What is Dynamic Pricing? I just recommend watching this Wall Street Journal Video its explains in very short way.
Dynamic pricing can offer great benefits for companies looking to maximize revenue; however, what makes your business potentially competitive is that you provide a source of stable prices, trust with customers, and reliability.
Dynamic pricing, I believe, only works in specific industries like airlines. I’ll be referring to a specific article called “The Rise of Surge Pricing: ‘It Will Eventually Be Everywhere’” by the Financial Times. As the article states, Amazon is able to change prices every 10 minutes, which has huge benefits for maximizing profits (Barnes, 2023). However, one concern with implementing dynamic pricing or revenue management techniques is the risk of frustrating customers. For example, the Stonegate pub chain faced backlash, and as the article notes, this kind of reaction can hurt your brand (Barnes, 2023). From this, it’s clear that only certain industries can truly benefit from dynamic pricing. Consumers often view food, drink, and music as essentials of life that shouldn’t be subject to the whims of supply and demand.
Stable prices are essential for a healthy economy where consumers can afford more advanced products. While dynamic pricing may increase revenues—such as the 1 to 4% revenue boost for airlines noted in the article (Barnes, 2023)—it also has serious consequences, especially in reducing consumer surplus. For example, late business travelers often face higher fares, and the total consumer surplus is 6.3% lower under dynamic pricing (Williams, 2021). This shows that with dynamic pricing, there will always be a loser—someone who misses out on the benefits of consumer surplus.
Why is this bad?
Let’s imagine if dynamic pricing were introduced in grocery stores. What happens when economic participants are not able to “afford” to be in the right place at the right time to benefit from lower prices? For instance, most people work 9 to 5 or 8 to 4, meaning they can only “afford the time” to shop after work or on weekends.
Prices would always be higher during those peak demand times. Those who can’t afford to shop at off-peak hours would consistently lose out on the consumer surplus that dynamic pricing offers. In this case, dynamic pricing becomes an economic tool that time-boxes consumers into the highest prices possible. It obscures price discovery, creating a system where only a select few—with wealth, flexible time, and knowledge—reap the benefits, while everyone else becomes a victim of inflated prices and diminished consumer surplus.
This isn’t good for the economy. It’s not good for tax revenue, and if people can’t afford basic goods because prices are consistently high during their available shopping times, it weakens overall demand. I would even argue that the rollout of dynamic pricing contributes to a widening wealth gap. There’s a reason the Federal Reserve’s goal is to maintain stable prices—because stability in consumer goods allows the broader economy to grow and lets people afford more advanced products like electronics, cars, or even recreational items (Board of Governors of the Federal Reserve System, n.d.).
Robert Cross argues in the article,
“Back in the day, only the wealthy people traveled,” says Cross, formerly of Delta. “Now, everybody travels and that’s thanks to dynamic pricing.”
However, I think it’s hyperbole to suggest that dynamic pricing is the sole reason the average person is now able to travel. There are several other contributing factors—such as deregulation in the 1980s, increased competition from low-fare airlines, technological advancements, and declining fuel costs. In fact, the cost of air travel per mile has fallen dramatically, reaching its lowest levels since the 1980s (Perry, 2013). I also believe readers should consider the potential bias in Cross’s statement, given that he was the one who introduced dynamic pricing to the airline industry, and his company stands to benefit from continued consulting opportunities in this area.
References
Barnes, O., Georgiadis, P., & Onita, L. (2023, September 16). ‘It will eventually be everywhere’: Surge pricing that responds to supply and demand is spreading from flights and hotels to retail, hospitality and entertainment. But not all customers are happy about it. Financial Times, 8.
Williams, K. R. (2021, August). The welfare effects of dynamic pricing: Evidence from airline markets (Cowles Foundation Discussion Paper No. 2103U3). Yale University, Cowles Foundation for Research in Economics. Retrieved from https://cowles.yale.edu/sites/default/files/2022-09/d2103-u3.pdf
Perry, M. J. (2013, March 4). Even with fees, the ‘miracle of flight’ remains a real bargain; Cost of air travel per mile has fallen by 50% since 1980. AEIdeas. https://www.aei.org/carpe-diem/even-with-fees-the-miracle-of-flight-remains-a-real-bargain-cost-of-air-travel-per-mile-has-fallen-by-50-since-1980/
Board of Governors of the Federal Reserve System. (n.d.). What economic goals does the Federal Reserve seek to achieve through its monetary policy? Federal Reserve. https://www.federalreserve.gov/faqs/what-economic-goals-does-federal-reserve-seek-to-achieve-through-monetary-policy.htm:contentReference[oaicite:0]{index=0}