Home > Behavioural Economics, Supply & Demand > ‘Dynamic’ pricing and a book that cost $23,698,655.93

‘Dynamic’ pricing and a book that cost $23,698,655.93

Dyn PriceBusinesses have always altered their prices to different customers. Special prices for the movies on a week day, half-price drinks for those who are in the bar before 7pm, increased train fares for those traveling before 9am, reduced prices for students and pensioners etc.

However some companies are now employing dynamic pricing which means prices change by the minute and are influenced by a persons income, location and the spending history of on a particular site. You’ll no doubt have come across certain websites where they recommend certain items/books that you might be interested in – this is generated by an algorithm. Furthermore competitors can be monitored constantly, and their prices matched – Amazon updates its prices on average every 10 minutes based on activity on its website and the characteristics of people browsing on its website.

Physical stores are now holding sales for hours rather than days as they can established certain times of the day that lower prices are needed to increase sales. Toll roads in Texas change prices every 5 minutes to try to keep traffic moving at more than 80kph. Sports teams and even zoos have embraced dynamic pricing to stimulate demand for hot tickets and those that have not been sold.

Are Apple users richer than Microsoft users?

Some companies have assumed that Apple users richer than Microsoft users and have therefore been pointing them in the direction of more expensive options. Some airlines have been charging frequent flyers more as they are assuming that because they are traveling regularly that it must be work related and their employer will be paying for it.

Where dynamic pricing can go wrong – a book on Amazon for $23,698,655.93

The use of algorithms to set the price can be very effective for business but things can go wrong. An example was shown at a TED talk by Kevin Slavin (see previous post) in which a paperback book “The Making of a Fly” was priced at $1,730,045.91 which was a bargain because if you had bought the book a few hours later the price had gone up to $23,698,655.93. The issue here is that nobody was buying or selling anything but it transpires that two algorithms got locked in loops with each other without any human intervention.

Customers are switching on.

With dynamic pricing the customer is learning to play the game as some are searching for low fare flights from an internet cafe therefore not displaying any history from the computer they use at home. Others are piling up goods on the online basket and not clicking ‘buy’, hoping this will prompt the algorithm to give them a cheaper price.

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