Bus Fare Increase on the Yangon–Mawlamyine Route
An express bus company on the Yangon–Mawlamyine route charges 18,000 kyat and carries 1,200 passengers a week. Management proposes raising the fare to 20,000 kyat. A passenger survey and ticket data suggest weekly demand would fall to 1,020. The company leases 40-seat buses and runs 30 scheduled trips a week; average load is currently 40 passengers a trip. Variable cost is 4,000 kyat per passenger for tickets, meals, and terminal fees; fixed weekly cost, including bus leases and staff, is 8 million kyat. A new railway service offers 15,000 kyat seats but only 300 seats a week. The company must decide whether to raise the fare, keep it unchanged, or use peak/off-peak pricing. The transport ministry also wants higher revenue to maintain rural feeder roads.
1. Calculate the price elasticity of demand for the proposed fare increase and the effect on weekly revenue and profit. Is demand elastic or inelastic over this range? Show your calculations.
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Percentage change in price = (20,000 − 18,000) ÷ 18,000 = 2,000 ÷ 18,000 = 11.1 percent. Percentage change in quantity = (1,020 − 1,200) ÷ 1,200 = −180 ÷ 1,200 = −15.0 percent. Price elasticity of demand = −15.0 ÷ 11.1 = −1.35, or 1.35 in absolute value. Demand is elastic. Using the midpoint formula gives about 1.54, also elastic.
Revenue before = 18,000 × 1,200 = 21,600,000 kyat/week. Revenue after = 20,000 × 1,020 = 20,400,000 kyat/week, a fall of 1,200,000 kyat.
Variable cost before = 4,000 × 1,200 = 4,800,000 kyat. Contribution before = 21,600,000 − 4,800,000 = 16,800,000 kyat. Profit before = 16,800,000 − 8,000,000 = 8,800,000 kyat.
Variable cost after = 4,000 × 1,020 = 4,080,000 kyat. Contribution after = 20,400,000 − 4,080,000 = 16,320,000 kyat. Profit after = 16,320,000 − 8,000,000 = 8,320,000 kyat.
The fare rise cuts profit by 480,000 kyat a week. Because demand is elastic, the percentage fall in passengers is larger than the percentage rise in fare, so total revenue falls even though costs also fall slightly.
2. Would you advise the company to raise the uniform fare? Consider the railway competitor, spare capacity, peak and off-peak passengers, and the ministry’s revenue objective. Recommend a pricing strategy.
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A uniform fare rise is not advisable on these figures. It reduces revenue and profit, and it leaves 34 passengers per bus instead of 40, creating 180 spare seats a week. The railway is a competitor, but with only 300 seats a week it cannot absorb all 180 diverted passengers; its capacity could grow, however, and then the bus company’s demand would become more elastic. Raising the fare also works against the ministry’s revenue objective if total passenger revenue falls.
A better strategy is price discrimination by time of travel. Peak services used by commuters and business travellers are likely to have less elastic demand; off-peak services used by students and leisure travellers are more elastic. The company could keep the standard fare at 18,000 kyat, add a peak surcharge, and offer an off-peak discount to fill the 180 spare seats. For example, a 20,000 kyat peak fare and a 16,000 kyat off-peak fare may raise total contribution if enough off-peak passengers are attracted. The company must prevent passengers from switching times purely to exploit the discount and must check that extra trips do not raise fixed costs.
Recommendation: do not impose a uniform 20,000 kyat fare. Trial peak/off-peak pricing for several weeks, monitor load factors and revenue, and keep the standard fare as the reference. This serves the company’s profit and the ministry’s revenue better than a blunt fare increase.