Consumer Dynamic Pricing

What Consumers -- and Retailers -- Should Know about Dynamic Pricing: Knowledge@Wharton (http://knowledge.wharton.upenn.edu/article.cfm?articleid=1245)

What Consumers -- and Retailers -- Should Know about Dynamic Pricing
Published : July 27, 2005 in Knowledge@Wharton

A study released in June by the Annenberg Public Policy Center of the University of Pennsylvania was provocatively titled,"Open to Exploitation: American Shoppers Online and Offline." It concluded that American consumers are "vulnerable to subtle forms of exploitation" by marketers. Much of the study, which was based on a telephone survey of 1,500 This is a single/personal use copy of adults, focused on privacy issues dealing with the collection of Knowledge@Wharton. For multiple copies, custom e-prints, posters orinformation about consumers. But it also examined people's knowledge of reprints,PARS International: plaques, please contact reprints@parsintl.com P. (212) 221-9595 x407. pricing. It found, for example, that 64% of respondents who had recently used the Internet did not know that it is legal "for an online store to charge different people different prices at the same time of day." In addition, 71%did not know that it is legal for bricks-and-mortar stores to do the same thing. Is this type of pricing, known as dynamic pricing, underhanded or unethical? No, according to faculty members in Wharton's marketing department. They say such pricing -- also called targeted pricing, flexible pricing, tailored pricing or, to use the phrase employed in the Annenberg study, discriminatory pricing -- iscustomary, an essential tool for companies, and often beneficial to individual customers and society as a whole. Does dynamic pricing sometimes upset consumers? Research shows that people do get disturbed if they learn that they paid more than someone else for the same item. But that happens because they often do not know much about the factors that go into a company's decision to set prices, arereluctant to ask for a lower price, or find bargaining distasteful. And, of course, the people who get bargains are not at all likely to be disappointed or feel exploited. "Dynamic pricing has always been with us," says Wharton marketing professor Peter Fader. "Think of the classic hagglers in the market of a Middle East bazaar. People will pay very different prices for the same bolt of fabric. Thisis more the norm in transactions than fixed pricing. Fixed pricing is a much later phenomenon and it's an artificial one. Companies must engage in flexible pricing practices in order to honor their responsibilities to their shareholders. If retailers charge a flat, low price to make everyone happy, they're leaving a lot of money on the table." "There is nothing really new here," agrees Whartonmarketing professor Z. John Zhang. "The only thing new is that the Internet has given companies so many different ways to set prices and adjust prices." Notes Stephen J. Hoch, chairman of Wharton's marketing department: "People are exposed to dynamic pricing all the time. Do they understand [everything about it]? No. But they understand senior citizen discounts and student discounts." To be sure,not all pricing strategies are permissible. Collusion by competitors in an industry to fix prices violates the law, as does the use of race or gender to target customers for different prices or other discriminatory treatment. In addition, if retailers use dynamic pricing in such a way that it angers customers, they can erode customer loyalty, spark a backlash and lose business. But dynamic pricingis common. Different customers in an automobile showroom at the same moment can end up purchasing the same vehicle with the same extras for wildly divergent prices, depending on their knowledge of the car business and their negotiating skills. People with poor credit histories may pay higher interest rates to the same credit card company than people with stellar credit scores. If you are a highly...