Does Indian Railways follow marginal cost pricing? A case study on its passenger business pricing through CES type cost functions

This paper estimates a CES type cost function, dual to the three input CES production function, for the passenger business of Indian Railways (IR) as a whole and then for each of the eight classes of passenger travel that IR offers. The output and input variables are cost of the service, passenger km, cost of capital (interest), labour (wage) and energy. The cost functions, empirically established, are then differentiated with respect to the output of the production function that is passenger km to get the marginal costs of the entire passenger business and also class of travel wise, which when compared with the average costs and prices charged / recovered reveal that Indian Railways’ passenger business prices are not at marginal costs or on any systematic departure from marginal costs, however it follows a pricing practice generally to bring distributional equity. A discussion drawing references from published literature is carried out to explore further possibilities.