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For years, airlines, accommodation websites, and ride hailing apps have been adjusting their prices in real time, responding to periods of higher and lower demand. It's known as dynamic or surge pricing, but powered by algorithms and artificial intelligence, surge pricing is now being used across a growing number of consumer industries, from theme parks to restaurants, retail outlets, and rock concerts.
In the retail industry, the practise is especially prevalent in online marketplaces. Amazon changes prices 2.5mn times a day across all its product lines, using millions of real time data points to benchmark against competitors and track demand surges. For sellers, dynamic pricing allows a product to have multiple price points, which can lead to increased revenues. A 2018 study by researchers at MIT found that dynamic pricing boosted airline revenues by between 1 per cent and 4 per cent.
One barrier to surge pricing for bricks and mortar retailers has been the time consuming task of physically changing in-store price labels, but the use of electronic labels is rising. In the US, for example, grocery giant Walmart plans to instal them in 2,300 stores by 2026. Its nearest rival, Kroger, began testing the tech in 2018 and has since expanded it to 500 stores across the country.
A 2023 report found that dynamic food pricing could increase supermarket gross margins by 3 per cent, but some are wary of the impact it could have on more essential goods like groceries. In August, two US senators announced they would be launching an investigation into Kroger's digital price tags, due in part to concerns the technology will enable price gouging.
Even in non-essentials, dynamic pricing is coming under increased scrutiny. This September, ministers in the UK announced plans to probe its use for rock band Oasis's concerts that saw ticket prices skyrocket. For regulators, another concern, across all industries, are the algorithms driving dynamic pricing. They often incorporate competitors' prices, and there is mounting evidence that can encourage implicit collusion between firms, raising prices overall.
Surge pricing can also conceal price gouging in markets where there is fixed supply and little transparency. The promise of dynamic pricing is that it better matches supply and demand, producing greater economic efficiencies. But if companies want to use it more widely, their biggest battle may be convincing regulators and consumers that dynamic pricing isn't just a more efficient way of increasing corporate profits.
