Regulators have an issue to solve: Balancing dynamic pricing's cost

Consumers are a worried lot as dynamic pricing is increasingly applied in their daily lives. The practice involves charging different prices to different consumers for the same product. A chocolate factory in the United States recently adopted dynamic pricing to adjust for turbulent cocoa markets. Surge pricing by cab aggregators during peak hours is another example. Last year, the United Kingdom’s competition authority launched a probe into surge-based sales of concert tickets. India saw this trend after Covid-19 in the form of smaller packages of grocery items, and in the sale of airline tickets requiring government intervention after the Pahalgam terrorist attack. Even hospitals have introduced variations of surge pricing. Shoppers in Norway see grocery stores changing prices over hundred times a day. India has launched a pilot ‘one route, one fare’ on state-owned Alliance Air and an annual pass for national highways.

 

Pricing decisions rely on mathematical calculations. Over time, the practice has transitioned from a unitary method to probability. For those born before the 1960s in developing Asia, school arithmetic focused on the unitary method, which is foundational in nature and calculates the value of a single unit. The concept of probability helped transition from arithmetic to mathematics and involves chance, random events, and probability. Both unitary and probability methods figure heavily in pricing decisions in aviation, railways, utilities, toll-based infrastructure projects, commodities, oil, gas, telecom, tourism and hospitality.

 

While the unitary method is used to determine the base price, the probability concept helps entities manage demand when supply falls short. Dynamic pricing allows for demand management during peak loads, busy shopping hours, and the rainy season. Probability overlooks proportional calculations of the unitary method; it also does not consider consumer sentiments of affordability and inclusivity.

 

Should banks use insured deposits to fund entities that follow dynamic pricing? Should private infrastructure concessionaires apply dynamic pricing when infrastructure is a public good? The issue matters in developing economies with large low- and middle-income populations. Infrastructure projects need certainty, and dynamic pricing could bring in opposite results, especially in ‘user to pay’ structured concessions. Investors desire certainty for long-term performance, and businesses applying dynamic pricing may not emerge as winners.

 

Should listed entities make disclosures about dynamic pricing? It’s about applying the right processes to check manipulation and consumer harm. Should such pricing figure in consumer price index calculation? Should dynamic pricing be applied to senior citizens? Principles of equity and natural justice need to be applied. India has to tackle this delicate issue impacting various economic categories. The Reserve Bank of India needs to take a call on fairness and transparency of financial intermediaries’ lending using insured deposits to entities that apply dynamic pricing.

 

There is a difference between cost-plus and cost-plus variable profit maximisation. In the latter case, consumers are left with a feeling of pricing fatigue besides having been charged more. Is it a corporate governance issue? Does it promote artificial scarcity value? Many Asian consumers see dynamic pricing as unethical, non-transparent, unfair, greedy, and a wealthy Western concept. Consumers may be indifferent to dynamic pricing for luxury goods, but applying the same principles to goods of necessity merits an evaluation.

 

A multilateral evaluation by institutions such as the Asian Development Bank and the International Monetary Fund will be helpful. Is algorithm-driven dynamic pricing equitable and conducive to inclusive growth? Is the profit maximisation motive depriving lower- and middle-income consumers? Does it limit the growth potential of a consumer market by hindering capacity creation and consumer pull back? A change in path will be challenging as it may not be easy to change the practice due to vested interests. Reforms are called for.

The writer is a former senior staff of Asian Development Bank, Philippines. Views are personal. This column has been edited for space