Express Lanes

State Route 91 connects the residents of Riverside County, California, to their workplaces in nearby Orange County, on the other side of the Santa Ana Mountains. The 12-lane freeway is one of the most congested in the United States. Two-hour commutes for a ten-mile stretch are not uncommon. In 1995, a privately funded company opened express lanes in the median of Route 91. Now drivers face a choice between the four free public lanes and the two express lanes. The express lanes vary in price from around a dollar in the middle of the night to nearly $10 on a Friday afternoon.

You might suspect that the express lanes would be popular among impatient drivers. While somewhat true, the express lanes save only a few minutes on an average day. What they do offer is predictability, as delays on the free lanes can vary greatly from day to day. Motorists who value reliability pay the tolls, while those who can afford to be late every now and then, don't.¹The challenge is pricing the toll lanes just righttoo high, and even high-value travelers will choose the free lanes; too low, and the "express" lanes will be too popular and congested, decreasing their value.

Airline Travel

Business travelers have less elastic demand than do leisure travelers, both because they don't pay for their own tickets and because they have fewer alternatives due to very specific time and geographic demands for a flight ("I have to be in Dallas, Texas, at 8:00A.M.on Tuesday"). Unfortunately for airlines, business and leisure travelers are not easy to identify, making direct price discrimination difficult. Instead, airlines identify leisure travelers by their willingness to plan vacations months in advance. In contrast, business travelers often have to plan trips on very short notice. A ticket purchased a month in advance can often be had for half the price of one purchased closer to the flight.

However, if too many business travelers take advantage of such advance-purchase discounts, they can render the price discrimination scheme unprofitable. For example, one manufacturing company found that its 60 regional managers purchased tickets for their biweekly travel just days before takeoff. By standardizing its meeting dates (and purchasing tickets three weeks in advance), the company saved nearly half a million dollars in travel expenses. This, of course, means that the airline lost half a million dollars in revenues.

Summarize these 2 examples and include one more example.