We know and accept that prices vary over time with demand. What’s new – and triggering a moral panic – is the rise of technology that allows companies to tweak prices near-instantaneously in real time. We face the prospect of the Uberisation of entertainment, hospitality and more.
A lot of the outcry can be attributed to fear of change. Uber itself was unpopular to begin with. Some complaints, including over Oasis tickets, centre on transparency – that consumers don’t know how high prices might go under dynamic pricing, and that feels unfair to those waiting or planning. But there’s more to the worries than just a lack of fair disclosure. Many believe, wrongly, that dynamic pricing is always bad for consumers and that it’s pure price gouging.
But that’s not how markets work. Keeping prices fixed as demand fluctuates has its costs too. If prices can’t adjust, then something else has to give – like longer queues, shortages or bureaucratic rationing when demand surges. It’s a trade-off. There’s no guarantee that these alternatives fare better for consumers than letting prices move with demand patterns.
The upside of dynamic pricing is obvious from its current applications: it can open up opportunities. Lower-income consumers can score bargains when demand dips, like traveling off-peak or buying products when less popular. Marketing well matters. People hate surge pricing when it’s framed as “higher prices,” but love a “discount”. If companies implied their highest prices were normal and were constantly talking about discounts rather than surges (hello, DFS), perhaps dynamic pricing would have a better reputation.
Even when companies don’t sugarcoat their pricing, however, there are benefits to dynamic adjustment. Uber’s surge pricing rations rides to those who really need them, while casual customers can wait until prices drop.
Higher fares also lure more drivers onto the roads and keep them there, helping to reduce wait times compared to traditional taxis. The result? Faster service as markets clear, and, on average, lower fares. While consumers sometimes see the price spikes and still often get upset, economy study after study has found customers benefit from Uber’s price algorithm overall, on net.
When it comes to concerts like Oasis, dynamic pricing means some fans pay more than they would under a flat price. But previously what tended to happen is that bands had to guess on demand strength and so often priced their tickets below market rates to ensure they sold out (good for the brand!). The consequence was a deep secondary market where tickets were flogged by touts to those willing to pay more.
Dynamic pricing allows the artists and venues to capture profits the touts used to absorb by getting prices closer to people’s willingness to pay to begin with. Dynamic pricing cuts out the middleman, in other words, letting the artists and venues capture that value themselves. Sure, the higher price when this happens stings for casual fans hoping for a steal, but it gives die-hards a better shot at getting in – and ultimately means more profits for the band, which incentivises them to announce more dates for the tour.
So why not go the whole hog and simply auction tickets to the highest bidders? Well, Oasis probably thought they needed to sell at least some more affordable tickets on a first-come-first-served basis to give their fans a shot, even if it was a long shot given the level of demand.
Hence, the uneasy combination of queues and volatile prices we saw. But the backlash to this combination helps explain why we haven’t seen these algorithmic pricing technologies rolled out everywhere, from supermarkets to lunch spots.
To be clear: dynamic pricing would help avoid long lines in shops at rush hour or after work, and dynamic pricing of individual products would mean supermarkets wouldn’t waste as much food or have to keep such complex inventories.
But, as the Oasis example shows, few people like to play “price roulette” at the checkout or spend 30 minutes figuring out which sandwich to buy each lunchtime because prices keep changing. There’s a customer benefit to certainty and knowing the price-quality bundle in advance. That’s why dynamic pricing works in some contexts, but flops in others – it’s all about how much hassle and economic calculation we’re willing to tolerate.
In economic terms, sometimes the fixed costs of waiting in a longer line or risking not getting a ticket at all are lower than the costs associated with searching around or making complex judgments. When that is the case, dynamic pricing will be deeply unpopular, with companies that fix prices having a competitive edge.
Evidently, many Oasis fans loathed Ticketmaster’s pricing strategy. Yet many music fans also hate touts, the inability to resell tickets, or missing out despite being willing to plough their life savings into getting a seat. These competing tensions are why companies need to experiment with different pricing models as part of their broader offer to customers. If consumers like the package, those firms in the longer term will be profitable. If they don’t, competitors have an incentive to steal custom with a more popular fixed pricing model.
The real conceit here is thinking that Keir Starmer or some bureaucrat knows what is best in all circumstances. Markets do a generally good job of trial and error in figuring out what customers want. Sometimes businesses will use pricing strategies we hate and face a backlash and…that’s ok? What we must avoid is one instance of unpopular pricing leading to the UK government snuffing out the next Uber by imposing one-size-fits-all rules on all firms or artists, curbing the potential for this exciting new technology.
