Below is an excerpt from a new Demography Unplugged research note written by Hedgeye Demography analyst Neil Howe. Click here to learn more and subscribe.
| The increased use of dynamic pricing means that travel companies are nearly always outbargaining customers. With the help of AI, airlines and hotels now update prices dozens of times a day, factoring in data like weather forecasts, local events, and even trending Google searches. (The New York Times) |
NH: Say you’re planning a family vacation to Disney World. Not too long ago, it was clear when you could score the best deals. You knew, for instance, that prices would be highest during peak demand periods: weekends, summer, school holidays. This is still true, but seasonal considerations are now only a tiny slice of the data airlines and hotels are using to set prices now.
If the weather’s been bad lately, they know. If BTS just announced a concert there, they know. If a hot new restaurant just opened nearby and you’re a big foodie, they know. The pricing is up-to-the-minute and ever-more individualized. On high-traffic flight routes like New York to London, they can change up 70 times in two days. What's more, they know a lot about just how much you personally can afford.
Forget dynamic pricing. Now we’ve entered the era of “hyperdynamic pricing.”
How did we get here so fast? The scope of data available to companies is growing exponentially, and so is their ability to crunch it. In the cat-and-mouse game between companies and consumers, the company holds so much more information that they’re almost always the cat. They’re getting closer and closer to achieving perfect price discrimination. This is an issue we’ve written about extensively. With a downward-sloping demand curve, retailers can practice perfect price discrimination by charging each customer according to his or her willingness to pay at that moment. If you can pay more, you will. If you can only pay less, you will. This enables the firm to pocket all of the consumer surplus that would be ordinarily left on the table by one universal price. It’s much more effective than simply limiting raising your (one) price and limiting your sales--which is the classic "monopoly" strategy.
To work well, price discrimination requires not only pricing power. It also requires a relatively low marginal cost per good sold. Airfare and hotel rooms (and pharmaceuticals) are perfect candidates. It costs Marriott and Delta very little extra to fill a room or a seat that would otherwise go empty. So they make money even at a "super-discount" price. On the other hand, price discrimination doesn’t make sense for products with a relatively high marginal cost. A big-name masseur, for instance, could possibly make more money by upping his price for all customers, but probably would not benefit by charging differential prices to different customers. There's just too much labor and cost that goes into each sale.
The comments to the original NYT story are full of readers chanting a familiar refrain: This isn’t fair. Surveys reach the same conclusion: When informed about the practice of selling the same thing to different customers at different prices, the vast majority of Americans agree that it's not fair. Yet even as Silicon Valley antitrust concerns have gained steam on Capitol Hill, price discrimination remains basically a non-issue among policymakers. They’re plenty worried about possible monopolistic practices by the big FAANG firms, but not (yet) about the obvious antitrust implications of rampant price discrimination. Once upon a time, the FTC frowned on the practice (mainly in the context of B-to-B transactions). But that was decades ago. Today, it goes pretty much unregulated.
Why? Well, for starters, most companies aren’t engaging in egregious levels of personalization just yet. One analysis of Amazon’s prices found that they are the same across different geographies 91 times out of 100. But I suspect it’s also because dynamic pricing so often delights the customer as a "bargain." A recent paper from the University of Chicago found that personalized pricing improves a company's profits by 86% compared to standard pricing--but at the same time, 60% of consumers benefited from prices lower than the announced "sticker price." You may be outraged that NYU charges $100K per year to send your child there--but then again, aren't you delighted that your special child got a $30K scholarship? (Colleges are masters of price discrimination: See "Six-Figure Tuitions are Coming to Colleges.")
Safeway says it's giving you a "personalized price." And maybe a few coupons. How can you get angry about that? One word of advice, though. If you suspect you may have a higher-than-average ability to pay, you should do everything you can to erase your social-media identity or buy incognito. It's like the old joke about the poker game.
If you look around the table and can't figure out who's getting conned, well... you know the rest.
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ABOUT NEIL HOWE
Neil Howe is a renowned authority on generations and social change in America. An acclaimed bestselling author and speaker, he is the nation's leading thinker on today's generations—who they are, what motivates them, and how they will shape America's future.
A historian, economist, and demographer, Howe is also a recognized authority on global aging, long-term fiscal policy, and migration. He is a senior associate to the Center for Strategic and International Studies (CSIS) in Washington, D.C., where he helps direct the CSIS Global Aging Initiative.
Howe has written over a dozen books on generations, demographic change, and fiscal policy, many of them with William Strauss. Howe and Strauss' first book, Generations is a history of America told as a sequence of generational biographies. Vice President Al Gore called it "the most stimulating book on American history that I have ever read" and sent a copy to every member of Congress. Newt Gingrich called it "an intellectual tour de force." Of their book, The Fourth Turning, The Boston Globe wrote, "If Howe and Strauss are right, they will take their place among the great American prophets."
Howe and Strauss originally coined the term "Millennial Generation" in 1991, and wrote the pioneering book on this generation, Millennials Rising. His work has been featured frequently in the media, including USA Today, CNN, the New York Times, and CBS' 60 Minutes.
Previously, with Peter G. Peterson, Howe co-authored On Borrowed Time, a pioneering call for budgetary reform and The Graying of the Great Powers with Richard Jackson.
Howe received his B.A. at U.C. Berkeley and later earned graduate degrees in economics and history from Yale University.
