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Long-time reader, first-time commenter. This is an interesting piece in defense of dynamic pricing. Do you think that part of the appeal (and the way customer trust is earned) comes from predictable pricing? Some of that predictable pricing will be influenced by a Wendy's franchise's "reserve capacity." If customers think that dynamic pricing will affect predictable pricing (whether or not it actually does) there's bound to be a decline in trust and customer backlash.
Even in the case where customers may pay less for a meal during "off peak" hours than under the status quo pricing model, they would still prefer the predictable pricing over variable pricing.
I'm reminded of this passage from Universal Economics:
"Customers are willing to pay a slightly higher price, which covers the cost of unsold copies [of newspaper], in order to have immediate availability at a predictable price. The cost of inventories may result in a smaller paper or fewer retail outlets, but this will result also in a lower full cost/price to consumers than will the other options. Thus, a third reason for inventories is that they help a seller maintain stable, reliably predictable prices despite minor fluctuations in demand and supply, thereby helping customers plan their shopping." (Alchian, Armen and Allen, William. Universal Economics. Liberty Fund, 2018, pp. 146-147.)
Great line from Alchian and Allen. I'll need to send to Josh.
You're absolutely right about the predictability of it. Lunch discounts at restaurants is completely acceptable since it is predictable. It avoids the problems stated above. No reason off-peak discounts can't be predictable.
I wonder if it's less about predictability per se, and more about avoiding signals of being a potentially duplicitous trading partner.
If I *know* that a restaurant has different prices for lunch and dinner, then there's no real difference between lunch discounts and dinner surcharges. But suppose I'm not aware of the dynamic pricing. I go somewhere and find the price to be higher than (what I believed to be) the advertised price. In this scenario, there are several possibilities from my perspective:
1. The seller made an honest mistake, a typo, something was mislabeled, etc.
2. I was simply ignorant of the dynamic pricing, despites the seller's efforts to advertise it; or
3. The seller's trying to scam me.
If it's costly to discover which of these possibilities was the true one, then it may be sensible to switch trading partners, even when the price misunderstanding is my own fault. On the other hand, when the price is lower than I expected, possibilities 1 and 2 are still on the table, but not 3, and there's less of a reason to cut off the trade relationship.
So what's the seller to choose? Lunch discounts or dinner surcharges? For the informed buyer, it makes no difference. For uninformed buyers, implementing a lunch discount will result in more new customers but fewer repeat customers.
I think there's another testable prediction here: I'd expect "dinner surcharges" to be more common for sellers who have fewer competitors and in cases where there are large switching costs for the buyer.
Thanks, Brian! An example of a predictable "off peak" discount that comes to mind is Dunkin's "Happy Hour" discounts on coffee ranging from various times in the late afternoon to early evening depending on the day:
Dynamic pricing is essential in dynamic systems. The capital cost of a production facility will typically be set by the peak througput of the facility. If I have to size it for the 99.9% of demand at a specified SLA, it will typically be a LOT bigger and more expensive than if I have to size if for 90% of demand. I may be able to adjust my staffing for common usage patterns, but I am truly stuck with the capital cost issue. So if I can move some of my consumption from my peak periods to off peak areas, I can reduce the capital cost and reduce my costs - and prices. This is a particular problem in the utility space where demand can be highly dynamic. All the discussion about high speed battery charging technology is ignoring the power supply problem - high speed charging requires higher peak power provision and the supplier has to handle a stochastic demand of high peak demand. This is going to require considerable investment - frankly I expect the power providers are going to have to distribute large battery systems to load level the demand on power generation and make the system more manageable.
Hi Brian,
Long-time reader, first-time commenter. This is an interesting piece in defense of dynamic pricing. Do you think that part of the appeal (and the way customer trust is earned) comes from predictable pricing? Some of that predictable pricing will be influenced by a Wendy's franchise's "reserve capacity." If customers think that dynamic pricing will affect predictable pricing (whether or not it actually does) there's bound to be a decline in trust and customer backlash.
Even in the case where customers may pay less for a meal during "off peak" hours than under the status quo pricing model, they would still prefer the predictable pricing over variable pricing.
I'm reminded of this passage from Universal Economics:
"Customers are willing to pay a slightly higher price, which covers the cost of unsold copies [of newspaper], in order to have immediate availability at a predictable price. The cost of inventories may result in a smaller paper or fewer retail outlets, but this will result also in a lower full cost/price to consumers than will the other options. Thus, a third reason for inventories is that they help a seller maintain stable, reliably predictable prices despite minor fluctuations in demand and supply, thereby helping customers plan their shopping." (Alchian, Armen and Allen, William. Universal Economics. Liberty Fund, 2018, pp. 146-147.)
Would love to hear your thoughts about this!
Great line from Alchian and Allen. I'll need to send to Josh.
You're absolutely right about the predictability of it. Lunch discounts at restaurants is completely acceptable since it is predictable. It avoids the problems stated above. No reason off-peak discounts can't be predictable.
I wonder if it's less about predictability per se, and more about avoiding signals of being a potentially duplicitous trading partner.
If I *know* that a restaurant has different prices for lunch and dinner, then there's no real difference between lunch discounts and dinner surcharges. But suppose I'm not aware of the dynamic pricing. I go somewhere and find the price to be higher than (what I believed to be) the advertised price. In this scenario, there are several possibilities from my perspective:
1. The seller made an honest mistake, a typo, something was mislabeled, etc.
2. I was simply ignorant of the dynamic pricing, despites the seller's efforts to advertise it; or
3. The seller's trying to scam me.
If it's costly to discover which of these possibilities was the true one, then it may be sensible to switch trading partners, even when the price misunderstanding is my own fault. On the other hand, when the price is lower than I expected, possibilities 1 and 2 are still on the table, but not 3, and there's less of a reason to cut off the trade relationship.
So what's the seller to choose? Lunch discounts or dinner surcharges? For the informed buyer, it makes no difference. For uninformed buyers, implementing a lunch discount will result in more new customers but fewer repeat customers.
I think there's another testable prediction here: I'd expect "dinner surcharges" to be more common for sellers who have fewer competitors and in cases where there are large switching costs for the buyer.
Thanks, Brian! An example of a predictable "off peak" discount that comes to mind is Dunkin's "Happy Hour" discounts on coffee ranging from various times in the late afternoon to early evening depending on the day:
https://happyhourtimes.net/dunkin-happy-hour/
Good thing I decided to stick with my normal post for Monday because I was about to write about this one
I was minutes ahead of Ryan Bourne. Price discrimination. So hot right now!
Dynamic pricing is essential in dynamic systems. The capital cost of a production facility will typically be set by the peak througput of the facility. If I have to size it for the 99.9% of demand at a specified SLA, it will typically be a LOT bigger and more expensive than if I have to size if for 90% of demand. I may be able to adjust my staffing for common usage patterns, but I am truly stuck with the capital cost issue. So if I can move some of my consumption from my peak periods to off peak areas, I can reduce the capital cost and reduce my costs - and prices. This is a particular problem in the utility space where demand can be highly dynamic. All the discussion about high speed battery charging technology is ignoring the power supply problem - high speed charging requires higher peak power provision and the supplier has to handle a stochastic demand of high peak demand. This is going to require considerable investment - frankly I expect the power providers are going to have to distribute large battery systems to load level the demand on power generation and make the system more manageable.