Responses to complex pricing signals: Theory, evidence and implications for road pricing

There is a potential tension between the theoretical desirability of highly differentiated tariff structures and the ability of consumers to respond effectively to them. Evidence from studies of road pricing schemes and tolls, from other transport modes, and from other industries (notably telecommunications), is reviewed and its transferability assessed. Relevant models of human decision making (notably Prospect Theory, Risk Aversion, Ambiguity Avoidance and Bounded Rationality) are explored, and the use and efficiency of heuristics to deal with complex situations is discussed. It is concluded that people have a strong preference for simple tariffs but that they are able to respond to quite complex tariffs provided that they have a clear and logical structure. However, people's difficulties in estimating distance will severely limit the accuracy of their estimates of distance-based charges and their response to complex pricing signals will be influenced by their attitude to the fairness of the charge. These conclusions are summarised in a general model of response to complex prices. The paper, which reports and extends a study conducted for the UK Department for Transport, concludes by considering the implications for the design and performance of road pricing schemes (an inherent problem being that the theoretically optimum, first-best, pricing structure might be so complicated and dynamically variable that it would be unreasonable to expect road users to predict, let alone respond to, the prices on any given road at any given time - a simpler pricing structure might therefore yield a better overall result). (c) 2006 Elsevier Ltd. All rights reserved.