Time for Dynamic Pricing for Tolls and Other Businesses

Last Saturday, my father gave me a ride from Brooklyn to Manhattan. Not only was this a great way to get a life lecture from an all-knowing immigrant while trapped in his car, it was also a lesson in price inefficiency. Driving is a series of small decisions. The biggest one on this trip was whether to take the Brooklyn Bridge (free) or the Battery Tunnel ($5.50 toll). Hundreds of other drivers were making that same choice. Guess which one had unbearable gridlock? Yes, the free one. An indicator that the toll was mis-priced, at least for that time or group of drivers.

As the shock of watching my dad pay a toll for the first time wore off, I wondered why governments don’t use dynamic pricing. Airlines, hotels, and oil companies price based on peaks and troughs in supply and demand. Why not tolls? In a terrible economy, municipalities need to maximize revenues. What better way to do this than to put tolls on sale when demand peaks? This can also reduce bottlenecks and allow for safer cleanup of accidents by redirecting traffic using incentives.

Though I can’t guarantee there’s a clear cut business case here, I suspect there is. Much of this can be a relatively low-tech implementation using existing technologies. No doubt some eager beaver consultants are already on the expressway with decks in hand.

How would this work?

There would be two levels of pricing – one based on intra-day patterns and another based on longer, historical trends. You wouldn’t have to raise individual tolls to increase revenues. Over time, you’d learn what price works best during what periods to motivate drivers to use toll vs. free roads. Eventually, the long-term data can help you discover the right price for any given toll. Some of that can be done already.

As the traffic bureau collects traffic data, it can send price changes, say every 15 minutes, to toll booths. Drivers can receive updates via GPS units, mobile phones, radio, billboards, EZPass, or other devices. Newer GPS devices already receive traffic data from satellites, why not toll data?

Plausibility

If other industries can do dynamic pricing with minimal customer revolt, so can governments. After all, times are tough and you can easily promote this as a positive, as long as prices are lower than current tolls and create enough incentive to change behavior. For this to work, tolls have to be sizable, likely $5 or more.

In this equation, everybody wins. Governments make more dough. Drivers save on tolls. And, I reduce my father’s lecture time by a whopping 30%!!

– Steve Faktor at ideafaktory.com