Did you know we have an online conference about digital commerce coming up? Checkout will share strategies on how to move forward in these unprecedented times. COVID-19 has made the public more aware of price fluctuations on basics like toilet paper, hand sanitizer, and dried goods, as demand for those products surged beyond expectations.
How does dynamic pricing work?
Dynamic pricing (or algorithmic pricing) relies on algorithms that can synthesize lots of information about the marketplace and then change the price of something based on what’s happening hour to hour or even minute to minute. Dynamic pricing is already common for items like plane tickets and hotel rooms. As the supply gets smaller or if there’s more demand—a big conference is going to be in town that weekend, for example—then prices go up. If demand goes down because, say, a pandemic has stopped people from traveling, then prices drop.
Can dynamic pricing benefit consumers?
Dynamic pricing can facilitate more competition by accurately reflecting the market and lowering prices for consumers. American Airlines started using dynamic pricing in the 1980s to compete with budget carriers. “There’s no doubt consumers benefited from that,” says John Morgan, a professor at UC Berkeley’s Haas School of Business, who studies pricing in online markets. Those new, lower prices made air travel a possibility for many more people. One study found that nonprofits like orchestras could use dynamic pricing to improve their revenue and also improve attendance. Prices may drop depending on the location of the seat, the program, or what night of the week the performance is scheduled, causing an increase in ticket sales. The authors of the study found similar results in dynamic pricing at major league baseball games. If a team isn’t doing well, or is playing a less popular opponent, their research suggests that dropping prices can help the team by incentivizing fans to fill seats that would otherwise be vacant. “Dynamic pricing, not gouging, is a natural way to go and should be more rule than exception,” said Peter Fader, a professor at the University of Pennsylvania Wharton School of Business, who was one of the authors of the studies.
Can dynamic pricing hurt consumers?
One big worry about dynamic pricing is that it could be used for intentional collusion and price fixing or that it could accidentally lead to price fixing when vendors set their algorithms with similar goals. One study even found that artificial intelligence pricing systems learn how to collude and may even be better at doing so than humans.
How can I make sure I’m paying a reasonable price?
During the COVID-19 pandemic, some countries have decided to regulate their markets. France set price controls for hand sanitizer to avoid price gouging. The United Kingdom relaxed collusion laws, allowing supermarkets to set prices on essential items. This article was originally published on The Markup by Sara Harrison. You can read the original piece here.
