Have consumers accepted dynamic pricing?
By Knowledge@Wharton staff
Presented here for discussion is a summary of a current article published with permission from Knowledge@Wharton, the online research and business analysis journal of the Wharton School of the University of Pennsylvania.
Although dynamic pricing got negative press when ride-sharing platform Uber used it to dramatically increase prices during surge times, consumers are becoming accustomed to the practice, according to a study from Wharton professors.
The study, “The Revenue Impact of Dynamic Pricing Policies in Major League Baseball Ticket Sales,” explored the impact of dynamic pricing with one MLB club.
The paper notes that for years, professional sports organizations used arbitrary prices and relied on secondary markets to reach the right equilibrium. The arrival of sophisticated secondary markets like Stubhub caused some consternation, but now clubs are exploring dynamic pricing advantages.
“Part of that means adjusting the prices over time, some charging different prices to different people, depending on the nature of the game and so on,” said Peter Fader, marketing professor at Wharton. “[Many clubs] are finally getting smart and saying, ‘We want to take control of this. We want to set the right prices.’”
One surprise finding in the study is that a “well-chosen” static price can work better than variable pricing, although it’s a challenge to come up with the optimal price amid constantly changing factors affecting supply and demand.
“People think of dynamic pricing as an evil or a panacea,” noted Senthil Veeraraghavan, a Wharton professor of operations, information and decisions. “The truth is somewhere in the middle. You can implement the same solution and do it poorly because of how you use information.”
A primary finding, however, was that more flexible pricing holds benefits for both buyers and sellers.
Prof. Fader noted that despite the fears, MLB clubs haven’t “overreached” and no major backlashes erupted.
“From the fan side, we’re getting used to it,” said Prof. Fader. “We’re understanding that whether it’s with airplanes, professional sports, ride-sharing services, dynamic pricing is here to stay. As long as companies are doing it in a smart way and as long as they have the long run in mind and they’re not trying to squeeze as many dollars as they can right now, it really can be in everybody’s best interest.”
DISCUSSION QUESTIONS: Are consumers becoming less apprehensive about dynamic pricing? How will the practice affect retailing in the years ahead?