Tejvan Pettinger

Dynamic pricing is a method firms use to constantly adjust the price of goods/services depending on demand. For example, if there is a surge in demand, firms respond to the market data by increasing price. New technology has increased the scope for more variable dynamic pricing, and it is increasingly used by companies, such as airlines, taxi companies and hotels. Dynamic pricing enables a firm to set multiple different prices and maximise total revenue.

Dynamic pricing requires


This is a simplified version of dynamic pricing. On the left, is a simple static price – a standard taxi fare to the centre of a city. However, at peak time, the firm could charge a premium price because demand is more price inelastic. For quiet periods, the firm could offer a discount price to encourage greater consumption. Overall the firm increases revenue. This works like standard price discrimination.

Development of technology

Modern technology allows much more sophisticated forms of dynamic pricing because the company can view real-time data. For example, if there is a bus strike on one particular day, demand will surge, and the company can raise prices instantly.

For a taxi firm, the increase in price during a period of surge demand can have a dual benefit – not only does it maximise revenue, but it also creates an incentive for taxi drivers to work during these busy moments. With dynamic pricing, customers are more likely to get taxis during popular times, though they would have to pay a higher price for the privilege.

Airlines increasingly use dynamic pricing to manage demand between different flights. If a flight is nearly booked up several months before the date, the company can increase the price to maximise revenue from the last few seats. Equally, if an unpopular time of the day is selling slowly, the firm can cut price. The advantage is that the firm is not stuck with inflexible prices but can deal with unexpected surges in demand.

Examples of dynamic pricing

Pros and cons of dynamic pricing


Advantages of dynamic pricing

Disadvantages of dynamic pricing

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