Why Does the London Tube Charge More If You Use a Paper Ticket?

London Tube map; via Transport for London

Robert Frank: Why does the public transport system in London charge significantly more for a tube or bus journey if you buy a paper ticket than it does if you use their Oyster prepaid card?

In most cities around the globe, the price of an urban transit ride depends on how you pay for it. In London, for example, the 2007 cash price of a single tube ride was 4 pounds, but if you bought a prepaid Oyster Card, the same journey would cost you only 1.50 pounds. Similarly, the cash price of a single bus ride in London was 2 pounds in 2007, while the same ride with an Oyster Card was only 0.90 pounds. Why do travelers pay less than half as much with an Oyster Card?

Because ticket revenues in urban transit systems generally fall short of covering total system costs, operators are constantly on the lookout for ways to boost their receipts. Relative to the alternative of charging the same price to all travelers, a seller can generally generate substantially more revenue by charging high prices to those who are willing to pay them, while offering discounts to those who would be unwilling to buy without them.

The Oyster Card is a simple hurdle that helps segregate buyers in this way. The hurdle buyers must jump in this case is exceedingly simple: They must fill in a form and buy a card in advance, which they can do either online or in person at any tube stop. Transport for London knows that those who are unwilling to clear even this simple hurdle can hardly be very sensitive to price, and hence the relatively steep cash fare of 4 pounds per ride. Had Transport for London charged everyone that much, it would have lost most of its travelers. But by offering the Oyster Card option, it keeps the system affordable for its price-sensitive travelers, while collecting a substantial premium from about 20 percent of its travelers.

Robert Frank’s latest book, The Economic Naturalist’s Field Guide: Common Sense Principles for Troubled Times, was published last month.