Page 32 - Policy Economic Report_Mar'25

POLICY AND ECONOMIC REPORT
OIL & GAS MARKET

Lessons from Economics

Congestion Pricing

The term congestion pricing refers to a dynamic pricing strategy designed to regulate demand by
increasing prices without increasing supply. The strategy is based on the economic theory of pricing and
is a common strategy in the transportation industry. It aims to decrease congestion and air pollution by
charging more for entering especially congested areas of major metropolitan cities.

Congestion pricing is also used in the hospitality industry and by the utilities sector in which demand
varies depending on the time of day or the season. Electricity rates may be higher in warmer months
because of air conditioning. Hotel rooms may be more expensive during major holidays. The idea behind
congestion pricing is that consumers will use and waste more of a free or negligibly priced resource than
an expensive one.

Nobel laureate economist William Vickrey first proposed adding a distance- or time-based fare system to
manage congestion on the New York City subway in 1952 but it wasn't adopted, in part due to
inadequate technology. This is why Vickrey is considered to be the father of congestion pricing.

Types of Congestion Pricing

Economists break down types of congestion pricing based on functionality.

? Dynamic, Peak, or Surge Pricing

Dynamic pricing is a congestion pricing strategy where the price isn't firmly set. It instead fluctuates
based on changing circumstances such as increases in demand at certain times, the type of customers
being targeted, or evolving market conditions. Dynamic pricing strategies are especially common in
businesses that provide a service such as the hospitality, transportation, and travel industries.

? Segmented Pricing

The segmented pricing structure charges customers based on their willingness to pay more for a given
service. Some may be willing to pay a premium for faster service, greater quality, or extra features such
as amenities.

For instance- A vendor may offer a product without a warranty at a low price but you'll pay a higher
price if you want the same product to come with a warranty. Business travelers may be willing to pay a
higher price for an airline ticket that allows them to fly midweek.

? Peak-User Pricing

Peak-user pricing is also referred to as “peak-load” or “time-of-use” pricing. It is based on peak travel
times and is common in transportation.

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