Chapter 8 Decision Making in Flexible Transport: The Importance and Application of the ‘Golden Rule’

Purpose This chapter demonstrates how the ‘golden rule’ can be applied by operators of flexible transport services to improve investment and pricing decisions. Design/methodology/approach The chapter explains why an appropriate decision making framework is particularly important for operators of flexible transport services and compares the traditional economic framework of fixed versus variable costs to the decision-oriented approach that analyses the activities of a firm in terms of costs that are avoidable (i.e. specific to a particular activity) and costs that are shared amongst a number of activities. The chapter introduces the ‘golden rule’ of decision making and discusses issues in implementing the rule. Findings An economic framework for decision making is particularly important for smaller scale transport operations (such as flexible transport services) because ‘lumpy’ investment costs are more significant than for larger operators. The traditional economic approach divides costs into fixed costs and those which vary by patronage. A better framework for decision making divides costs into those which are specific to a particular activity and, therefore, avoidable if that activity ceases, and those costs which are common to more than one activity. Practical implications Using this framework allows operators to apply the ‘golden rule’ in pricing their services so that the avoidable costs of each activity are recovered and the enterprise covers its shared costs overall. Originality/value This chapter will be useful to operators of flexible transport services who are new to the industry or are reacting to changes in the funding environment.