For
some time now I have been wondering why taxi drivers would take same fare for a
distance and half the distance. Why should one have to pay 60p from Legon
to Madina and same fare from ‘’Trinity’’ to Madina? Or why they charge 60p from
the Legon police station to the campus and same from the police station to
Okponglo junction. People who are price responsive and consciously match their
utility to price like me may have wondered same.
I have finally realised that it is in their own interest to charge according to distance covered rather than keep a flat rate for all distances.
Think of the utility maximisation theory where a person equates utility to price, and will be willing to pay less for successive units of the commodity than for the earlier units. Under this theory a consumer’s aim is to maximise utility. The consumer’s utility is maximised when the satisfaction they derive from consuming the commodity is equal to the price or cost they pay for it.
For example Mark is a student at KNUST. He spends the money he earns from a part time job on campus on different commodities. If Mark buys a box of chocolate he derives some satisfaction (utility). Let’s assume the box of chocolate costs GHC10. Mark would be said to have maximised his satisfaction if he thinks the satisfaction is worth the GHC10 he paid for it. If he were to consume more boxes of chocolate he is most likely to reach a point where he will be less willing to pay GHC10 for an additional box of chocolate because he thinks the additional satisfaction is not worth the price. He however may consume more if the price were reduced to GHC 8. It happens with all of us because we are rational consumers. Doesn’t it?
As mark consumes more at reduced prices, his total satisfaction increases, though his additional satisfaction from successive boxes reduces (shown be his unwillingness to pay same price, GHC10 for them). The seller of the chocolate obtains more revenue if they reduce the price subsequently, that is, their total sales goes up though not at intervals of GHC10. They will get more revenue nevertheless.
Note that, the second, third and fourth etc., boxes will not be bought if the prices were maintained at GHC10 (all other factors maintained).
Now let us see how taxi drivers can increase their sales with similar thinking.
Most of us will not pay same fare for 100km and 50km on an ordinary day, but will be willing to pay half the fare. Each day you may come across people who are walking to school or walking to the market. They often will say they will not pay ‘that’ fare to school; ‘it is too expensive for the distance’ they say; but may be willing to pay a reduced fare.
In Tamale, a city in Ghana, it costs 50p to take a taxi from Nyohini taxi rank (on the main road) to the town centre. The fare from Yapala, a suburb of Nyohini to the town centre is 60p. Many people walk from Yapala to the main road to do business and visit family and friends. The distance is longer than half a kilometre. However, because taxi drivers will insist that one pays the fare to the town centre even if they alighted on the way (main road), most people prefer to walk there than use the taxi. However, these taxis often drive empty or half empty to the main road before they pick passengers from the taxi rank to the town centre at 50p. They could have made extra income if they had picked aboard some of those who walk from Yapala to the main road, at reduced prices. Many walk not for luck of money but for the simple reason that they do not equate the utility from a ride to the main road (shorter distances) to 60p. They thus will not pay 60p but walk.
Recently I travelled from Accra to tamale. When I arrived at circle all Tamale bound busses had left and the only one available was bound for Bolga. Though the time set for departure was past, the bus was still not full so they would not set off. I had hoped for a reduction in the fare since I was travelling to Tamale, which is on the way to Bolga. They however insisted I pay the fare to Bolga which I finally paid. The drivers however picked more passengers from Tamale when I alighted. In this circumstance they gained, but this was just one of the rare lucky moments for transport owners. If I and other Tamale passengers had had another option, like walking, or another means of transport that evening, the bus would probably had taken off half empty and they would have lost revenue.
How often haven’t you seen busses leave the station half empty and had passengers complain of high fares? Could the bus owners not have increased their total sales by taking a lower fare from the passengers who cannot pay the regular rate than driving away empty?
In Ghana the ‘trotros’ do well to charge lower fares to passengers who alight at shorter distance en route. For example when travelling from Legon to Kwame Nkrumah Circle in Accra, one pays 80p to Circle but will pay 50p if they alight at “37” or Opeibea, and 30p if they alight at Shangri-La, or spanner. Taxi drivers too can increase their revenue if they adopt this system. Taxi drivers would drive empty less frequently if they do so.
By: Gabriel Amobila Aboyadana
I have finally realised that it is in their own interest to charge according to distance covered rather than keep a flat rate for all distances.
Think of the utility maximisation theory where a person equates utility to price, and will be willing to pay less for successive units of the commodity than for the earlier units. Under this theory a consumer’s aim is to maximise utility. The consumer’s utility is maximised when the satisfaction they derive from consuming the commodity is equal to the price or cost they pay for it.
For example Mark is a student at KNUST. He spends the money he earns from a part time job on campus on different commodities. If Mark buys a box of chocolate he derives some satisfaction (utility). Let’s assume the box of chocolate costs GHC10. Mark would be said to have maximised his satisfaction if he thinks the satisfaction is worth the GHC10 he paid for it. If he were to consume more boxes of chocolate he is most likely to reach a point where he will be less willing to pay GHC10 for an additional box of chocolate because he thinks the additional satisfaction is not worth the price. He however may consume more if the price were reduced to GHC 8. It happens with all of us because we are rational consumers. Doesn’t it?
As mark consumes more at reduced prices, his total satisfaction increases, though his additional satisfaction from successive boxes reduces (shown be his unwillingness to pay same price, GHC10 for them). The seller of the chocolate obtains more revenue if they reduce the price subsequently, that is, their total sales goes up though not at intervals of GHC10. They will get more revenue nevertheless.
Note that, the second, third and fourth etc., boxes will not be bought if the prices were maintained at GHC10 (all other factors maintained).
Now let us see how taxi drivers can increase their sales with similar thinking.
Most of us will not pay same fare for 100km and 50km on an ordinary day, but will be willing to pay half the fare. Each day you may come across people who are walking to school or walking to the market. They often will say they will not pay ‘that’ fare to school; ‘it is too expensive for the distance’ they say; but may be willing to pay a reduced fare.
In Tamale, a city in Ghana, it costs 50p to take a taxi from Nyohini taxi rank (on the main road) to the town centre. The fare from Yapala, a suburb of Nyohini to the town centre is 60p. Many people walk from Yapala to the main road to do business and visit family and friends. The distance is longer than half a kilometre. However, because taxi drivers will insist that one pays the fare to the town centre even if they alighted on the way (main road), most people prefer to walk there than use the taxi. However, these taxis often drive empty or half empty to the main road before they pick passengers from the taxi rank to the town centre at 50p. They could have made extra income if they had picked aboard some of those who walk from Yapala to the main road, at reduced prices. Many walk not for luck of money but for the simple reason that they do not equate the utility from a ride to the main road (shorter distances) to 60p. They thus will not pay 60p but walk.
Recently I travelled from Accra to tamale. When I arrived at circle all Tamale bound busses had left and the only one available was bound for Bolga. Though the time set for departure was past, the bus was still not full so they would not set off. I had hoped for a reduction in the fare since I was travelling to Tamale, which is on the way to Bolga. They however insisted I pay the fare to Bolga which I finally paid. The drivers however picked more passengers from Tamale when I alighted. In this circumstance they gained, but this was just one of the rare lucky moments for transport owners. If I and other Tamale passengers had had another option, like walking, or another means of transport that evening, the bus would probably had taken off half empty and they would have lost revenue.
How often haven’t you seen busses leave the station half empty and had passengers complain of high fares? Could the bus owners not have increased their total sales by taking a lower fare from the passengers who cannot pay the regular rate than driving away empty?
In Ghana the ‘trotros’ do well to charge lower fares to passengers who alight at shorter distance en route. For example when travelling from Legon to Kwame Nkrumah Circle in Accra, one pays 80p to Circle but will pay 50p if they alight at “37” or Opeibea, and 30p if they alight at Shangri-La, or spanner. Taxi drivers too can increase their revenue if they adopt this system. Taxi drivers would drive empty less frequently if they do so.
By: Gabriel Amobila Aboyadana
great message
ReplyDeletegreat message
ReplyDeleteGood analysis however i would like to take it form another view,that of the service providers. Now if i am a chocolate seller and i sell a box at Ghc10,i do so for several reasons,first to cover cost and make profit,so i wouldnt sell to Mark the second box at Ghc8 because his utilty(which bear in mind cannot be measured) and rather wait for Sam who hasn't taken any box yet and sell the initial one to him at Ghc10 and also not give him the next box because his post-gain utility is also not synonymous with my price level, and wait for Rebcca too for the initial price. In this case apart from time (which is unlimted) i'm not losing anything else but making the maximum returns as planned. The same applies for the bus drivers going to Bolga from Accra,to them they have fixed the price because they won't stop at Tamale like you,they will continue to Bolga which is also an extra cost so if they should take you a price synoymous to Tamale's distance they will loose,so they have to make thier profit anyways thats why they charge that way. Look at this too and get back to me ASAP. Nice initiative,started the journey to the flagstaff house.
ReplyDeleteBy Josiah Ansah Quansah.
Good analysis however i would like to take it form another view,that of the service providers. Now if i am a chocolate seller and i sell a box at Ghc10,i do so for several reasons,first to cover cost and make profit,so i wouldnt sell to Mark the second box at Ghc8 because his utilty(which bear in mind cannot be measured) and rather wait for Sam who hasn't taken any box yet and sell the initial one to him at Ghc10 and also not give him the next box because his post-gain utility is also not synonymous with my price level, and wait for Rebcca too for the initial price. In this case apart from time (which is unlimted) i'm not losing anything else but making the maximum returns as planned. The same applies for the bus drivers going to Bolga from Accra,to them they have fixed the price because they won't stop at Tamale like you,they will continue to Bolga which is also an extra cost so if they should take you a price synoymous to Tamale's distance they will loose,so they have to make thier profit anyways thats why they charge that way. Look at this too and get back to me ASAP. Nice initiative,started the journey to the flagstaff house.
ReplyDeleteBy Josiah Ansah Quansah.
Josiah Quansah, my good friend at Legon. Your observations are excellent. Thanks for that.
DeleteHowever, taken from another opinion point, what becomes of the drivers' gains if they go empty so often? Could they not increase thier gains by taking the passengers up on those times. Consider also that there potentially are passengers waiting at Tamale waiting to be picked on board. Will they then go on till Tamale empty only to pick up passengers to Bolga. They certainly should not!
On the chocolate seller, we need not assume that they are any less rational. So that they will not sell unless they cover thier cost price,all other factors considered.
taxi drivers, like every profession, have their regular customers and their long term success is really based on building up a reliable clientele. Being able to keep taht clientelle can be as sinple as having a an ice chest in the car and giving all the regulars a free bottled water or can of coke, or more sophisticated as selling volume discounts.
ReplyDeleteSay you have a student who will travel 3 days a week to college. If this is a fact of life for the student for the next 9 months then why not sell him a book of monthly travel tickets with a maximum mileage radius. Or the same thing for an old lady or even a business? This moves you to a more reliable business model and its actually easy to do.