Angry about dynamic pricing? It could become the 'new normal' for everything we buy – Ian Johnston
Politicians will need to be alive to the social consequences of the growing trend towards what’s being described as ‘the free market on steroids’
Imagine you’re in a shop and you notice something you’ve wanted for years – but could never afford – at a knockdown price. You join the queue with your purchase, holding it tight with excitement, only to discover at the till that the price has just doubled because the people ahead of you all bought the same thing. Disconsolate, you wander slowly back to the shelf and relinquish your prized non-possession. Welcome to a possible future in which ‘dynamic pricing’ has gone rogue.
Of course, traditionally, shops have tended not to do this, mainly because it would be annoying, and most local shop owners recognise the need to be reasonably decent to their customers, from both an ethical and financial point of view. In a small-scale community – the kind that humans evolved to inhabit – this just makes sense.
Dynamic pricing has been mostly a thing online, where the distances between retailers and customers can be vast, in more ways than one. However, as we have all been finding out over the last quarter of a century, the virtual world has a habit of spilling over into the real one in various, mostly unpleasant ways.
‘Only a matter of time’
In the US, some stores have already introduced electronic price tags to facilitate dynamic pricing. “This pricing model gives retailers the ability to change prices in a matter of seconds depending on a variety of factors, including demand, online competition, and possible promotions and sales,” according to an article on Arcadia University’s website last year.
Jennifer Fritch, an assistant professor of marketing at the university in Pennsylvania, suggested the idea was going to catch on in a big way. “Dynamic pricing is likely to become our new normal. It’s only a matter of time until it shows up in most grocery stores and other retailers,” she was quoted as saying. “There are some grocery chains that have it already. Once consumers come to expect dynamic pricing from the marketplace, static pricing may truly become a thing of the past.”
It’s usually not that long before American ideas cross the Atlantic, so get ready to see prices flickering up (and sometimes down) in real time at a store near you.
The case for dynamic pricing
Now, there are good arguments for dynamic pricing, as detailed in an article by venture capitalist and Uber investor Bill Gurley. In Boston in 2012, staff noticed that, late on Friday and Saturday nights, there was a spike in the number of passengers unable to find a car, with many drivers finishing work long before the 1am exodus of partygoers.
“There was a supply-demand imbalance, and the result was a lot of very unhappy customers,” Gurley wrote. “So the Boston team had an idea. What if they offered the drivers a higher price to stay on the system longer (until around 3am)? Would more take-home dollars for drivers increase supply?
“In just two weeks, they had a resounding answer. By offering more money to drivers, they were able to increase on-the-road supply of drivers by 70-80 per cent, and more importantly eliminate two-thirds of the unfulfilled requests. The supply curve was highly elastic. Drivers were indeed motivated by price.”
This is basic supply-and-demand economics and there is an obvious harmony in the way the system works. More people are able to get the lift home they need, but in order to do so, they pay a bit more, reflecting the drivers’ quite reasonable reluctance to work into the small hours.
That all sounds well and good, but harmony soon turned to discord. There were occasions when passenger demand – and therefore prices – rose sharply because of emergency incidents, such as snowstorms in New York and an armed siege in Sydney, Australia.
Suddenly, the simple implementation of a basic economic concept started to look like ‘price gouging’ or ‘profiteering’. Uber apologised and introduced fare price caps.
World Cup controversy
Fifa has also come in for criticism over the cost of World Cup tickets. While it insists it is using a system called “variable pricing”, rather than “dynamic pricing”, the effect, from a fans’ perspective, seems rather similar.
In a London School of Economics blog, Dr Ronnie Das, an associate professor in AI and digital transformation at the University of Western Australia, wrote that the average, inflation-adjusted price for a premium, category one seat at the World Cup final between 1994 and 2022 was about $1,300. “In contrast, equivalent tickets for the 2026 World Cup final cost a staggering $32,970. This is almost 25 times higher, while the cheapest final ticket has increased from roughly $540 to $4,185.”
Some might be tempted to suggest ‘dynamic’ and ‘variable’ are just codewords for “high”. However, economists studying air travel have found evidence that it can actually result in better value for consumers as a result of competition.
Not everyone is convinced. Ember, Scotland's biggest inter-city coach operator, is ultra modern with eye-catching electric vehicles and speedy wifi, but has rejected dynamic pricing. Co-founder Pierce Glennie explained that “we didn’t want to create something that makes people feel exploited every time they travel”.
Dynamic pricing has been described as “the free market on steroids”, and it’s easy to see why. If predictions that it is about to become the “new normal” turn out to be true, politicians will need to be on their guard.
The ‘guiding hand’ of the market should, in theory, produce reasonable outcomes for everyone. However, free markets still need to be regulated, in the same way as free societies have laws that constrain people’s freedom. Regulating dynamic pricing may be necessary to prevent the system running out of control.
If people “feel exploited” almost every time they buy anything, this retail revolution might end up producing a real one.
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