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DIFFERENT

User Reaction and Efficient Differentiation of Charges and Tolls
Determining efficient differentiation of infrastructure cost based charging schemes and methods to assess their impact on user behaviour.

Funding: European (6th RTD Framework Programme)
Duration: 05/2006 - 06/2008
Transport themes: Financing, pricing and taxation (key theme) , Regulation, competition and public services
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Background & policy context

In the European Union, levels and structures of transport infrastructure charges vary strongly across transport modes and countries. Some degree of convergence exists on the intention to apply the principle of marginal cost pricing in various transport sectors, but, in the presence of unsolved difficulties in funding transport investment and even serious concerns about marginal social cost pricing in several countries, any such convergence is slow. Furthermore, at present, the charging regimes that can be observed are often far from internalising external costs and are rarely based on efficiency principles. In this situation, differentiation of existing charges appears to be a sensible intermediate step.

The potential scope of price differentiation is broad and includes dimensions such as:

  • time, for example in the case of congestion or noise nuisance;
  • place, for example depending on congestion level or region;
  • type of infrastructure, to represent differences in quality supplied;
  • type of user and/or type of goods, to capture willingness to pay of clients;
  • type of vehicle and axle loads to take for instance maintenance costs into account.

Objectives

The main objectives of the DIFFERENT project were:

  • to improve the understanding of user reactions to differentiated prices;
  • to develop a scientifically sound approach to determine efficient differentiation of infrastructure cost based charging schemes and methods to assess their impact on user behaviour;
  • to analyse and demonstrate the benefits and effectiveness of differentiated charging and taxation schemes as a means to manage mobility, externalities, equity aspects and to obtain revenues and recover infrastructure costs;
  • to provide policy recommendations in general and, in particular, for the Common European Transport Policy.

Methodology

A key issue in putting differentiated charges into practice was the need to understand user reactions to differentiated prices, and this will be investigated in DIFFERENT through empirical as well as interrelated theoretical work. The main emphasis of the DIFFERENT project was on the empirical work, based on real-world case studies. Hence a range of cases where price differentiation was actually applied could be studied. Use was made of Stated and Revealed Preference research. In addition, models were used to analyse the effects of price differentiation, in particular with regard to long-term consequences.

The theoretical side in DIFFERENT were based three main pillars:

  • normative economic theory - information whether, given real-world frictions (in particular the costs of differentiation on the side of infrastructure operators, their clients and end users), which type of differentiated charging structures should be implemented to maximize welfare;
  • positive economic theory - investigated given political circumstances, selfish motives of decision makers and the influence of interest groups, which differentiated pricing structures were the most likely to be implemented;
  • behavioural theory - took account of cognitive factors, which might lead travellers, and in some cases also freight operators, to make sub-optimal decisions, either because of their inability to process complex pricing information or because of 'irrational' pattern of behaviour;
  • as a final step the results of the research were interpreted in view of the relevance for the European Transport Policy and European Pricing Reform.

The DIFFERENT work plan was broken down into five types of work packages:

  • the very core of the project were the five work packages (WP 5 to 9), each focused on one of the principal markets of transport infrastructure users. These five work packages investigated the effects of differentiated charges on airlines, shipping operators, railway operators, road freight operators, car drivers;
  • across these cuts one work package (WP 10) dealt with issues of intermodality and modal change that might be impacted through differentiated charging schemes;
  • WP 5 to 10 were accompanied by the two main building blocks of scientific theory in the project, namely WP 3 on economics and WP 4 dealing with behavioural issues.

All of the above were preceded by:

  • WP 2, set the overall scene for the project and described the starting point for the technical work in the different relevant subject areas, and fed WP 11, which provided a synthesis of the project results and came up with overall conclusions and recommendations;
  • WP 1 and WP 12 were respectively project management and dissemination and exploitation.

Research Programme

FP6-SUSTDEV-2 - Sustainable Surface Transport

Leading institution(s)

Public institution:

European Commission

Type of funding

Public (EU)

Key results

In general, the DIFFERENT project provided a general framework for identifying the preconditions for a fair and efficient implementation of pricing differentiation in transport, both theoretically and from a practical point of view.

In the theoretical parts of DIFFERENT several hypotheses were developed about the optimal degree of differentiation of infrastructure charges, reflecting both economic approaches as well as the viewpoint of psychology. Using a fact-sheet methodology these hypotheses were then confronted with the empirical facts derived from the case studies carried out within DIFFERENT. Among the many results that emerged from this exercise the most important were:

  • that pricing-schemes were rarely implemented in pure textbook forms but rather reflected a compromise between various aspects and approaches;
  • that there was an optimal degree of differentiation beyond which further differentiation was counter-productive;
  • that a political influence on pricing structures was always discernible and therefore should not be disregarded in the design of pricing-structures.

The factors that played a decisive role, when designing charging schemes, and therefore, that were essential for differentiation, were also identified. Normative economic theory identified three main dimensions, which must be taken into account:

  • Aims of pricing;
  • Cost structure;
  • Demand of infrastructure user.

Furthermore, the case studies, undertaken within DIFFERENT, had revealed a multitude of very interesting results. The general result, often denied in transport economics, was that pricing was effective. This result had been obtained considering the following two aspects across modes of transport: 1) effects of price changes (did price changes have any effect on travel behaviour and mode choice?); 2) effects of differentiation (did differentiation have any effect on travel behaviour and mode choice?).

  1. Effects of Price changes

    In general, the evidence collected within DIFFERENT showed that price changes affected travel behaviour and mode choice.

    In the case of interurban road transport, the evidence from case studies indicated quite clearly that price changes lead to changes in transport demand. Different network structures caused different effects, but there could be no doubt that infrastructure pricing had substantial influence on travel behaviour. As far as urban car transport was concerned the case studies showed considerable effects in all cases, except for Rome.

    The case of railways was very unclear, mainly due to severe data limitations, which were a consequence of the regulatory upheaval that the railway sector was running through. As to the air transport, in all cases investigated the effects of changes in starting and landing fees on the behaviour of airlines were rather limited. A closer look at the case studies revealed that the cost-share of airport-fees in the total costs of airlines was rather small, and therefore there was no surprise that airlines reacted rather inelastic to these fees. However, this was not to say that differentiation could not work in the future if charges became more substantial, and it would be premature to conclude that pricing in the airport sector was of no relevance for airlines.

    Despite of the many case studies on ports, the picture of effects of price changes for the mode 'shipping' was not clear. However, evidence was found that differentiation aiming at more environmental sound performance of mitigation of risk might be used as a tool within a wider group of tools or policy measures.

  2. Effects of Differentiation

    In general, the evidence collected within DIFFERENT indicated that differentiation affected travel behaviour and mode choice, but they depend very much on the particular mode under investigation and the particular circumstances.

    In interurban road transport the differentiation of the German and Swiss HGV toll according to axle weight and emission classes showed clear effects. As far as urban car was concerned significant effects of differentiation could be detected in several cases analysed.

    As already mentioned for the effects of price changes, the scarcity of data made it very difficult to derive clear conclusions in the case of rail.

    As to air transport, the Spanish case studies delivered evidence on substantial possible welfare effects of peak-load pricing. The Spanish case studies made also clear, however, that institutional constraints currently prevent this welfare gains from being exploited. The Hamburg case study concerning noise charges indicated no effect at all. This result, however, was closely connected to special political circumstances that surrounded the introduction of these charges. The case of London led to the conclusion that there was relatively little competition between airports (at least among the London airports). Therefore, price differentiation did not seem to be a competitive parameter of airports.

    For what concern maritime transport, port dues amounted only to a small share in shipping companies’ overall voyage costs, which delivered a somehow similar picture to the results found in the airport case studies. Even though a clear direct impact of differentiation could not be indicated, it should be considered that differentiation as in the case of environmental differentiated charges in Sweden had contributed to greater awareness of the environmental challenges in the sector and in combination with other mechanisms had contributed to a shortened period of implementation of emission reducing technology in ships in a geographically limited area.

    Finally, a number of finding and conclusions had been drawn regarding elasticities, user reactions, regulatory factors, institutional factors, welfare and general political effects, and psychological factors.

Technical implications

DIFFERENT Project produced many results but also raised many new questions

  • From the viewpoint of normative economics it was regrettable that up to now there were only few studies concerning the welfare effects of differentiated pricing schemes. Most of the existing studies of urban and interurban tolling systems concentrated on physical traffic flows, less on welfare benefits.
  • Research in DIFFERENT made it very clear that the analysis of differentiation could gain a lot by bringing psychology and economics closer together. There were many unexplored questions in the intersection of psychology and economics. One important issue is the possibility to study the effects of incorporating behavioural models like Herbert Simon’s 'satisfying behaviour' or others into the study of price-differentiation (instead of the main-stream 'utility maximising' paradigm).
  • From the viewpoint of positive economic theory many new questions had arisen. The case of Hamburg airport, for instance, remained a puzzle. Why did authorities introduce a noise-charging system that had no effect on the airlines' behaviour whatsoever? There remained modelling work to be done (probably based on game theory) to explain this riddle. Another important question to answer was why certain users object so strongly to certain pricing-schemes which at first glance seemed to be even in their own interest. A further important direction of research had been opened by Laffont’s insight that simpler pricing-schemes might be better (in welfare terms) than more differentiated schemes because simpler schemes might be less open to political manipulation of special interest groups.
  • DIFFERENT had indicated that in the case of railways far too little data were available to draw reliable conclusions and recommendations, be it from the normative or the positive viewpoint of economics. The European Commission should seek ways to remedy this deficiency. Price differentiation might be one (or even 'the') key to the long-term survival of railroads as a mode of transportation, notably in freight transportation.

Therefore, it was highly recommended that the European Commission need to initiate research on both issues: (1) how to collect data in a way that makes better research possible but which respects the strategic interests of the railway industry and (2) the relevance of price discrimination for increasing the modal share of railways.

Policy implications

Results from field experiments and surveys indicated that the degree of differentiation affects user’s information processing and thus their handling of differentiated pricing. Furthermore, several aspects of pricing schemes seemed to affect the likelihood of behavioural adaptation as response to schemes.

Based on the results from case studies and experiments, following conclusions were deduced:

  • If the degree of differentiation increases, inaccurateness and time to respond (latency time) in examination of pricing schemes will increase as well as perceived difficulty and perceived uncertainty of price predictions.
  • Considering complexity of pricing schemes, results emphasised that the handling of different dimensions (like space, time or user characteristics) of differentiation was perceived differently difficult by users. A higher likelihood of perceived difficulty was given by the following conditions of charge differentiation:
    • the charge varies non-linearly;
    • the charge varies unpredictably;
    • differentiation dimensions are not clearly observable;
    • charges based on values which were not readily known;
    • the pricing scheme was based on spatial divisions which might not be widely known;
    • charges imply complex cross-linking to other elements.
  • Users’ experiences of any dimension of differentiation reduced the effect of complexity in that dimension. Price differentiation which builds on already existing cognitive structures and mental maps of users were advantageous. It must therefore be recognised that cognitive structures and mental maps could differ with the user’s different background (regional, cultural etc.)
  • Overall, simplicity of pricing schemes was preferred. Unless a complex scheme offers them a clear price advantage, people would prefer schemes as simple as possible.
  • Motivational factors, particularly acceptance, affected user’s perception of pricing schemes and user responses towards differentiated prices.
  • Users’ motivation to deal with pricing schemes and users’ responses towards pricing schemes depended on personal price thresholds.
  • The effect of price level on likelihood of behavioural response was moderated by the perceived difficulty of the pricing schemes.
  • Lack of perceived behavioural control over response to pricing schemes, and scheme characteristics that restrict people’s perceived freedom of action, might lead to an intense adverse motivational state and to attempts to restore behavioural freedom and eventually, to failure of behavioural adaptation.
  • Commercial examination of infrastructure charges (freight operators) differed from individual examination of infrastructure charges (car users, passengers). Understanding of charging schemes and motivation to deal with charging schemes did not play the same role for companies as they did for single individuals.
  • The knowledge about transferability of results from one transport mode to another so far was limited. The findings suggested that the way people reacted to pricing schemes strongly depended on people’s perception of unique characteristics of specific transport modes. So, cross sectional transfer of charging scheme principles and thus the transfer of expectations in behavioural changes seemed not to be adequate if unique characteristics and specific perception of users on (specific) transport mode were not taken into consideration

    For what concerned institutional factors:
  • Positive economic theory showed that special interest groups intervene in the political process in order to derive utility for their members. In this respect it was very likely that apart from regulation special interest groups would try to affect the tariff structure. In other words the degree of differentiation of a charging scheme would finally also reflect the balance of the political power. The establishment of independent regulatory authorities could be a solution.

Other project deliverable

Project Leaflet (627 Kb)

Synthesis and Conclusions (888 Kb)

Partners

France
Ecole nationale des ponts et chaussées

Germany
Technische Universität Dresden

Italy
Istituto di Studi per l'Integrazione dei Sistemi; TRT Trasporti e Territorio; Department 'Idraulica Trasporti e Strade' - University of Rome 'La Sapienza'.

Norway
SINTEF - Stiftelsen for Industriell Teknisk Forskning ved Norges Tekniske Hogskole

Poland
Instytut Logistyki i Magazynowania

Slovenia
Univerza v Mariboru, Fakulteta za Gradbenistvo

Spain
Universidad De Las Palmas De Gran Canaria

Switzerland
Ecoplan: Economic Research and Policy Consultancy

The Netherlands
Stichting Economisch en Sociaal Instituut van de Vrije Universiteit

United Kingdom
Napier University; University of Leeds

Contact for further information

Prof. Christiane Bielefeldt
Transport Research Institute, Napier University
Merchiston Campus-Room D39; 10 Colinton Road
EH10 5DT  Edinburgh
United Kingdom

Tel: (+44) 1620 89 55 25
Fax: (+44) 1620 89 55 25

CORDIS: Project page
Website: Organisation website