Applying the lessons from financial markets for train ticket pricing will help the travellers and the Railways.
An invariable trending topic, every Thursday morning on Twitter used to be “#IRCTC”. IRCTC stands for Indian Railway Catering and Tourism Corporation, the arm of the Indian Railways that among other things is responsible for ticket sales over the internet. The frenzy started on Thursday morning because that is when the floodgates opened for the reservation of ‘Tatkal’ tickets for travel on Sunday.
The Indian Railways introduced the Tatkal (urgent) class of tickets as a service to aid passengers who had to make travel plans at the last minute, and also as a means to garner additional revenue. About a twelfth of all tickets available for a particular train were set aside for this category, which would be sold at a premium. This facility has since been modified such that tickets can now be booked only one day in advance, extended for all classes of travel except First AC. The frenzy has now shifted to the weekends.
The explanation of the frenzy over the weekend is that the number of people who desire to travel on Sundays usually far exceed the number of tickets available, and this is despite the railways introducing special weekend trains to help clear this crowd. With cancellation fares being rather low for ‘normal’ tickets, they are usually sold out over a month in advance. Thus, for people who plan their travel at a short notice the only option left is to buy a Tatkal ticket — the bookings of which open on weekends.
Despite the railway ticket booking system being computerised, travel agents retain a significant hold on its sales. The Indian Railways being a monopoly of the Government, (and being politically controlled) tickets have almost always been subsidised in relation to their market clearing price. Though subsidised, long-distance transport can have positive externalities (in terms of greater mobility of goods and people), the upshot has been that demand for railway tickets has always exceeded the supply. Enterprising agents have thus taken advantage of this situation by hoarding tickets when they become available and then re-selling them at a premium (which is the real market clearing price) to needy travellers.
While it might be intuitive that the “real price” of the tickets be raised to the market clearing price, political expediencies have prevented any such measures from being implemented. Keeping train fares low has been the favoured method by successive railway ministers to keep their constituents happy, and with the reliance on railways by large sections of the Indian population, prices of train tickets have always been a sensitive issue. In 2012, Railway Minister Dinesh Trivedi was even sacked because he attempted to raise fares (after nine years of constant fares) against the instructions of his party boss Mamata Banerjee.
The reason IRCTC gets so much abuse on Twitter is because its website is extremely slow, with capacity being significantly below demand. Booking requests from users across the country flood the system, with many requests getting timed out and the users getting disconnected. Thus, the race for Tatkal tickets on weekend mornings acquires a random component with several users unable to book their tickets due to the unavailability of server capacity.
How, then, can the Railways solve this problem? A result of railways consistently pricing their tickets below market price has been that the organisation is severely starved in terms of finances, with little money available for investment on enhanced safety standards and passenger amenities. For the same reason, it is unlikely that the total capacity of the railway network will improve significantly in the next few years.
Economics also dictates against a dramatic increase in train fares. Increased mobility of goods and people has significant externalities in terms of economic activity, and with competition being restricted, and given the failure of the railways in expanding infrastructure, it is not appropriate to raise the prices to their natural market-clearing prices.
When buying a reserved ticket, you are not just buying the passage to travel on that particular train. If you examine carefully, the price of the ticket can be split into two – one component being the price of travel from your source to your destination and the other being the price of the ‘option’ to occupy a particular seat on that particular train.
In financial markets, one of the most popular instruments over the last 40 years has been the stock option. By buying an option, you are entering into a contract wherein “you have the right but not the obligation” to purchase a particular security on a particular day at a particular price. If on the appointed day, the market price of the security is higher than the price at which you have contracted to buy (called the strike price), you execute your right, buy the security at the strike price and sell it at the market price and make your profit. If, however, the market price of the security is below the strike price, you let the option ‘expire’ – since it is worthless. By purchasing an option you stand to benefit significantly (and without a limit) if the price of the security moves in the right direction, while at the same time your losses are capped (at the amount paid to purchase this option). The popularity of option markets over the last 40 years illustrates the utility of such an instrument.
If you are travelling to Chennai on work, unsure of the date of return, you want to take the first train out once your work is complete. Given that you could return home on any of the three possible days, you may not want to purchase tickets for travel on all three of those days. What is preferable, instead, is the option to travel on each of those days. On the day you finish your work, you will ‘exercise’ your option by traveling on that night’s train, letting the the option to travel for the other days ‘expire’.
The price of a reserved train ticket can now be thought of as having two components – the price of actual travel itself and the option of occupying a particular seat on a particular train. The cancellation charge can be seen as the option of occupying that seat. Currently, the railways charge a nominal and flat sum of twenty rupees on cancellation of a reserved ticket until a day before the date of the journey. Thereafter, it increases in proportion to the value of the ticket. Considering that on certain routes in India, tickets are priced at several hundreds of rupees (for second class), this option price is indeed an extremely tiny proportion of the overall cost of the ticket.
If someone has to travel from Chennai to Bangalore, unsure whether on Sunday, Monday or Tuesday, (with the option price being a nominal twenty rupees) he simply books tickets for all three days, with the intention of cancelling the ones he doesn’t need once he is sure of the travel date. For a mere extra forty rupees (on a ticket that costs about two hundred rupees) he gets flexibility.
The problem of low cancellation charges is that people can sometimes book tickets simply because of the option value — and the price of the option is cheap.The reason tickets get sold out (days after booking is opened for a particular train) is because the option is underpriced. Economically speaking, underpricing of option value of travel doesn’t lead to greater economic activity (unlike subsidised travel fares).
By setting cancellation charges at more reasonable rates, spurious ticket purchases can be further discouraged. People will book tickets only when they are sure of the date and time of their intended journey. This increases the availability of confirmed tickets closer to the date of the journey, and will help people plan better – rather than depending on the vagaries of the waiting lists clearing up.
Note – The original article has been updated to reflect the current rule to allow booking of tickets only a day in advance.