The assignment for this essay was to give my take on dynamic pricing, which is the practice of constantly updating a price to take into account the external and internal enivornment and situation of the buyer and seller (for instance “a soda vending machine that raises the prices as the temperature goes up”), from the perspective of a manager and consumer. Also, I had to answer whether this practice is ok “given what you know about public policy on pricing?” As there is a rising debate today on the ethics and practicality of network neutrality, which is in essence a debate on dynamic usage, I thought it’d be relevant to post the entire content of this essay here. As usual, this essay can also be found under the education section (under the MARKETNG 301 – Fundamentals of Marketing course). I’ll update that page with my grade for this essay once I receive it (update, 04/23/07 – I earned a 10/10 for this essay). Without further ado:
The goal of nearly every business is to maximize profit (there are certain companies with a focus on social benefit); in Adam Smith’s classical economic theory, a company should focus on maximizing profit, by any and all legal methods, in order to deliver the most social benefit. Dynamic pricing circumvents the invisible hand of the marketplace and instead uses modern technology to deliver different prices to different consumers. Rather than letting the collective mind of the total market determine the best price and quantity for a product, dynamic pricing analyzes each individual’s preferences, situation and history to deliver a customized price. From a manager’s perspective, dynamic pricing is the holy grail of price setting, as it allows the company to deliver the ideal price to each individual. From a consumer’s perspective, a flexible price policy is unfair and borders on violating discrimination laws in many scenarios, although there are exceptions (especially for essential goods & services).
Through data mining, a company uses dynamic pricing to deliver a unique price to each consumer. For companies, especially ones who already have access to a lot of data about their customers [for instance online retailers such as Amazon or Expedia], dynamic pricing saves them money by eliminating the need to estimate one single, standard, price. Dynamic pricing also expands a firm’s potential customer base and allows them to generate additional revenue by delivering the right price to the right customer. A number of factors, such as previous purchasing behavior and volunteered information from the customer, would be used to compute a price for each individual. Potential issues may arise if the method for determining a flexible price does not accurately meet a consumer’s expectations or payment ability. Companies may also lose customers who do not wish to partake in dynamic pricing. Even worse, consumers may attempt to manipulate the dynamic pricing system and firms would lose revenue they could have charged those customers.
Corporations could use dynamic pricing to equalize the marketplace for consumers of various income backgrounds. Pharmaceutical companies, for instance, may charge consumers below the poverty a much lower rate than they would to a millionaire. In fact, many pharmaceutical companies already implement a policy to deliver prescription drugs to low income individuals at a price substantially lower than the market rate. Is it fair to reward users for not generating enough income to afford a product, while punishing those with the guile to become financially successful? I’m certain a large proportion of the population would agree that there are certain essential products which no one should be denied based on income, and for these products (health-care, food and shelter) dynamic pricing should be encouraged to ensure the users who can afford to pay the company for their resource costs do so, while also allowing access to these essential goods to people who cannot afford to compensate the company for their costs. However, when companies uses other factors, such as education or preferences, to deliver a flexible price, they mimic illegal, discriminatory practices.
Offering discounted prices to repeat consumers is fair to all parties as it allows the company to share the benefits of diminishing costs, which the repeat consumers enable the company to partake in. If Jane is a continuous shopper at Best Buy, she should be able to receive discounts based on the fact that her prior purchases have enabled Best Buy to reduce their costs. However, if Best Buy offers Joe a cheaper price on goods, based on the fact that he’s only bought goods that were on sale in the past, but does not extend that discount to Jane who does not follow the same pattern, Best Buy is committing an act of discrimination. The difference lies in opportunity, and whether both individuals had the same opportunity to enable these discounts. Both Joe and Jane could have bought the same amount of goods from Best Buy and thus been rewarded for their loyalty with discounts. However, Jane may not have received coupons or advertisements that alerted Joe to the sales he utilized. If the company is issuing a dynamic price based on opportunities all individuals had a realistic chance of partaking in, then the flexible price is fair and complies with regulations. However, if a flexible price is being delivered based on consumer preferences or past purchasing behavior (which is different from past purchase volume), then the company is discriminating against consumers.
Apple sells a Macbook in two colors, white and black, and charges a premium for the black computer. This is fair as all consumers have an opportunity to purchase the black Macbook, albeit at a premium. However, if Apple charged premiums for black Macbooks to consumers whose favorite color was black, yet declined to charge a premium to consumers who disliked black Macbooks, Apple would be breaking discrimination laws.
There is a growing debate concerning whether sites on the internet which generate a lot of traffic and consume a lot of bandwidth should be forced to pay a fee to internet service providers based on their greater usage of the providers’ network. Currently, the internet is structure to enable “net neutrality”, meaning all requests sent through the internet are issued the same priority. Proponents of a tiered network structure, would prefer if high band-width sites, for instance YouTube, paid a fee for their larger proportion of available band-with consumption, or else suffer a lower performance. Users of sites with high traffic would suffer from delays if the site did not pay a fee. By the same token, if Microsoft charged different prices to different income groups for its’ Xbox Live service, all users would suffer as higher income groups would be less likely to join the network (and thus reducing the size of the community and potential gamers to play with).
Dynamic pricing, in and of itself, is not unfair or illegal; rather, the method used to determine the price has potential for violating discrimination regulations. Flexible pricing may increase profits for firms, but it could also decrease profits, if consumers chose not to pay a higher price based on their situation. As a side note, an area I believe flexible pricing is ideally suited is taxes. The amount of taxes an individual pays should be equivalent to their financial standing in the community. If the top 1% of the country holds 75% of its assets, that 1% should be responsible for 75% of the countries’ tax needs. Consider it dynamic taxing. Such a system would be fair, but easily manipulated (CEOs could take a $1 salary and move their assets out of the country). Whether dynamic pricing is discriminatory to consumers depends on how the price is determined. If all consumers had access to the same opportunities, then there is no discrimination, however, if a discounted price is offered to a certain group of consumers who had access to and took advantage of an opportunity which was not offered to others, then discrimination may exist. For essential goods, dynamic pricing has the potential to benefit the most people, while disrupting the free market as little as possible. For luxury goods, dynamic pricing would disrupt the free market however, it would not be unfair, as consumers would not require these luxury goods to survive. Companies choosing to dynamically price their products and services must pay careful attention to how their prices are being derived, while ensuring they are not denying consumers essential goods.