml

[4] Tel-Aviv Fast Lane, accessed 2/10/2013: http://www.shapir.co.il/en/content/tel-aviv-fast-lane

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Using PPP in Israel to create a rail connection to the Galilee

By Hannah Aronshtein

High-speed transportation infrastructure is the cornerstone of developed economies. In addition to influencing economic growth, the design of transportation systems also play a key role in shaping density and land use patterns. Many countries and cities are learning that they can achieve faster and more efficient results with public-private partnerships for a variety of infrastructure projects. This is particularly true for governments that have low revenue bases or high expenses.

Israel, for example, must cut its budget for 2013 by NIS 15 billion, and the Ministry of Finance plans to use more PPP and BOT (build-to-operate) to continue its planned infrastructure projects. The Minister of Transport, Katz, says he prefers not to give administrative responsibility to private hands and prefers a private financing initiative which uses shadow tolls (Barkat, 2012). This differs from the successful Road 6 project, which is the first toll road in Israel and first large project built through PPP.

A strategically important project is creating a rail-line to the Galilee region, connecting to the center of the country. This region’s importance is supported in the National Master Plan that does not allow for any new towns to be built, except in the Negev (South of the country) or the Galilee (North of the country). Land around the major cities in Israel is particularly expensive and affordable housing is very difficult to find. Israel is a nation with a population of 7 million and a land area of 22,150 km2 and population increase rate of 1.8% (Assif, 2007).

Israel constantly faces a legacy of planning policy based on population disbursement; critical for a young nation trying to build itself and ensure its security. The consolidation and expansion of existing cities, decreases the amount of new infrastructure that must be developed at such a distance from one another. Which is environmentally damaging, inefficient, and difficult for regional governments to manage.

The distance between Tel Aviv and the Galilee is only approximately 105 km, but it can take up to 3 hours to get there by public transportation. This lack of transit connection is one of the barriers to the densification of residential dwellings or the establishment of a dense city with a bustling economy.

While building a rail to connect the Galilee area to some major cities in Israel by rail makes sense for several reason, not only because it aligns the government’s strategic planning mission, the economic advisor to the Prime Minister has rejected the idea on the grounds that it would not make enough money. However, if inexpensive housing were to be built there, it is almost certain that people would move, since families are continuously moving to the settlements in Samaria (West Bank) to find affordable housing options.

The budget for transportation increased by 84% from 2000-2008 with more than NIS 100 billion allocated between 2005-2015, however, there has been a gap in planning and execution, with the actual amount invested dropping by .9% between 2000-2015. Projects become delayed as minister change and each comes in with policy change and replacements of key positions. The Ministry of Finance is the second with its micromanagement, preventing the flexibility that is needed for complex projects (Globes, 2011).

Assif, S. (2007, January). Tama 35 Presentation. Jerusalem, Israel: The Ministry of the Interior.

Barkat, A. (2012, September 5). Treasury seeks to outsource infrastructure projects. Retrieved from Globes Israel’s Busibess Arena: http://www.globes.co.il/serveen/globes/docview.asp?did=1000782664&fid=1724

Globes. (2011, September 8). Lack of gov’t continuity blights transport planning. Retrieved from Globes Israel’s Business Arena: http://www.globes.co.il/serveen/globes/docview.asp?did=1000680810&fid=1724