Will Biddeford’s Tram Make a Return?
Question 1
The central focus of this case is how Biddeford Tram Company, under the management of Mary Jo and Marty, can increase revenue and become profitable given the business constraints it must operate under, namely:
(a) Loss of $0.15 subsidy per passenger from the State of Maine.
(b) Not increase the price of tram fare above $2.00 for two years and subsequently not above the rate of inflation. The railway tram would have to find a way to increase revenue to cover the loss of the $0.15 subsidy, provide a return on their investment while keeping the average fare at $2.00 during the season for two.
Other notable business challenges to be addressed were:
(a) The agreement the authorities had with the local trade union to keep manning levels high at Biddeford tram company.
(b) Mary Jo and Marty had been instructed to charge all passengers including children, a flat fee such that children were not to be offered a discount on the fare.
(c) A potential market in the local visitors who were very price-sensitive.
Question 2
Option A – Shorten the season and concentrate on reducing cost (see excel sheet option A)
If it was practicable, Option A would be a profitable route for Biddeford Tram Company to pursue. However, this option is not a viable one for the following reasons.
- There are businesses in Old Orchard Bay that depend on visitors at all times and not only at peak season because they are not seasonal businesses.
Operating the Tram only at peak season would be detrimental to their business because they do depend as well on customers that come in the off-peak season. - Shortening the season would displease the local trade union of the tram drivers because manning levels and therefore wages would be greatly affected by this. It would almost certainly lead to a dispute in the first two years and may hurt business moving forward.
- For the first two years at least, Biddeford Tram Company is still owned by the State of Maine and therefore a public service. It would be difficult to get approval from the authorities to shorten the season. The Trams and Old Orchard Bay are the community’s top selling points. It won’t work.
Question 3
Option B – Use market power to increase passenger revenue across the season
What Mary Jo means by having market power is that she understands that Biddeford Tram Company is a monopoly. A monopoly can either increase the price or vary supply at a time but not both. Therefore, in this case, Biddeford Tram can increase its fare within the constraints it was given. The nature of a monopoly is such that the company is the only provider of that service and thus, it can segment its market. Hence, the off-peak fares for when most locals will use the tram service and peak fares for when mostly out-of-town visitors use it. This option allows Mary Jo to remain price-competitive and at the same time, gain as much of the market as possible.
Year One and Year Two respectively (Option B)
Total Cost (TC) = TVC + TFC
Profit = Revenue – TC
TFC = $330,528
Subsidy of $0.15 per passenger = (0.15 x 483336)
TVC = VC + (0.15 x 483336) = 466353 + 72500 = $538,853
Profit = $1,057,725 – ($330,528 + $538,853) = $188,344
Year Three
Total Cost (TC) = TVC + TFC
Profit = Revenue – TC
TFC = $330,528
Subsidy of $0.15 per passenger = (0.15 x 483336)
TVC = VC + (0.15 x 483336) = 466353 + 72500 = $538,853
Profit = $1,077,557 – ($330,528 + $538,853) = $208,176
Year Four
Total Cost (TC) = TVC + TFC
Profit = Revenue – TC
TFC = $330,528
Subsidy of $0.15 per passenger = (0.15 x 483336)
TVC = VC + (0.15 x 483336) = 466353 + 72500 = $538,853
Profit = $1,099,167 – ($330,528 + $538,853) = $229,786
Option B will yield good returns for Biddeford Tram and make most of the season and market.
