Realizing the Promise of Dynamic Pricing Through Responsible Innovation

Abstract

Dynamic pricing, or the practice of altering rates in response to demand, is becoming more common in businesses such as air travel, hotels, and entertainment. While the economic idea of balancing supply and demand through pricing is sound, dynamic pricing implementations have sparked customer skepticism. The lack of transparency in demand metrics and price setting fuels the perception that the systems are manipulative ploys to overcharge clients. Though dynamic pricing tries to maximize revenue when demand spikes, customers believe the slant is exclusively upward during peak hours. Case studies on short-lived dynamic pricing trials for fast food and movie theaters, which sparked threats of boycotts, illustrate the consumer backlash. Thus, the application of dynamic pricing merits oversight given the asymmetries between producer and consumer interests. Opportunities exist to create fairness standards around transparency, monitoring to prevent predatory pricing levels devoid of real demand swings, and communicating the rationale behind dynamic pricing models. Dynamic pricing is expected to increase as digital transactions become more common and data-analytics capabilities develop. Even while inventory revenue management benefits from the practice, it should be regulated to provide acceptable limits and consumer protections against misuse. Demand-based pricing can mitigate the current climate of mistrust and prevent a race to the bottom for profit maximization by ensuring dynamic pricing lives up to its free market principles. Before adoption of this new pricing strategy may proceed unhindered, norms and governance surrounding it are required to strike a balance between producer income aims and customer perceptions of fairness.