Though there is no direct legal basis for this posting, it still may be of interest to readers who have an interest in the practical mechanisms by which supply and demand function. We have spent a lot of time on supply and demand in the past. And with good reason. The same forces Adam Smith used to describe how markets work going on 240 years ago can be used to explain everything from how oil prices impact decisions to buy SUVs to what billing rates firms can use without losing business. However, such relationships can sometimes be difficult to understand, and can be even more complicated to model. Therefore anytime a simple example using numbers is available, it can be helpful to walk through it step by step and see what lessons can be gleaned.
Megabus is a low cost, long distance bus transportation company with roots in the UK and routes across the US. It advertises as a low-frills service and competes, depending on the route, with everything from other busing lines to the train system and airlines. And with its recent addition and expansion of a direct line to and from Washington DC, it provides a fine real life case study in modeling supply and demand.
Just why does Mega provide such a good example? Most of Mega's ticket sales occur through its online system. Therefore, it has a very easy means by which to track what its ridership is doing at any given time. For example, it always knows what buses are full without having to receive a delayed and potentially inaccurate report from a driver. It also knows when people are purchasing, and what price they are purchasing for, indicating the willingness to purchase at different price points. The online purchasing system also allows the company to analyze data points that might be a little bit less obvious. For example, a few years back, it probably noticed how often riders were utilizing its new New York-Boston line. The powers that be also very likely further noticed that many individuals purchased Washington DC to New York tickets simultaneously with the NY-Boston purchase.
In other words, people were cobbling together trips from DC to Boston for somewhere in the neighborhood of $30 on average. This compares very favorably with similar DC to Boston flights and trains. Especially in a down economy, the costs savings (and arguably convenience of pick up and drop off points...NY and DC airports are not exactly downtown...) trumped the 'luxury' and time savings of planes and trains. Therefore, sometime last year Mega started a direct line from DC to Boston. This saved those who had been previously self-constructing this trip time (no switch over in New York) and money (even with the low cost model, service fees and a tiered pricing model typically make multiple trips relatively pricier) and greatly increased convenience.
Notably, when this route started, Mega was using single storied buses. These carry around 55 passengers for the trip. Because of the tiered pricing system (purchases closer to the travel date cost more; a few lucky early purchasers get their trips for about $2, while later buyers pay somewhere in the $20s) and the online records, Mega could track what people were willing to pay and how often busses sold out for the twice-daily route. At some point in recent times, demand outstripped supply on the route. In other words, more people were willing to pay the prices Mega was offering than Mega had room for. I personally saw this in action as Mega overbooked a single tier bus for one overnight trip, leaving some potential riders unhappy, but serving our purpose of a literary tipping-point; Mega knew it had a winner of a route.
In another personal experience that bore this out, I was on the maiden voyage of Mega's double-tiered bus on the DC to Boston route recently. There is a future lesson in supply and demand here as even the 80+ passenger bus was filled. Clearly Mega's next move will be to add a few more trips per day between Boston and Washington. Some readers may note that it could also have some pricing power, however its model and history suggests that it will likely keep prices in shouting distance of where they currently are; elasticity is high. In other words, it may be able to raise prices a bit, but the closer those prices get to alternatives such as trains, planes and even rental cars, the more likely people will be to switch to those alternatives. Therefore, and if the assumptions about pricing power are correct, Mega will choose to exercise its other power and increase supply at its existing low but still profitable price points.
To summarize, Mega was able to identify demand through its online purchasing system. It was then able to see what prices consumers were willing to pay as its tiered pricing system afforded great visibility into purchasing decisions. The fact that busses were selling out consistently and early in the purchasing cycle (the popular Sunday route, for example, should be purchased a few weeks in advance) gave further evidence of consumer demand. This led to the use of larger buses. And, there is no doubt in this writer's mind that the same information points will lead to the addition of further daily runs on top of the use of higher capacity busses. As long as Mega is making money, and as long as no incredibly favorable substitute (perhaps a $25 flight?) comes along to sap demand, the company will continue to expand the route.
Conversely, and to extend the point a bit, the company has shown that it listens to demand on the other end of the spectrum as well. For example, it has rapidly reacted to low demand for routes, notably on the West Coast. There, the company cut its losses on the unprofitable Los Angeles hub after it quickly became apparent that there just weren't enough people willing to brave LA to Arizona trips on a bus. Much like online ticket sales allowed the company to see that many people were buying at higher and higher prices further in advance on the DC to Boston line, it was able to plot out low advance demand on the West Coast and, as a result, cut its losses before they became debilitating.
Figuring out how geopolitical turmoil around the world impacts auto sales is difficult. Even economists have trouble with this; how else to you explain the now (in)famous overproduction of SUVs by American makers long after high oil prices became the 'new normal?' Figuring out how taxes will impact demand, and therefore behavior, for inelastic goods such as tobacco can be tough because addiction makes people irrational. Even modeling demand curves for, say, tomatoes, during a tough growing season or oranges during a frost can prove difficult. However, the simple and easy to understand numbers provided by Megabus can help readers intuitively understand, based on simple numbers, how the forces of supply and demand work providing a foundation for understanding so much more of the world around us.
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