Optimal Pricing : Theory and Application to Publicly Supplied Bus Transport Services

Optimal pricing facilitates attainment of specific goals. The optimum price to achieve profit maximization may differ from the one needed to maximize welfare or to ensure the highest revenue. Profit maximization is the traditional motivation of the private firms. In case of private monopoly supplier, it is almost certain that the profit maximizing price will result in charges above marginal and average cost. That’s why, traditionally in most countries, public sector firms are involved in supplying essential goods and services and operate in an industry that experiences natural monopoly characteristics where it is cost effective to have a single firm to supply the whole market. Pricing in public sector firms is as important as it is in private sector since prices are an instrument for coordinating supply and demand of goods and services. This paper discusses the theory of public sector pricing and its application to publicly supplied bus transport services using a case study of state transport undertakings in India. The paper focuses on extended version of the Boiteux (1956) model following the analysis in line with Bös (1994). Although, implementation of the general extended Boiteux model presents a challenge with respect to information and computation, paper shows that some simplifying assumptions can be made to find out optimal prices for publicly supplied bus transport services