Dynamic Pricing

In basic economics we learn about supply and demand and the effect it has on pricing. The greater the supply and the lower the demand the less we can charge. Conversely, the less the supply and the greater the demand the more we can charge.

Are we really ready for true dynamic pricing based on supply and demand? This would be where prices go as high or as low as the market dictates based on supply and demand.

The ride providing service Uber has tried this and encountered a PR nightmare when the reality of dynamic pricing was applied on New Years Eve. Because of the tremendous demand for rides on this very busy day their prices went up by as much as a multiplier of 6 in certain cities. Their rationale is if they only increased the price slightly, it would not incentivize additional drivers to miss their new years eve activities and get on the street and provide rides (the drivers get a percentage of the fares for each ride they make). By increasing the fares by 6 times, it motivated additional drivers to provide the service being requested (and also decreased the number of riders due to the price). Uber has been accused of price gouging but really, isn’t this just supply and demand in action?

If a hotel only has one vacant room available and they have 3 different people wanting to rent it, doesn’t supply and demand dictate they should increase this rate until only one person is left? Likewise, if a hotel is nearly empty and a person calls at 11PM asking about a room for the night, should be clerk quote full price knowing the potential customer is going to most likely call other hotels or, should he quote a much lower price since he knows supply is high and demand is low?

The thought of Dynamic Pricing based on true supply and demand is appealing…until it’s applied to you.

Have a great day!


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