CASE 3.

2: A NOT-SO-POPULAR NORDIC BRIDGE

Prepared by: Adjarani, Andalahao, Bautista, Mae

Synopsis of the case:

A 16-kilometer bridge was constructed for $2 billion to connect Sweden and Denmark along the
Oresund Strait. The bridge was intended to strengthen economic times across the strait. After an
early boost from summer tourism (20,000 vehicles a day), car crossings have fallen sharply to an
average daily flow of 6,000, while trains now connecting Copenhagen (Denmark’s capital) and
Malmo (Sweden’s third city) are struggling to run on time due to the number of people they have
to cater. Many people think that the costs of using the bridge is simply too high ($26.40 each way).
This did not appeal much to tourists and businessmen, the latter even discouraging their employees
from taking the toll bridge and instead encouraged them to take the ferry in spite of the slower
route. This has induced authorities to make a price cut of 50% for a one-way route and launch a
new advertising campaign.

Statement of the problem:

What should the authorities do in order to boost demand further and improve the pay-off of the
bridge, specifically with regards to its latest advertising campaign and pricing strategy?

Objectives:

1. Identify areas of consideration, specifically factors that affect demand and whether demand
is elastic or inelastic
2. Provide a recommendation that be in the best interests of the stakeholders

Areas of consideration:

a. Demand factors

 Seasonality and tourism – it was mentioned in the case that there was relatively strong
demand during the summer season due to the influx of tourist, while such demand dropped
once the summer season was over.

 Perception of customers on the current price charged – prospective consumers think

that the cost of using the bridge are “simply too high”.

 Existence of substitutes - since it was also possible to take the ferry or train to cross the
border, much of the prospective consumers avail of these more affordable substitutes albeit
lesser convenience and more travel time.

 General traffic trend – the proponents believe that a macro-factor that directly influences
the demand for the bridge is the general traffic trend. Any variation in this trend has an
effect on the demand figures of the bridge.
  Varying economic condition of the two countries – it was mentioned the traffic is more
one-sided mainly from the Scandinavian solidarity point of view, which could have
implications on the difference of economic condition or lifestyle. Along with that, people
visiting art galleries and café’s, cross-border ventures in health, education and information
technology also depends on the economic condition of the countries.

 Effect of advertising – the case mentioned about an advertising campaign which the
authorities are aiming to launch. However, how elastic is demand with advertising? Is it
really a good addition to the price cut in order to boost demand?

b. Elasticity of demand

From the case, we can infer that the demand of bridge is most likely elastic in nature. When the
price cut was made, there was a subsequent change in demand (75% more people crossed the
bridge after the price cut). However, we must consider some other things that have probably led
to such increase in demand, such as those mentioned in (a). More specifically, there is a need to
identify as to how the new price differs with that of the price charged by the ferry and train for
their similar service.

Question: the Swedish government estimates that the price elasticity is -1.4, calculate the effect on
traffic using the bridge, stating any assumptions.

Assuming a price elasticity of -1.4, we can calculate traffic flow using the demand
elasticity/inelasticity formula given the following facts:

Initial price (P0) = $26.40

Initial demand (Q0) = 6,000 cars (daily flow)
Current price (P1) = $26.40 x 50% = $13.20
Current demand (Q1) = ?

-1.4 = (Q1 – 6000) / (Q1 + 6000)

(13.2 – 26.4) / (13.2 + 26.40)

Q1 = 16,500

This means that traffic flow will improve by 10,500 (16,500 less 6,000) on average on a daily
basis (or an increase of 175%) given the current price cut.

Assumptions:
 Seasonality is factored out for simplicity, meaning seasonal trends are ignored.
 In spite of the price of substitute services is not given, we assume that the new price of
$13.20 is either lower, or the convenience it offers is not justified by the price, leading to
the bridge capturing some of the market of the substitutes.
Given the assumptions above, it is obviously unlikely that such computation is a good measure of
forecasting demand in the long term. As mentioned in our chapter discussion and in the areas of
consideration in this paper, there are a lot of factors that affect demand in both subtle and
significant ways. This includes changes in the prices of substitute services (e.g. ferry and train
fees), unpredicted spike in tourism due to certain events, changing customer preferences, and
future links and business ventures between the two countries, just to name a few. Although it is
possible to quantify these factors and include them in our formula, this requires large amounts of
data and complex computations which are beyond the scope of our analysis presented here.

Recommendation:

Regarding the advertising campaign

Since the advertising campaign is no longer a question of “if” but “when”, the proponents believe
that its effect on demand will strongly depend on the marketing label which the campaign would
utilize. Our recommendation is that the campaigners should market the bridge through the lens of
tourism. This utilizes the fact implied in the case that tourism largely influences the flow of traffic
on the bridge. Along with the price cut and the on-going links between the two countries, we
believe that this approach will not only improve demand but will also help sustain it in the long
run.

Regarding the pricing strategy

Since demand is elastic in relation to price, we can say that the next step the authorities have to
take is to optimize the price such that it maximizes demand and minimizes the payback period of
the bridge. The optimization model should also consider other factors that affect demand which
the proponents have not considered due to their complexity. Thus, experts in the field of
optimization and economic models should be consulted to arrive at the optimal price.