TUBE BUS DAILY TRAVEL
(Off peak) (Peak time) (Off peak)
Oyster card £2 50p £5.80
Cash fare £3 £1.50 £6.30
Saving by Oyster £1 £1 50p
Source: Author’s research
Above is a comparison between the Oyster fares and cash fares on tube/bus/daily travel. Looking at which one can clearly see how cheap Oyster is. Oyster card user travelling by tube pays £2 whereas the cash fare for the same journey is £3. As a result Oyster card user saves a £1compared to the cash payer. Similarly, on the bus Oyster card users save £1 extra for the same journey. Oyster card users also save 50p for daily travelling. Therefore one can undoubtedly say that no matter how small the saving is but Oyster never misses to pass it over to the customers. Overall Oyster brings plenty of advantages to its users and the GLA too. According to Londonist (2005 online) in the future Oyster will bring additional revenue for GLA and greater convenience for customers such as it might be used in place of small payment for example to buy a milk or a newspaper. Implications of strategy for the Greater London Authority: TheLondoner (January 2006, p. 2) predicts that changes coming into force on 2ndJanuary 2006 will increase the revenue of GLA on London underground by 1% and on buses by 10%. The expected increase in revenue of £80 million will be achieved by the reduction in the Oyster fares, which will thereby lead to an increase in demand for it. This is because: Revenue = Price x Quantity What the GLA needs to know is if the price goes down, then by how much quantity will go up. This will depend on i) The number of new customers deciding to use oyster card ii) The ability of attracting customers away from other private means of transport Hence, it is important to understand the concept of elasticity of demand. Elasticity of demand can be defined as the degree of responsiveness of quantity demanded with respect to a price change but everything else remains constant (Begg, Fischer and Dornbusch 2000, p. 60). The following two diagrams differentiate between an elastic and inelastic demand curve for a similar price change.
The diagram 1 depicts an elasticity of demand, when the Oyster fares will go down from £1.70 to £1.50 and in response the demand demanded will increase from 100 to 200 oyster cards.
Previous Oyster fare:
Oyster fare Quantity GLA’S Revenue
£1.70 X 100 = £170
New Oyster fare:
Oyster fare Quantity GLA’S Revenue
£1.50 X 200 = £300
In the example above one can observe when demand is elastic a small change in price will lead to a big change in the quantity demanded. Customers will save 20p, when price changes from £1.70 to £1.50 and therefore quantity demanded for Oyster will go up from 100 to 200 leading to an increase in revenue for the GLA from £170 to £300 almost double the revenue earned previously.
Previous Oyster fare:
Oyster fare Quantity GLA’S Revenue
£1.70 X 100 = £170
New Oyster fare:
Oyster fare Quantity GLA’S Revenue
£1.50 X 120 = £180
The diagram 2 and the example above illustrate what happens to the quantity demanded when the demand is inelastic. If demand is inelastic, then a small change in the Oyster fares from £1.70 to £1.50 will cause a small change in the quantity demanded from 100 to 120 Oyster cards. This will raise only 10% more revenue, for instance from £170 to £180 there is only £10 extra. Therefore GLA needs to create a situation, which is likely to going to lead to elastic demand for Oyster in the market as it is favourable for the GLA and that will raise them almost twice the revenue made with previous Oyster fares.
As an economist I would advice the GLA to consider the responsiveness of demand to price changes and should be able to attract customers away from other private means of transport and substitutes, for instance a recent mean to attract customers away was an increase in the congestion charges from £5 to £8 plus if the customer delays the payment of congestion charge it will have to pay the penalty too. This is going to be ten times superior than the amount customer will pay for the Oyster fare.
Income elasticity: It might be of interest for GLA to know the income elasticity of demand hence if there is a change in income GLA will be able to know by how much demand will change (Begg, Fischer and Dornbusch 2000, p. 66). One can anticipate that the revenue of income elasticity is more appropriate in the long run. Since in the short run income tends to change trivially and more likely to remain constant.
However knowing the cross elasticity of demand for Oyster card with respect to price changes in other private means of transport is more relevant. By cross elasticity of demand we mean how responsive will the demand for Oyster card be if there is a change in the price of other means of transport for example if price of petrol goes up including congestion charges to travel into the central London a car user will have to pay mush more than the Oyster card user (Begg, Fischer and Dornbusch 2000, p. 65).
Availability of other private means of transport and substitutes opposite Oyster fares:
There are several other means of transport and substitute, which are available to customers such as saver tickets, private cars, mini cabs and taxis (The following information is found from the local mini cab office and grocery store). Saver tickets: Saver tickets as the name imply literally are money saver for passengers who make a single journey a day. Saver ticket cost £1 a single journey and come in a pack of six whereas with Oyster a single journey costs 50p by bus and £2 by tube. The disadvantage saver tickets carry is that they are only available for use on buses not for underground journeys. Therefore Oyster is the best choice for customers. They will only have to buy one travel card to travel by any mean of public transport. Private cars: People travelling by cars, not only pay for petrol but also for the congestion charges when travelling into the central London. Congestion charges cost £8 (registration needs to pay) on top of it there are large penalties customers have to pay along with the congestion charge when they payment is delayed. Therefore this mean of transport is also costly and time consuming compared to Oyster. Mini cab: Mini cab drivers have their minimum charges, which the passenger has to pay regardless of the length of the journey. Most of the mini cab drivers; the minimum fare is £3 a single journey, again higher than the Oyster single fare. Taxi: Taxis are metre based, which even runs when stopping at the traffic lights, rush hours and queues, therefore that’s a big disadvantage for those who travel by taxi as this will increase the fare double or even triple the amount a customer will pay for Oyster depending on the rush and traffic. Considering the advantages that Oyster’s new fares will bring to customers and the fares charged by the other private means of transport and substitutes Oyster still is much cheaper and flexible in many ways for passengers. Not only this but also revenue gained by this policy will be spent on the development of public services and transport system to make it better for the 2.5 million users of Oyster card. So they will literally be getting the best. Therefore customers should be able to choose the right and “the best value fare” for themselves as said by the Mr Livingstone.
Conclusion: The proposed strategy will benefit both customers and the GLA. A decrease in Oyster fares and an increase in cash fares will save customer time and money. As Oyster is a high tech smart card so it saves time and low fares save money for customers. Not only Oyster is the cheapest fare in London, but Greater London Authority offers a quality service to its customers. Firstly the Oyster fares are very cheap compared to other private means of transport and cash fares. Secondly, it offers benefits to all age groups. Third and the most important feature of London Transport Authority’s (2005) service to customers is safe and secure such as Oyster’s unique ID, separate bus lanes, when stolen or lost can be stopped like credits cards so nobody else can use it, CCTV cameras on buses, unformed police staff by TFL, revenue protection inspectors, network for pass and tickets inspection by London transport authority. I would advice customers to support this policy for the advantages it brings and will bring in the future too. Nevertheless, Oyster cards have been subject to criticism too. On Thursday 10 March 2005 computer crashed the underground Oyster card network. The card reader stopped working. The system crashed during the peak time in the morning and the problem continued until mid morning (Andy McCue 2005). Therefore I would advice GLA that before this problem takes place again and because it was due to the fault in card reader so people may start losing their trust on Oyster. I would advice GLA that an adequate part of the revenue generated by the implementation of this strategy must be spent on the for efficient Oyster network. Security is another reason for, which people prefer public transport over private transport. Therefore attention must be paid to security features on public transport too. Another issue concerning Oyster its limited use does not include rail journeys “rail companies’ refusal to embrace pre pay means more than 1.5 million commuters face higher cost” (TheLondoners, 2005). Train companies don’t accept pre pay Oyster card therefore people travelling by rail have to buy a separate ticket for rail journey. This can not neglected as over a million people are affected by this. They are losing money on trains and it is not the best fare for them. This may lead discouragement and therefore a decrease in demand for Oyster. As an economist I would advise GLA to increase the awareness of the savings Oyster offers and its highly differentiated features to increase demand for it. GLA should review their marketing strategies to enlarge its target group. Also must take the two issues concerning the Oyster into account. As they, may discourage users to switch to private means of transport. Therefore efficiency of the system must be considered and improved, certainly not forgetting the benefits Oyster puts forward to customers but it will enable customers use Oyster with confidence.
