Free To Ride: The Zero-Price Effect on Transit Decisions

Abstract:
The Zero-Price Effect, or the behavioral economic response to a free good, could be used
to encourage more King County residents to choose to ride public transportation. This
increase in demand for public transit will be much stronger if we remove the price
entirely than if we dropped it down to even the minimal amount of one penny. As King
County already subsidizes the majority of the price of transit for individuals, subsidizing
the full cost will provide the county with a larger return on investment than subsidizing
99% of the cost.

Devin Glaser
Behavioral Economics
6/1/2015
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Introduction:

Use of Public Transportation has many positive externalities, including reduced

traffic congestion, increased productivity and economic growth (Weisbrod et al, 2014),

and decreased air pollution (Rifaat 2015). Between 2003 and 2013, King County transit

ridership increased by 25% (King County Metro 2015b). Within Seattle alone transit

made up 22% of ridership in 2013 (SDOT 2014). For individual residents, driving a

personal vehicle costs more than riding public transportation (AAA 2015). Despite

growth in yearly transit ridership, many city residents still choose to drive personal

vehicles. While there are many factors behind transportation choices, the Zero-Price

effect likely induces some residents to choose to drive personal vehicles instead of taking

transit. Dropping the price of public transportation to $0, or placing a visible price on

per-trip driving would likely increase the number of residents who choose to take public

transportation.

The Zero-Price Effect:

According to the standard economic theory of supply and demand, overall

demand for any good will increase as the price drops. As such it should be no surprise

that a free good will be seen as more desirable than one with a cost. But behavioral

economists have found that people’s reactions to zero-priced goods are much stronger

than a reasonable cost-benefit analysis would predict.

Dan Ariely, a Professor of Psychology and Behavioral Economics at Duke

University, has conducted multiple studies on individual’s outsized reactions to free

goods. In one such study, he gave shoppers in a Boston mall two choices, a free $10
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Amazon gift card, or a $20 gift card for $7 (Ariely, 2008)(Shampanier, et al 2007). A

purely rational agent would make a cost-benefit analysis and choose the $20 gift card for

a net gain of $13. In this study however, the majority of respondents chose the free gift

card. The allure of “Free!” altered people’s behavior, distracting them from the more

beneficial option.

This power of zero-price disappears when even a small price enters the equation.

In subsequent trials, when shoppers were offered a choice of a $10 gift card for $1, and a

$20 gift card for $8, the majority chose the $20 gift card. Once the shoppers were freed

from the power of zero-price, they were able to make rational decisions.

Amazon.com has found a similar effect when they offered free shipping on orders

over a certain price threshold (Ariely, 2008). Rather than pay a small shipping fee for

one book, customers could choose to purchase a second item in order to receive free

shipping. Customers were so happy to save a few dollars on shipping they were willing

to double the cost of their total order. This deal increased Amazon’s sales in all places

but one – France – where instead of offering free shipping they offered shipping for one

franc. One franc, worth approximately 20 cents, is still a very low cost to have a book

shipped directly to your home. But removed from the power of zero-price, Amazon’s

French customers made a rational cost-benefit analysis and decided to only buy one item.

When Amazon changed their promotion to include free shipping, sales increased

dramatically as it had in all other countries.

The Zero-Price effect changes individual perceptions and alters individual’s

behaviors. As such it is a powerful tool for policy-makers to wield when attempting to

affect citizen’s choices. As Ariely wrote: “I don’t think most policy strategists realize
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that FREE! is an ace in their hand, let alone know how to play it. It’s certainly

counterintuitive, in these times of budget cutbacks, to make something FREE! But when

we stop to think about it, FREE! can have a great deal of power, and it makes a lot of

sense.” (Ariely, 2008).

The Zero-Price Effect on Transit Choices:

The current price of an adult bus trip is $2.75 (King County Metro 2015a). This

represents a bargain for the rider; Metro only recoups 30.5% of their costs from the

farebox (King County Metro 2015b). The rest of the cost of each trip is subsidized by

local taxes. In addition, owning and operating a car is considerably more expensive than

riding the bus around town (AAA 2015). Why aren’t rational individuals choosing the

option that saves them money? I propose here that in the moment when individuals

choose how to travel around town, they are faced with two choices, a personal

automobile in which all costs have been paid and so the trip appears to cost $0, and a bus

ride with a $2.75 price tag. Even if individuals know when they stop to think that they

are spending more on the car, in the moment the allure of Zero-Price beats out the

generously subsidized trip they could take on King County Metro. Just as in the

Amazon.com scenario where the shipping isn’t truly free, the illusion of a free trip

encourages individuals to spend more money than they would have otherwise.

Leveling the Playing Field:

In order to compete with this Zero-Price effect, King County has two options:

either reduce the cost of Metro to $0.00, or find a way to introduce a per-trip price to
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driving alone. (Or if planners wished to further alter individual behavior, both could be

done to use the power of Zero-Price to encourage commuting.)

The Case For Zero-Cost Public Transit:

King County already subsidizes nearly 70% of the cost of riding transit. In 2007

during the great recession this amount peaked to 80.2% of the cost of providing this

service (King County Metro 2015b). Clearly public officials value the benefits of public

transportation enough to dedicate a considerable portion of tax dollars towards it.

Subsidizing the final portion of the cost of public transit will cost less than the amount we

currently dedicate, and the benefits received from the final 0.1%, going from a price of

one penny to a price of zero, will dramatically outstrip the benefits received from the first

99.9% we subsidize. Even if bus riders were to pay an identical amount in higher taxes,

the benefits of a “FREE!” price would still motivate residents to take transit.

Putting a Price Tag on Driving:

While driving already comes with considerable costs, each individual trip often

appears free as individuals decide how to commute. Adding a visible price tag to driving

allows each person to make a rational cost-benefit analysis before taking each trip. One

option for placing a visible price per trip could include road tolls or congestion charges,

as has been done in Europe and some East Coast cities. As technology improves, future

tolls or taxes could be levied on miles driven. Oregon has recently introduced a

voluntary program that replaces the gas tax with a charge of 1.5 cents per mile traveled in

order to maintain their State Highway Fund (Orego 2015). Such programs are designed
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to maintain funding for road maintenance in a future where fuel-efficient vehicles reduce

the revenue from gas taxes. An additional benefit from these programs would be to

provide drivers a readily available per-trip price so they could make daily cost-benefit

analyses.

Conclusion:

King County officials have a simple yet powerful tool to encourage more

residents to take public transportation. By reducing the cost of riding King County Metro

to $0, residents will be induced by the power of the Zero-Price Effect to take public

transit. In doing so, County officials would be utilizing the behavioral economic power of

“FREE!” to encourage users to alter their individual choices in a manner which benefits

the region. Adding a visible price indicator to each individual car trip would further

compound this effect. Done together, King County Metro will likely see a large increase

in the amount of people choosing to take public transportation.

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References:

AAA (2015). Annual Cost to Own and Operate a Vehicle Falls to $8,698, Finds AAA.
Retrieved from: http://newsroom.aaa.com/2015/04/annual-cost-operate-vehicle-falls-
8698-finds-aaa/

Ariely, D. (2008) Predictably Irrational. (ebook). Available from Amazon.com.

King County Metro (2015a) Fares & ORCA. Retrieved from

http://metro.kingcounty.gov/fares/fare-change-effective-03-01-15.html

King County Metro (2015b). Performance Measures. Retrieved from

http://metro.kingcounty.gov/am/reports/monthly-measures/ridership.html
(25% growth 2003-2013, Farebox recovery 20.2% in 2003, 29.1% in 2013).

Orego (2015). Oregon Department of Transportation Road Usage Charge Program.

Retrieved from http://www.myorego.org/frequently-asked-questions/

Rifaat, S. I. (2015). The Modern City Re-invented: A Conceptual Model for Sustainable
Urban Form. Global Studies Journal, 7(4), p. 9-24.

Seattle Department of Transportation (SDOT) (2014). 2014 Traffic Report. Retrieved

from: http://www.seattle.gov/transportation/docs/2013TrafficReportWEB.pdf

Shampan'er, K., & Ariely, D. (2006). How Small is Zero Price? The True Value of Free
Products. Research Review, (6), p. 17-19.

Shampanier, K., Mazer, N., Ariely, D. (2007). Zero as a Special Price: The True Value of
Free Products. Marketing Science Vol. 26 p 742-757

Weisbrod, G., Cutler, D., Duncan, C. (2014) Economic Impact of Public Transportation.
American Public Transportation Association.