Dynamic pricing is the system of charging different prices for goods and services depending on the time of supply of goods or provision of service; if the goods and services are in high demand then the prices go up and if the demand is low then the prices go down. Price discrimination is the provision of similar goods and services to consumers for different prices depending on where the consumer has been rated to be by the provider. Dynamic pricing is a business model which is widely used by providers of goods and services to maximize profits from the consumers by adjusting their prices according to the demand for these services and goods. Dynamic pricing is similar to price discrimination in many ways. This essay tries to explain why dynamic pricing is price discrimination.
Dynamic pricing is said to be price discrimination because in essence the goods and services offered are similar all through and it is only the prices that changes depending on the time that the goods or services have been offered. Consumers will therefore pay different prices for the same goods and services, making it price discrimination even though these goods and services are offered at different times. Pricing the goods and services according to demand is indeed price discrimination since different consumers require different commodities at different times; this means that a consumer might need a product or service at the time when the demand for such goods and service is high and will have to pay a high price for the goods or services. Whereas a different consumer might require the same goods and services at a time when the demand for these goods and services is low, this consumer will get these goods and services at low price compared to the person who got them when the demand was high. Analyzing the above scenario and excluding the time factor it is evident that the above scenario is like charging different prices for similar commodities to different consumers. This clearly demonstrates that dynamic pricing is indeed price discrimination since consumers pay different prices for the same goods and services.
Critics of dynamic pricing have suggested that the gains from dynamic pricing are short term and they can be explained by the following arguments. The perception of the consumer might change drastically if the consumer discovers that others got the same product at a cheaper price compared to his price. The response to this by the consumer can take different forms; the consumer might become more enlightened and in the future program his purchase of products in such a way that products are only purchased during the periods when they are sold at cheaper prices. This is most likely to happen since most consumers are increasingly becoming aware of this pricing model through the web and other communications outlets. In the long term it will not be profitable to run a retailing business in this model because once the consumers become enlightened they will only purchase products when their prices are low and therefore the profit margins will also be low. The long term gains will therefore be low compared to the short term gains which is not good for any retailing business.
Despite the fact that huge gains may be accomplished in the short term in dynamic pricing, consumers who find out that they paid more for products than other people may adopt a negative perception toward the provider of the products. They may lose the trust in the provider simply because they feel duped. This would be dangerous to the provider and his business since the consumer is likely to look for an alternative provider of this services and goods and services. This would be detrimental to the provider as the long term benefits and gains would be dismal.
Consumer loyalty is also significantly reduced in dynamic pricing. Consumers prefer to purchase products at a fairly constant price and when the prices fluctuate continuously the consumers may become disillusioned and opt to purchase these products from other providers who meet their demands at a fairly constant price. When many consumers are driven away by dynamic pricing then the long term gains in a retail business would be minimal. The gains from dynamic pricing would therefore be short term as the consumer base would reduce leading to lower profits in the long term.
Price discrimination has been extremely successful in some industries mainly because the manner in which it is carried out leaves the consumers often satisfied. The tourism industry is an example of an industry where price discrimination has had huge gains. In tourism the local tourists in a country often pay for the services offered to them at a cheaper price compared to the international tourists from other countries. This model of price discrimination is normally aimed at increasing the numbers of local tourist who visit places of attraction; the increased number of local tourists leads to higher gains, at the same time international tourist also receives the same services but at a higher price. The international tourists do plan for their trips and often go to the places where they can afford and enjoy their stay. The international tourists will therefore not feel duped by the higher prices they pay compared to the local tourists. The tourism industry successfully implements price discrimination with maximum gains (Robles).
Other industries where price discrimination is often a success are industries where products are produced in mass quantities. The consumers buying products in small quantities are charged higher prices compared to the consumers who buy the products in bulk. This is effectively implemented because the consumers who purchase small quantities of products often require the exact amount and therefore have to buy them and will not mind the slightly higher prices they pay compared to the bulk buyers. These mass production industries sell the products at different prices and maximize their gains without having any negative effects on their business. The airlines have also had huge success by applying price discrimination model. Customers who use the different services offered by the airlines pay different prices while the services are often the same. By giving options they achieve customer satisfaction and at the same time make huge profits (Videopedia).
Price discrimination has not been met with success in retail as has been in some other industries. This is mainly because implementation of price discrimination in retail is difficult. Distinguishing between the consumers who can pay more for particular product and those who would pay less for the same product is difficult. It becomes difficult to price the products differently as any misjudgment by the provider of the service on the type of consumer would have adverse effects on the business. In retail business the consumers react differently to product discrimination, most of the consumers are not enlightened on how this model of pricing operates and therefore any slight doubt on the part of the provider of products often leads adverse reactions from the consumer, making application of price discrimination difficult in retail. The success of price discrimination is hindered based on the facts above and as a result low success is recorded in retail unless the market is highly controlled.