Business: Will Biddeford’s Tram Make a Return?

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:

• Loss of $0.15 subsidy per passenger from the State of Maine.

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• 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:

• The agreement the authorities had with the local trade union to keep manning levels high at Biddeford tram company.
• 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.
• A potential market in the local visitors who were very price-sensitive.

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:

• 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

Will yield good returns for Biddeford Tram and make most of the season and market.

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