Responses to Price Signals

1. Responses to Price Signals Peter Bonsall Prepared for workshop on “What works in behavioural Change?, Edinburgh , 28 June 2010 ,

2. Introduction • Pricing of goods and services is a well established method of influencing demand without imposing rules or regulations • Increased prices generally lead to reduced demand • But…. • this relationship may not hold at the individual level – it is an aggregate relationship • sensitivities vary depending on the substitutability of the good but, typically, a 10% increase in price leads to a 3% reduction in demand • the full response may take a considerable time to emerge • there are exceptions to the general rule (Babysham) • responses to complex pricing signals (e.g. via differentiated tariffs) are less well understood

3. Responses to complex price signals • Suppliers introduce differentiated tariffs to • Manage demand (e.g. peak →off-peak) • Maximise revenue (e.g. by capitalising on range of WTPs) • Increase overall demand by establishing variants (e.g. by pricing business class higher than economy class simply to establish its superiority) → Plethora of tariffs designed to appeal to different market segments • Individuals • Generally prefer simple price structures • Rarely understand complex tariffs • Rarely conduct “rational” assessment of the suitability of tariff (utilities) • Often ignore cost when choosing (mobile phone) • May act counter-intuitively (HOT lanes) • Even when cost is considered, factors other than overall cost may dominate: • predictability of expenditure pattern v flexibility and control • cash flow problems

4. Responses to Differentiated Road User Charges • 2007-2009 study in UK and Germany • Simple charge structure → • fairly accurate estimates of the charge • anticipated behavioural responses were consistent with the price signal. • Highly differentiated charges(e.g. varying by distance, time of day, type of road) → • frequent disengagement • numerous errors • many behavioural responses appearing to ignore the subtlety of the price signal

5. Responses to Emissions-based VED • Freight and commercial sector respond “rationally” • Individuals have lack of knowledge, MORI (2003) found: • 34% thought VED was still based on engine size • 45% did not know the basis of VED levels (even prior to the change) • 51% were not even aware that VED is graduated • MORI concluded that: • fuel consumption (as part of running costs) is a key factor in vehicle purchase decision • environmental performance (and VED) is less important than attributes such as colour and legroom • Behavioural impact is limited unless duty band differentials rise (tho 28% said that they would not change even if the differential was £300) • VED’s role as a behaviour change instrument is limited by: • lack of understanding • overlap with fuel consumption (and mixed message) • political difficulty of achieving large enough differential (equity issues)

6. Conclusions on the Use of Pricing • Factors affecting engagement with price: • Personal characteristics (age, income, gender, education, NFC, ToA, NTE) • Situational factors • Visibility and simplicity of the pricing signal • Design implications • If you want to affect demand… • Keep the price signal clear and logical • Publicise the prices • Emphasise the price (e.g. via a meter) and the transaction (e.g. require cash) • If you want to maximise revenue… • Introduce a complex price structure • Minimise its visibility and make the transfer painless (e.g. electronic payment) • Equity implications • A differential large enough to have an effect will seriously disadvantage some people • Overall • can be effective in aggregate and can avoid use of coercion - but has equity implications and can produce unexpected effects