Lecture on Dynamic Pricing

Introduction

• Dynamic Pricing: A high-tech strategy where businesses vary their prices based on market conditions.
  • Examples: Cost, competitor actions, and demand.

Examples of Dynamic Pricing

• Ride-sharing and Airlines: Commonly known for price fluctuations.
• Gas Prices: Can change daily.
• Amazon: Uses dynamic pricing to determine competitive prices for items.
  • Example: Tide Pods prices throughout a day.
• Brick and Mortar Stores:
  • Best Buy and Kohl's use electronic price tags.
  • Kroger tested digital labels for quick price changes.

Customer Reactions

• Frequent price changes can surprise and turn off customers.
  • Especially in grocery stores for staple items like eggs and milk.

Why Businesses Use Dynamic Pricing

• Traditional pricing strategies (e.g., monthly or quarterly updates) may not suffice.
• Dynamic pricing helps avoid margin squeezes due to shifting costs.

How Dynamic Pricing Works

• Software and Algorithms: Used to track factors and set prices automatically.
  • Gas station example: Considers fuel costs, competitor prices, customer alternatives.
  • Grocery store example: Considers cost of goods and customer willingness to pay.

Exceptions to Dynamic Pricing

• Certain items have manufacturer-set prices.
  • Examples: Jeans, specific sneakers, prestige cosmetics.

Increasing Use of Dynamic Pricing

• Expected to continue growing.
• More noticeable during inflation periods.
• Utilized by both large corporations and small local retailers.

Summary

• Dynamic pricing is becoming a ubiquitous part of the economy.
• Essential to understand its mechanisms to comprehend current price structures.