Spread of Dynamic Pricing Increases Economic Surplus

The theory of consumer and producer surplus implies that total economic surplus will be greater when pricing changes as supply and demand shift. Dynamic pricing increases the extent to which that is possible, and so should increase the total economic surplus (which is the sum of consumer surplus and producer surplus.) Dynamic pricing should also reduce the time consumers waste waiting for the product or service, when pricing is below the market clearing level (like when there are more people seeking a taxi, than there are taxis at the location).

(p. B1) Adult passes to the Indianapolis Zoo used to cost $16.95. Now they set customers back $8 or $30–or almost anywhere in between.
The zoo prices tickets like airfares, changing prices daily based on advance sales and expected demand. It discounts cold weekdays in February and boosts prices after school groups book dozens of tickets. Since introducing such dynamic pricing last year, the zoo’s admission revenue has grown 12%.
. . .
Backed by vast amounts of data and powerful software, more businesses are varying prices by the day, the hour, or even the minute. Online sellers have used such tactics for years, but frequent price (p. B4) changes are increasingly common in the physical world, amplifying the effects of supply and demand on everything from parking spots to golf-course greens fees.
. . .
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.”
. . .
“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.”
The trend is good for business, helping companies charge more for in-demand items and offload surplus goods. Caberfae Peaks ski resort in Cadillac, Mich., said its revenue per customer has surged 17.6% since it began dynamically pricing its advance-sale tickets five years ago.
Variable pricing can also influence behavior. Uber and Lyft raise prices during peak times in part to lure more drivers onto the road.
Highway operators use dynamic pricing to regulate traffic. Over the past two years, Ferrovial SA unit Cintra has opened several toll roads in the Dallas area that can change prices every five minutes to keep speeds above 50 miles an hour. The toll for one 7-mile stretch, for instance, fluctuated between 90 cents and $4.50 in a recent week.
The Indianapolis Zoo said it adopted dynamic pricing in part to limit crowds after opening a new orangutan center last year. The strategy worked: two-thirds of guests visited on weekdays this summer, compared with 57% in 2013.
And Gogo Inc. shifts the price of its in-flight Internet between $8 and $40 based on a flight’s route, day and time to limit the number of users and keep speeds high.
Andrew Sullivan, a products manager at a California manufacturer, recently paid $34 for the Wi-Fi. “It’s a drag as a consumer,” he said. “You’re not getting any additional value when you’re paying twice as much for the same commodity.”
Consumers typically resist dynamic pricing when it is introduced, but then quickly acclimate, Mr. Fader said. Five years ago, Major League Baseball teams caught flak when they began changing ticket prices based on factors such as date, opponent, weather forecasts and seats remaining.
“Now pretty much every one of them is doing it routinely, and doing it with a remarkable lack of backlash,” Mr. Fader said. “The first time, it’s ‘That ain’t right.’ The second time, it’s all right.”

For the full story, see:
JACK NICAS. “The Price You Pay Depends on Time and Day.” The Wall Street Journal (Mon., Dec. 14, 2015): B1 & B4.
(Note: ellipses added.)
(Note: the online version of the story has the title “Now Prices Can Change From Minute to Minute.” The three contiguous paragraphs quoted near the end above (on the orangutan center, on Gogo, and on Wi-Fi) appeared in the online, but not the print, version of the article.)

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