26 September 2023
Should dynamic pricing be banned?
Dynamic pricing was back in the headlines last week, as the pub group Stonegate announced plans to up the price of drinks at peak periods. Although demand based pricing is something that is prevalent in many different markets – from Uber to flights to concert tickets – technology is bringing it to ever more places all of the time. While it’s applauded by shareholders and by purist economists - it’s a strategy that as well as being unpopular also serves up unfair outcomes to less well-off consumers.
Economist Ryan Bourne made the case for it in the comment pages of The Times last week – in his piece entitled “Consumers will learn to love the rise of dynamic pricing”. His argument was essentially that more agile balancing of supply and demand can only be a good thing. If Uber decides to surge price because demand for its drivers is high, it forces customers to think harder about how much they need the service immediately. Those who see the surge price as too high can wait or take other options. But for those who need an immediate service, Uber is able to continue offering availability by using price to control demand and improve supply.
He called out comments that I had made in a recent article, which essentially said that a price isn’t fair just because a consumer is willing to pay it. And of course if you’ve swallowed the economics textbook, it’s a statement that doesn’t make any sense. The very definition of a fair price in economics is the price at which the seller and buyer agree to transact.
Market efficiency is not always fair
But what Ryan misses in his argument is the social and political side of dynamic pricing. Although it may help balance supply and demand, it also allows those with the greatest resources to continue getting what they want at all times, while excluding those who are priced out.
The people who have the greatest need for something may not be the people with the means to pay the higher prices that dynamic pricing serves up.
Where the onset of dynamic pricing worries me the most is in markets where we don’t have as many choices – or where consumers are buying essentials. If the goalposts are constantly moving without any transparency or predictability – it’s impossible for resource stretched families to budget.
This is not a marginal viewpoint. Back in the pandemic, some cynical retailers started jacking up the price of essentials like hand sanitiser. It’s true that demand was at a peak - but it was deemed socially unacceptable by the government and regulators for businesses to profit from higher demand in an emergency.
So there are clearly limits on where we – as a society - think dynamic pricing is acceptable. I’m not suggesting that dynamic pricing should be banned in all settings. But there needs to boundaries. If Stonegate wants to charge 20p more a pint at peak hours – that’s not necessarily a problem. But it needs to be plastered all over the pub – and the differential pricing needs to be clear in the menus – so that customers can make an informed decision before they buy a drink.
The importance of transparency
It certainly wouldn’t be ok to change the price minute by minute depending on how many people are in the bar – as a customer could end up committing to buy a pint at one price and then find that it has changed by the time they get to the front of the line. Customers need to have transparency over prices to allow them to make informed decisions.
Some supermarkets have already begun experimenting with more real time pricing – controlling prices on all their goods centrally, and updating price tags on the shelves at the touch of a button.
That’s another example that concerns me. When we go into a supermarket, we might buy dozens of items – and it’s impossible to keep the typical prices for all of those in our heads. Real time dynamic pricing undermines the consumer’s ability to compare and make informed decisions – and likely trips them up into spending more than they might if they had been in possession of all of the information.
When it comes to flights and concert tickets, I imagine dynamic pricing is here to stay. However, all markets that use this kind of demand led pricing need to be governed by the principles of transparency – so that consumers understand the rules of the game.
Beyond that, we also need to protect against profiteering - where firms abuse a monopolistic position to charge enormous margins on essential goods and services.
As things stand, there’s a complete lack of boundaries – leading to a growing number of cases where consumers are caught out. It’s time for the Competition and Markets Authority to create some rules.