But a recent article in The Economist (!) confuses the matter.
Dynamic pricing occurs when sellers adjust prices on a frequent basis to account for varying shifts in demand, or limitations in supply. Uber raises fares when demand spikes upward and drivers are scarce; sports teams cut prices for tickets for the final games in a season when it becomes clear the team will not qualify for the playoffs; airlines raise or lower prices to maximize revenue from scheduled flights; theatres lower prices for shows, or specific dates for shows, where demand is proving to be weak at the starting prices.
Price discrimination occurs where sellers attempt to charge higher prices to those with less sensitivity to higher prices and higher willingness to pay, and lower prices to those who are more price sensitive, and will not buy at higher prices. This can be achieved by setting different prices for different identifiable groups (student discounts; lower membership fees for people who live at least 100 miles away from the museum) or by offering a menu of different options on quality and quantity to all, knowing that those with a high willingness to pay will choose the more expensive option (scaling the house; subscriptions vs single tickets; two-part pricing; lower prices on weekdays than weekends).
Any arts organization can use both – your theatre can use dynamic pricing and have student discounts – but they are different concepts.
At The Economist, columnist Schumpeter in an article on dynamic pricing begins:
Businesses have always offered different prices to different groups of customers. They offer “matinée specials” for afternoon cinema-goers or “happy hours” for early-evening drinkers. They offer steep discounts to students or pensioners. Some put the same product into more than one type of packaging, each marketed to a different income group.
Dynamic pricing takes all this to a new level—changing prices by the minute and sometimes tailoring them to whatever is known about the income, location and spending history of individual buyers. The practice goes back to the early 1980s when American Airlines began to vary the price of tickets to fight competition from discounters such as People’s Express. It spread to other airlines, and thence to hotels, railways and car-rental firms. But it only became the rage with the arrival of e-commerce.
But dynamic pricing is not price discrimination ‘to a new level’ – it is about varying prices due to the supply-and-demand conditions of the moment, not about discriminating between buyers. An airline can use dynamic pricing without knowing anything about individual customers. They can also price discriminate (business class vs economy vs economy ‘plus’; points for frequent flyers) but that is a different technique. Again from the article:
The dynamic-pricing revolution provides plenty of benefits for businesses. Besides helping them smooth demand (which can spare them the cost of maintaining extra capacity for peak times), it makes it easier for them to squeeze more out of richer customers. Travel websites have experimented with steering users of Apple computers—assumed to be better-off than Windows PC users—towards more expensive options.
But you can smooth demand without looking to get higher fees out of Apple users, and get higher fees out of Apple users without using demand-smoothing dynamic pricing. They are different kinds of strategy.
Schumpeter (the columnist, not the namesake) goes on to write about psychological resistance:
… companies’ reputations can suffer if they offend customers’ sense of fairness. Uber encountered a backlash when it increased its prices eightfold during storms in New York in 2013. Such “surge” pricing makes perfect economic sense: drivers are more likely to go out in hostile conditions if they get paid more; and many customers would prefer a high-priced ride to no ride at all. But these arguments cut little ice when prices run counter to people’s sense of equity. So, in this week’s snowstorms in New York, Uber capped its surge prices for its regular taxis at just 3.5 times the normal fare.
Psychological resistance can be fierce when companies use data collected from their customers to charge them more. That is why, in 2000, Amazon quickly dropped a scheme to charge some customers more for DVDs based on their personal profiles, and why it has trodden carefully since.
Different things, and individuals will differ according to their aversion to surge pricing, and to first-degree (i.e. at the level of the individual) price discrimination.
A plug: in my book on pricing for arts organizations I attempt to go at these issues systematically, rather than just catalogue a list of pricing techniques that are somehow new because of the internet. Best think clearly on pricing.
A thought experiment in morality. Perhaps our elite universities, which often only accept 5% of applicants, should use dynamic pricing. With so much money transferred away from the middle class to the extremely rich, I’m sure there are many American families who would pay even a million dollars a year for their pedigree child to go to Stanford or Harvard. And of course, there are many wealthy foreigners who could be serviced with dynamic pricing as well.
We needn’t worry about a loss of standards. After all, those pedigree families give their children special training for SAT tests, and ninety-four of the top 100 feeder schools for Harvard are private and have very high tuitions average people cannot afford.
How does this compare to continental Europe where private universities, with rare exception, are forbidden by law, and where there is no tuition or student debt? Is the deeper question in the arts is to ask if flexible pricing leads to flexible morality?
Ah but you are suggesting price discrimination, not dynamic pricing, which it was the point of my post to clear up.
Elite universities are restricted in their ability to charge million dollar fees by competition – there are too many elite universities for any one university to get away with such high prices. Even Harvard and Stanford are bound by the net costs of attending MIT or Yale.
How does it compare with Europe? Let’s just say that the empirical evidence on whether free tuition across the board is progressive in terms of income distribution is mixed, to say the least.
Or does the university example illustrate the large overlap between dynamic and discriminatory pricing? If all universities charged higher prices based on scarcity, dynamic pricing would kick in, and those less sensitive to higher prices would be most willing to pay them. This overlap might even account for the confusion of the terms, if not a certain interchangability.
It is difficult to say that free university tuition is not progressive, even if for the fact that it is most commonly supported by progressives, and a common part of Europe’s social democracies. (Bernie Sanders also advocates the elimination of tuition) Are there not cases where furthering the interests of some elites benefits all levels of society?
Conversely, why is it that reactionaries are most inclined to oppose public arts funding or free tuition? Are they actually being progressive by not allowing support for those who appreciate the so-called high arts, or those families whose children might be more inclined to attend college? Or is it merely a specious argument based on an obsessive desire for small government?
I think the confusion about the definition of progressive political thought might come from the notion that it is solely concerned with income distribution – or not using government in any way that would support the upper income brackets. Of course, that’s too simplistic. In reality, progressiveness also embrace the manifestations of humanism such the high arts and knowledge. Higher income brackets might be more inclined toward those things, but progressives allow for that to reasonable degrees in the desire to maintain humanistic values, while encouraging a society where class plays an increasingly smaller role in defining the appreciation of the arts and education.
This plays a large role in how the arts are supported in Europe, and for ticket prices that are far less expensive than in the USA. The overall effect, has indeed leveled the playing field in arts appreciation and participation.
In Europe’s education system the results are more complex and troubling because children are usually divided into academic and vocational career paths around sixth grade. This increases the chances that working class children will remain working class. In the USA, students are kept on the same path, but high schools average around a 30% drop out rate, and those students often haven’t been given vocational training. Very complex issues. And they do come back to concepts of arts participation and funding.
Although I agree that dynamic pricing isn’t the best term, it has become the de facto term to describe these kind of strategies. It makes sense if you take a less restrictive definition of “supply and demand”.