Douala bus fares after a fuel price adjustment
A private bus company in Douala carries 18,000 passengers a day on one route at a flat fare of 250 FCFA. Fuel is 35% of its operating cost. When the government raised pump prices by 15%, the company's monthly fuel bill rose from 24 million to 27.6 million FCFA. The manager proposes raising the fare to 300 FCFA. A survey of regular passengers suggests that a 20% fare increase would reduce ridership by about 12% in the first month, and by 18% after three months as some commuters switch to moto-taxis. The company has 40 buses and a daily capacity of 22,000 passengers. Its other costs are largely fixed. The transport ministry must approve any fare increase and is worried about inflation.
1. Calculate the price elasticity of demand for the first month and after three months. Interpret each value.
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Price elasticity of demand = percentage change in quantity demanded ÷ percentage change in price.
- First month: −12% ÷ +20% = −0.6. Taking the absolute value, PED = 0.6. Demand is inelastic: a 1% fare rise reduces ridership by about 0.6%.
- After three months: −18% ÷ +20% = −0.9. PED = 0.9. Demand is still inelastic but more responsive as commuters find substitutes.
The negative sign shows the inverse relationship between fare and ridership. Because demand is inelastic in both periods, a fare rise should raise revenue in the first month. But the elasticity is moving towards 1, so the revenue gain is fragile. The survey also warns that moto-taxis are a growing substitute, which makes demand more elastic over time. The manager should not assume the first-month response will last.
2. Calculate daily revenue before and after the fare increase under the two ridership assumptions. Would the fare rise raise revenue?
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Before the increase: 18,000 × 250 = 4,500,000 FCFA per day.
First month: ridership falls by 12%, so 18,000 × 0.88 = 15,840 passengers. Revenue = 15,840 × 300 = 4,752,000 FCFA. Gain = 252,000 FCFA per day.
After three months: ridership falls by 18%, so 18,000 × 0.82 = 14,760 passengers. Revenue = 14,760 × 300 = 4,428,000 FCFA. Loss = 72,000 FCFA per day compared with the original revenue.
The fuel bill rose by 3.6 million FCFA a month, or 120,000 FCFA a day if 30 days are assumed. In the first month, the extra revenue of 252,000 FCFA more than covers the extra fuel cost. After three months, revenue is 72,000 FCFA lower and fuel cost is 120,000 FCFA higher, so the company is about 192,000 FCFA a day worse off than before. The fare rise is therefore profitable only in the short run; it becomes harmful once passengers switch.
3. Advise the manager. Consider elasticity, capacity, the ministry's inflation concern and possible alternatives.
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The manager should not rely on a permanent 20% fare rise. The calculations show a short-run revenue gain but a medium-run loss as demand becomes more elastic. A smaller increase, or a phased increase, may keep more passengers. The company also has spare capacity: 18,000 passengers against 22,000 capacity means it could fill more seats without adding buses, so retaining passengers has value.
Alternatives include: a peak-hour fare with a lower off-peak fare; improving reliability and safety so passengers do not switch to moto-taxis; negotiating bulk fuel or route subsidies with the ministry; and cutting non-fuel costs. The ministry's inflation concern is valid because higher fares raise commuting costs and may push up wages and prices. The manager could propose a fare increase below 20%, combined with a service improvement, and monitor ridership monthly. The judgement is that the fare should rise by less than proposed, or be temporary, because the company's revenue is more secure with more passengers at a moderate fare than with fewer passengers at a high fare.