Prices convey information.

Speed Pricing

Sep 6, 2012 • Businesses, Demand, Supply, and Markets, Economic History, Regulation, Thinking Economically, Uncategorized • 240 Views    No Comments

What does a price tell you?

Assume that you were going to purchase a GE Advantium 120 microwave oven on Sunday, August 12. Comparing Sears, Best Buy and Amazon’s sellers at 3 a.m., you would have seen, respectively, $899.99, 809.99 and 744.46. At Amazon’s website, the price changed to slightly more than $850 at 5 a.m., it dropped again to their $744.46 low several hours later and then back above $850 at 10 p.m. During that day, Sears kept the same price, Best Buy changed twice and Amazon, 9 times.

Call it dynamic pricing.

The story of dynamic pricing begins with airline deregulation in 1978. American Airlines (although some say Delta) was the first to realize that different classes of passengers were willing and able to pay different fares. Of course they could not ask if someone was planning a vacation or a business trip, but they could snag the business traveler by charging more if the flight was the next day. And so began what they called yield management. Spreading to hotels and cruises, rental car businesses and a host of others, yield management helped many firms increase revenue.

The dynamic pricing version of yield management has the same revenue enhancing goal. As you probably know, all sorts of goods like bicycles, jewelry and detergents are dynamically priced online. One baby clothes vendor changes his prices every 15 minutes because being cheaper than everyone else means he will top the list of price related search results.

But what does this mean? In a market economy, price is a source of information. Prices enable the supply side to assess productivity, to identify cost and to project profits. On the demand side, price can convey quality and affordability. With price changing frequently, the information flow increases.

Or, as one market participant commented, “The long term implication is that a price is no longer a price.”

My sources and other resources: A front page WSJ article, “Don’t Like This Price? Wait a Minute ” was interesting and had this fascinating graphic comparing price changes from Sears, Amazon and Best Buy. In addition, this academic article explains yield management while this more recent study looks at internet dynamic pricing.

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