ng Strategy of Indian Railway

PGPM 2014 16
Secton C Group 9
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Dikshant 14P138
Nikhil14P152
Sakshi14P162
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Vikramaditya14P178

About

IR
Economics of IR
Monopoly of IR
Price Discrimination

Peak Load Pricing & Off Peak Pricing

First Degree Price Discrimination
Second Degree Price Discrimination
Third Degree Price Discrimination
Inter Temporal Price Discrimination
Dynamic Pricing

Overview
2

Indian

Railways is a state owned

enterprise, which is owned and operated
by GOI through the Ministry of Railways.

It

is worlds fourth largest rail network

comprising of 115,000 km of track over a
route of 65,436 km and 7,172 stations.

First

introduced to India in 1853 from

Bombay to Thane.

Indian Railways
3

Size

of the industry

Total

contribution to the
economy/sales

Employment

Opportunities

Economics of Indian Railways

4

Indian

Railways operates 7,566

locomotives, 50,000 coach vehicles and
222,147 freight wagons.

The

IR registered a 15% growth in gross

revenue to Rs. 140,485 crores over the
last year.

The

railways have over the years

increased the freight revenue by
increasing its axle loading, improving
customer
and adopting an
Size
of services
the Industry
innovative pricing strategy.

IR

is the fourth largest rail network in the

world.

It

is second largest in terms of the freight

it carries (2.65 mn tonnes daily) under a
single management.

It

contributes to the development of

Indias industrial and economic landscape
for over 160 years & accounts for around
1% to the GDP.

Total contribution to Economy

6

Indian Railways A monopoly

Capital

Intensive Venture

Economies

of Scale

Government

Rules and Regulations

Sources of Monopoly Power & its

effects on Pricing Strategy
8

Price

discrimination exists when the

sales of the identical goods or
services are transacted at different
prices from the same provider.

Indian

railway enjoys some part of

the consumer surplus by employing
the different methods of price
discrimination.

10

Following

are the few factors that enable Indian

railways to engage in price discrimination:

It

employs market segmentation, and achieves

this based on various factors like age, sex, job
type etc.
The product and services of IR are not resalable
and hence restricts its discount customers to
become resellers and benefit from arbitrage.
It has monopoly and hence is able to dictate the
pricing terms and conditions in spite of being
regulated by GOI.

11

It

is a form of price technique that is applied to

public goods and is a particular case of Lindahl
equilibrium.

Different

prices are charged for the same facility

which is used by the consumers.

Indian

Railways uses the practice of charging

higher prices during peak periods when there are
capacity constraints cause marginal costs to be
high. This is called Peak Load Pricing.

Peak Load Pricing

12

13

Indian

Railways employs this type of discrimination

by differential discounts in peak and off-peak
seasons.

IR

launched Empty Flow Direction Freight Discount

Scheme.

This

was to ensure better utilization of empty wagons

in the return direction, Railways introduced a freight
discount of 30% during lean season and 20% during
peak season on incremental loading in the empty
flow direction.

Peak Load Pricing

14

IR

also launched Two Leg Freight Discount Scheme.

This

is to ensure that If trainload traffic is offered in

covered wagons for both up and down directions,
then, a discount of 20% in lean season and 15% in
peak season would be given for traffic in both
directions.

There

also exists an alternative to a peak load pricing

strategy is an off-peak pricing strategy whereby
discounts are offered to the standard commuter fare
for travel outside of designated peak periods.

Peak Load Pricing

15

Also

known as Perfect Price Discrimination

The

firm should be aware of every

consumers willingness to pay and restrict
resale of the product

Price

variations will be based on

Customer Willingness to pay
Ability to pay for the goods and services

First Degree Price Discrimination

16

Firms

will charge every consumer a different price

Complete

transfer of Consumer Surplus to Producer

Profits

increase and economic efficiency is

improved (Removal of DWL)

Presently,

Indian Railways does not engage this but

plans to do so in future by having online auction of
freight capacity.

First Degree Price Discrimination

17

Price
A

varies according to quantity sold

monopolist sets the block prices

Prices

are highest
quantity bought

for

first

block

of

Prices

are reduced for each successive

quantity consumed by the same customer

Second Degree Price

Discrimination
18

Heavily

employed by Indian Railways

Indian

railways charge for every kilometer which

is reduced as one travels longer.

Rajdhanis
Price
Distance Price per
IAC
(Rs)
(km)
km
Bangalore to
6690
2365
2.83
Delhi
Bangalore to
4600
1282
3.58
From the above example it is very clear that the
Nagpur
more you consume, less will be the price per km

Second Degree Price

Discrimination
19

IR

provides special passes called IndRail

for foreign tourists and NRIs.

Second Degree Price

Discrimination
20

Variation

in price based on location of

purchase and customer segment
Segmentation based on age
Child (5 12 yrs) 50% discount
Citizens (12 60 yrs) At purchase price
Senior Citizens (60 yrs for Male & 58 yrs for Female)
Males 40% discount (Code SRCTZN)
Females 50% discount (Code SRCTNW)
Train

Child ( 5 12
yrs)

Citizen (12
60 yrs)

Senior Citizen
(M, F)

Sampark Kranti

2690

5240

3200, 2690

Rajdhani

3710

6675

4300, 3710

Karnataka
Express

2760

5380

3285, 2760

*All discount codes applicable for 1ST AC from Bangalore to Delhi obtained from http://www.indianrail.gov.in

Third Degree Price Discrimination

21

Segmentation
Discount
Code
Passengers

based

on

type

of

Description

Discount %

SPORTN

Sports National Level

50% (1st Class)

75% (2nd and SL)

STDNT

Student Concession
(General)

50%

TEACHR

Teacher

25%

TLSMIU

Thalassemia Patient plus

one escort

50% (1AC & 2AC)

75% (3AC, AC Chair
etc.)

KIDNEU

Kidney Patient

50% (1AC & 2AC)

75% (3AC, AC Chair
etc.)

YTH2SR

Unemployed youth for

interview

100% (2nd class)

50% (SL)

*All discount codes applicable obtained from http://www.indianrail.gov.in

Third Degree Price Discrimination

22

Segmentation

based

on

travel

purpose:
Target customers intent for sightseeing or
pilgrimage tour
Provide incentives for Round Trips
Issued on all journeys and all classes starting
Fare (2nd
Route
and ending on same train
AC)
New Delhi Kanpur Central Gaya Howrah
Patna Allahabad Kanpur Central New Delhi
(3112 km)

3214

Source: http://www.indianrail.gov.in/circular_Journey_Fares.html

Third Degree Price Discrimination

23

Individual Leg Fare

Train

Fare (3rd AC)

New Delhi Kanpur

Central

Sampark Kranti

735

Kanpur Central
Gaya

Purushottam Express

900

Gaya Howrah

Kolkata Mail

760

Howrah Patna

Akal Takht Express

880

Patna Allahabad

North East Express

655

Allahabad Kanpur
Central

Magadh Express

535

Kanpur Central New

Delhi

Prayag Raj Express

735

Source: https://www.irctc.co.in

Total Fare

5200

Third Degree Price Discrimination

24

Railways

used segmentation based on location by

charging convenience charge ranging between INR 10
20 for those who books the ticket online

This

charge commands premium from customers who

are willing to pay extra to avoid queues

Railways

also does segmentation based on destination:

6% freight Concession for traffic booked from other states for

stations in North East

Third Degree Price Discrimination

25

 This

is the practice of separating consumers with

different demand functions into different groups
by charging different prices at different points in
time

Indian

railway employs this type of discrimination

through their Tatkal Seva

In

Tatkal they charge higher prices as ticket is

booked one day before the date of journey

Inter Temporal Price Discrimination

26

Tatkal Charges have been fixed as a percentage

of fare at the rate of 10% of basic fare for second
class and 30% of basic fare for all other classes
subject to minimum and maximum as given in
Class
of below. Min. Tatkal
Max. Tatkal
the
table
Travel

Charges (in INR)

Charges (in INR)

Second (Sitting)

10.00

15.00

Sleeper

90.00

175.00

AC Chair Car

100.00

200.00

AC 3 Tier

250.00

350.00

AC 2 Tier

300.00

400.00

Executive

300.00

400.00

Source: http://www.indianrail.gov.in/tatkal_Scheme.html

Inter Temporal Price Discrimination

27

Additional Tatkal charges are levied

passengers for booking one day before.

Let us take an example:

Rajdhanis III Normal Price
AC Fare
Mumbai to Delhi
2030

on

Tatkal Price
2390

Inter Temporal Price Discrimination

28

Consider
The

the railway reservation system

train seats are a very perishable commodity

After

the train moves on from a particular station, all the

unsold seats lose their value which can never be recovered

At

present Indian railways mostly employs fixed prices for

seats based on various degrees of price discrimination.

Dynamic Pricing
29

But in past they have tried dynamic pricing on

premium trains only having AC-II and AC-III coaches

The

dynamic fare pattern used by railways is similar

to the one used by airlines with it going up with
rising demand

Encouraged

by the overwhelming response to the

experiment of running premium trains on dynamic
fare pricing, railways has decided to run such trains
on 36 new routes in a bid to cater to the rush during
summers and also to generate extra revenue

Dynamic Pricing
30

Dynamic Pricing
31

In this Advance Reservation Period (ARP) of these trains will be a

maximum of 15 days. As the journey date comes closer and seats
get filled the price increases

Base

price of the fares is increased and is at par with

that of the Rajdhani tatkal tickets. But a higher limit is
fixed.

By

dynamic pricing Indian railways charging more to the

customer who are willing to pay extra for urgent travel

Because

of this producer is able to acquire consumer

surplus as well.

Dynamic Pricing
32

Pricing under railways without dynamic pricing

Dynamic Pricing
33

Pricing under railways with dynamic pricing strategy

Dynamic Pricing
34

Thank You
Have a Safe
Journey

35