On-Demand Pricing

Now Prices Can Change From Minute to Minute
by: Jack Nicas
Dec 14, 2015
Click here to view the full article on WSJ.com

TOPICS: Price Discrimination, Pricing

SUMMARY: Backed by vast amounts of data and powerful software, more businesses are varying prices by the day, the hour, even the minute. Online sellers have used such tactics for years, but frequent price changes are increasingly common in the physical world. "On average, consumers pay more as a result of [pricing based on demand and also supply conditions at a particular point in time], economists say. Dynamic pricing also affects who gets the goods in highest demand, favoring those willing to pay the most, while creating deeper discounts for shoppers who can buy when prices are low."

CLASSROOM APPLICATION: Students can evaluate the effect of "dynamic pricing" (i.e., basing prices at a particular point in time on the demand and supply characteristics at that point in time) on seller profits, consumer welfare, and economic efficiency. One important point for instructors to emphasize is that sellers changing prices according to demand and supply conditions can be the result of a technological change in measuring demand on the equilibrium process of a competitive markets. Due to the technological change, equilibrium prices adjust quickly. Alternatively, changing prices over time as a result of changing demand conditions can be the result of price discrimination with consumers selecting from a price-time of purchase menu.

QUESTIONS: 
1. (Advanced) Consider the statement: "Previously, a taxi at rush hour went to 'the person who happened to be on the right street corner,' said Ian McHenry, the president of Beyond Pricing, which helps homeowners price their rented guest rooms like big hotels. Now, rides go to people willing to pay more, and fewer people 'hit the jackpot and get that underpriced reservation or baseball ticket or open cab.'" Does this statement imply that prior to "dynamic pricing," markets experienced excess demand during peak demand periods? Does "dynamic pricing" improve economic efficiency?

2. (Advanced) Evaluate the statement: "'This is not a passing fad,' said Peter Fader, co-director of the University of Pennsylvania's customer-analytics initiative. Amazon is making dynamic pricing the norm, he said, 'and then it's going to become imperative for the brick-and-mortar players to figure out how to do this.'" Why is it imperative for brick-and-mortar stores to adopt the same pricing policies as those of online retailers? In terms of game-theoretic analysis, why is it a best response for brick-and-mortar players to do so?

3. (Advanced) Does the price discrimination based on demand and supply characteristics a particular points in time result in higher average consumer prices?

4. (Introductory) The article notes a case about highway pricing based on time-of-day or congestion. Does basing the price of highway use on the amount of congestion improve economic efficiency?

Reviewed By: James Dearden, Lehigh University