Dynamic Pricing in The Future


This post is by Jeff Carter from Points and Figures


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Was thinking the other day about dynamic pricing.  Today, if you go to a physical store, no matter who goes in they get the same price.  The .10 cent pencil is .10 to everyone.  The physical store is unable to change the price on the fly.

In the digital world, a company like Amazon could change the price for me since it is a singular shopping experience.  Because Amazon knows my preferences and history, they could adjust prices as I am browsing.  Suppose Amazon increases the price of a good that their probabilistic models think I will buy by a dollar.  Amazon gets more producer surplus.

Do that a million times and you make a million more dollars.  Because Amazon does so many transactions, they can increase their profit by quite a bit if they adopted this system.

It works in reverse too.  Suppose the probability model thinks I am the fence about buying a particular good.  It could lower the price by a dollar to entice me to buy it.  You might think that “Amazon makes less” except the cost vs opportunity cost for them actually is in their favor.  They will generate more producer surplus.

We have seen this with air travel costs.  Logon to a site at a particular time of day, or day of the week and the fare will be different than at another time.  I have seen fares change in minutes when I am trying to book travel.

High frequency traders make billions simply by flipping volume and acquiring pennies.  I think it’s only a question of time before high volume retailers start doing the same thing.