Modal diversion

All urban transport systems have spare capacity for some of the day and in parts of the network, and it may make sense to try to utilize this in order to increase the return on investment.

The principal tactic for this purpose is to price services at such times and places against their marginal cost of production, rather than against their total costs, and offer fare concessions accordingly. This is particularly effective for capital-intensive modes, as these have relatively high fixed costs in the recovery of their investment and relatively low marginal costs of direct operation.

In many cases the elasticity of off-peak travel demand to fare price is high, and significant additional patronage and hence increased revenues may be generated. There is also an overall economic benefit if more efficient services act to displace those with a higher production cost.

Differentiation in fare pricing by time of day may also serve to divert discretionary passenger demand from peak periods to times where there is spare capacity, and therefore allow for the high-cost peak service capacity to be reduced and / or peak service quality to be increased. Any reduction in peak demand also restricts the overall requirement for investment in rolling-stock, and hence improves financial returns.