MSP Explained

 

The rise of surge pricing: ‘It will eventually be everywhere’

Oliver Barnes, Philip Georgiadis and Laura Onita in The FT

For drinkers at the Coach House in central London on a busy work night this week, there was an uncomfortable piece of news to digest: the price of Britain’s favourite alcoholic beverage had just gone up — again.

Stonegate, Britain’s biggest pub company which runs the Coach House, has announced it will charge pubgoers 20p extra for a pint of beer on busy evenings and weekends. It is part of what it called a new “dynamic pricing” policy in some of its venues.

This has come much to the annoyance of some of its regulars. “It’s not right; we’re being done over enough on beer as it is,” says Adrian, a 37-year-old brand marketing manager, who has nipped into the pub near Piccadilly Circus after work. Sipping a £6.25 pint of Heineken, he admits that after the fuzziness of a few more drinks he might not even notice the price increase as the pub fills up.

“It just fleeces people trying to enjoy themselves,” he adds.

"Dynamic” pricing, as many in industry call it, or “surge” pricing as is more widely known by consumers, whereby businesses flex prices at particular times in response to shifts in supply and demand, is not a new phenomenon. It has been used by airlines in the US, for instance, since 1983 when the US government relinquished the power to set domestic airfares.

When booking flights and hotel rooms, consumers have become accustomed to the rhythms of the dynamic pricing model: book early or during the shoulder season and get a good deal; book last-minute or during the busy holiday periods and get penalised.

However, powered by algorithms and artificial intelligence, it is being introduced at a rapid pace by a growing number of consumer industries. Amazon changes the price of its products on average every 10 minutes, using millions of real-time data points to benchmark against competitors and track demand surges.

“It will eventually be everywhere,” says Robert Cross, who created a computerised dynamic pricing model for Delta Air Lines in the early 1980s before doing the same for hotel giants Marriott, Hyatt and InterContinental Hotels Group.

As high inflation erodes margins and improvements in technology make dynamic pricing cheaper and more practical for businesses to implement, the temptation to deploy the pricing strategy is growing in industries that have so far remained largely untouched by the method. Bars, restaurants and bricks-and-mortar retailers have historically only adopted dynamic pricing for basic discount offers, but that could change.

“If you’re a business, it’s irresistible because it will improve your margins and it’s in the consumer’s best interests too,” argues Cross, who chairs a revenue management company. “Anywhere there is a mismatch between what a customer is willing to pay and the actual price is ripe for dynamic pricing.” A 2018 study by researchers at Massachusetts Institute of Technology found that dynamic pricing boosted airline revenues by between 1 and 4 per cent, compared with traditional pricing.

However, the furore this week about the rollout of surge pricing in a beloved British boozer has reignited debates around the ethics of the pricing strategy and whether it is rigged against the consumer.

In some industries, dynamic pricing has proved less palatable. Ride-sharing app Uber refunded users in central London after its pricing engine briefly surged fares in the aftermath of the London Bridge terror attack in June 2017.

Fans trying to bag tickets for arena tours by Beyoncé, Coldplay and Harry Styles in the past year have expressed frustration over the wild fluctuations in Ticketmaster’s dynamic pricing model, which resulted in some paying more than double the face value. Ticketmaster’s parent company Live Nation Entertainment is being investigated by the US justice department as part of an antitrust probe.

Marco Bertini, a professor of marketing at Esade business school in Barcelona who advises Boston Consulting Group on pricing practices, agrees that dynamic pricing will only become more common. But he warns companies to be aware of the pitfalls, including the way that such pricing is explained to customers.

“The question is making sure there’s no secondary effect, like people getting pissed off and not understanding [the pricing method],” he says. “The devil is in how it’s communicated because you’re trying to get this customer to come back tomorrow.”

A question of fairness

For most of the history of human commerce, dynamic pricing was the norm, with customers haggling and bartering with vendors over the price of every item. But in 1876, inspired by notions of equality, Quaker merchant John Wanamaker introduced price tags at the launch of his eponymous department store in Philadelphia. Macy’s, the iconic New York-based department store, also under Quaker ownership at the time, did the same.

Beyond high-minded ideas of fairness, fixed prices allowed the stores to save on years of training for shop clerks in price negotiation, which in turn enabled faster expansion. The price tag quickly caught on.

Now, however, with advancements in data collection and the transition of commerce online, businesses are reverting to the historical norm and pivoting away from the fixed price.

There is also still room for growth: while retailers in the US have embedded dynamic pricing into their operations more widely, Europe still lags behind, according to Pini Mandel, chief executive of Israel-based Quicklizard, whose dynamic pricing tools are used by the likes of Ikea and Sephora.

More than half of retailers use it in the Nordic countries, about 40 per cent in Germany, Austria and Switzerland, but only 15 to 20 per cent in the UK, according to Mandel. “Inflation is the reason why the UK, which is the most conservative market when it comes to dynamic pricing, is also joining the revolution,” he adds.

One UK hotel group chief executive says complaints about dynamic pricing for room bookings are rare as consumer awareness has grown. “Now, I think customers generally get it in a way that they didn’t before,” he says. “Customers . . . understand that the earlier you book, the better the deal is.”

Dermot Crowley, chief executive of Dalata hotel group, which manages 52 hotels across the UK, Ireland and Germany, says despite the widescale uptake of dynamic pricing among hotel groups, even they have erred away from introducing surge pricing on food and beverage.

“When you’re deciding to stay in a hotel, it’s a big part of your weekend away, that’s the price and you can budget accordingly,” says Crawley. “If you buy a drink and then it gets more expensive, that leaves a different impression.”

Some 52 per cent of 901 US consumers surveyed by software company Capterra this year said they regarded dynamic pricing in restaurants as equivalent to price gouging. Despite the negative reaction to Stonegate’s new pricing policy, Alex Reilley, chief executive of casual dining group Loungers, says price discrimination is more common in the hospitality industry than most operators let on. Stonegate, which owns the Slug and Lettuce and Craft Union chains, had previously rolled out the same pricing strategy on a temporary basis during the 2022 football world cup, upping the price of a pint by up to £1.

A spokesperson for Stonegate said that using dynamic pricing also meant it could offer promotions on food and drink throughout the week and helped offset higher running costs when it was busy.

“I think Stonegate have almost fallen foul a little bit because of their honesty because there are lots of operators, particularly in city centre locations that do exactly the same and it’s not exactly a new phenomenon,” says Reilley. “I wouldn’t necessarily see this as Stonegate taking the piss. It’s them thinking about ways they can generate extra revenues . . . given the pressure they are under.”

Seth Moore, former chief strategy and analytics officer at online retailer Overstock.com, says the backlash that Stonegate has faced is more a result of the way it communicated the price change.

“If my pub goes out and says, ‘Before 7pm, we’re serving drinks 25 per cent off’, nobody objects to that,” says Moore. “In general, it’s better to market it as a discount off prime rather than an increase on prime.”

Threat of manipulation

In the period that surge pricing has been in operation in the airline and hotel industry since the 1980s, prices have largely declined with the rise of low-cost airlines and budget hotels and consumers have grown accustomed to the pricing model.

“Back in the day, only the wealthy people travelled,” says Cross, formerly of Delta. “Now, everybody travels and that’s thanks to dynamic pricing.”

But there are signs that consumer and regulatory tolerance could be waning because of the sharp rise in prices over the past year.

Italy’s rightwing government sparked a furious row with Europe’s airlines last month after outlining plans to cap fares on flights between mainland Italy and the islands of Sicily and Sardinia at 200 per cent of average prices. The government said that ticket prices had risen 70 per cent on those routes.

The plans to intervene in the market were unusual, but followed a drumbeat of questions over airlines’ pricing models this year. The Spanish government has also laid out plans to limit fare rises on some domestic routes, while the European airport trade association has called on the European Commission to “monitor” the level of air fares.

“As a consumer, I understand why people don’t like paying more for things . . . but it is important to understand that it often allows the same business to charge less during another time and create more access to whatever it is,” says Jonathan Ayache, chief executive of South African airline Lift and a former senior executive at Uber.

For many retailers with a large bricks-and-mortar estate, dynamic pricing is still in its infancy, as it involves having to physically change labels, a costly endeavour. But the uptake of so-called electronic shelf labels, offering the ability to rapidly update prices, is spreading. Walmart is installing digital labels in 500 of its stores and France’s Carrefour has been using them for years.

But greater reliance on algorithms to price products could have downsides. A 2021 research paper published by the Competition and Markets Authority, the UK watchdog, concluded that while pricing algorithms have “enhanced efficiency”, companies “may also misuse them, whether intentionally or unintentionally, and can cause harms to consumers and competition, often by exacerbating or taking greater advantage of existing problems and weaknesses in markets and consumers”.

A push towards more dynamic pricing has proved unpopular for ticketing platforms. In the UK, 71 per cent of 1,523 music fans surveyed by polling company YouGov late last year said they were either strongly opposed or tended to oppose surge pricing for concerts. Rock star Bruce Springsteen angered fans in the US last year when he adopted dynamic pricing for a tour for the first time, leading ticket prices to surge as high as $5,000.

Robert Smith, lead singer of the Cure, who this year convinced Ticketmaster through a social media campaign to refund service charges to his fans, stressed that he had avoided dynamic pricing, calling it “a bit of a greedy scam”. Taylor Swift, the second most streamed musician globally, opted not to use dynamic pricing model for this year’s Eras tour after it dragged on sales and angered concertgoers during her 2018 tour.

Some ticketing industry figures are unrepentant. “It’s called the ticket business, it’s not called the ticket fan club. Nobody pays more for a ticket than they want,” says Fred Rosen, who built Ticketmaster into a behemoth in the industry before leaving as chief executive after 16 years in 1997. “It’s not the ticket companies that set the prices, it’s a simple supply and demand curve.” Rosen predicts that despite some pubgoers “moaning” about dynamic pricing, the pubs “will still be full”.

But others question whether the intrusion of dynamic pricing into all aspects of commerce and culture represents a step too far, fearing that it could be rolled out to ever more essential goods.

“The world is full of micro moments but they all add up,” says Phil Hutcheon, the founder of ticketing platform Dice, which shuns dynamic pricing. “People will ask, ‘Why are these tickets $1,000? Are they only available to the ultra-wealthy?’ If a beer at 6.30pm is a certain price, then an hour later it is a totally different price . . . you just start losing trust in the system.”

A level Economics: UK's inflation is due to rise in corporate profit-taking

Figures give fuel to claims that profiteering has played a big part in the UK’s high levels of inflation writes Phillip Inman in The Guardian 


British companies have boosted their profitability, according to the latest official figures, insulating themselves against cost pressures and fuelling claims that profiteering has played a big part in the UK’s inflation story.

In a week when Joe Biden said he was only winning the war against inflation in the US because corporate profits were declining, figures released on Thursday by the Office for National Statistics showed UK business profits increased in the first quarter of 2023.

Manufacturing firms increased their net rate of return to 8.8% in the first quarter, from 8.4% in the fourth quarter of 2022. Services companies, which account for about three-quarters of economic activity, increased their net rate of return to 16.1%, an increase of 0.4 percentage points from the last three months of 2022.

The rate of return is a measure of profitability that shows the margin between operating profits and the cost of assets used to generate those profits. Unions have accused firms of putting up prices by more than the rise in their costs, a trend nicknamed greedflation.

It is a hot topic because the Bank of England has consistently said the small ups and downs registered by the ONS in its calculations of corporate profitability show little evidence of profiteering. It has repeatedly urged workers to restrain wage demands and played down the need to tell companies to restrain price rises.

On the other side of the argument stand a growing number of academics, thinktanks and unions.

The TUC general secretary, Paul Novak, said he was shocked by the ONS figures, which he claimed showed “a culture of entitlement is alive and well” among the large corporations that he said were mostly to blame for higher prices.

Sharon Graham, the head of the Unite union, arguably credited with doing more than anyone in the UK to promote research into corporate profits, said companies were exploiting a crisis.

Philip King, a former government adviser and small business commissioner until 2021, said many small and medium-sized companies would wonder what the fuss was about. He said it was clear from the figures that “companies are maintaining their profitability despite the difficult trading conditions they have faced”, and it was large businesses that would be to blame. These “typically have more flexibility when it comes to increasing prices and cutting costs”, he said.

The International Monetary Fund (IMF), the Organisation for Economic Co-operation and Development (OECD) and many leading academics say steady profit margins show businesses are doing better than any other participants in the economy, in particular workers.

An OECD report last month found average profit margins in the UK increased by almost a quarter between the end of 2019 and early 2023. Stefano Scarpetta, a director of the OECD, said it was “somewhat unusual that in a period of slowdown in economic activity we see profit picking up”.

George Dibb, an economist at the IPPR thinktank, said the Bank of England was “plain wrong” to consider steady profit margins a non-story.

On closer inspection the headline average is if anything worse than it first appears. Overall, the net rate of return for all non-financial businesses – a measure that excludes banks and insurance companies but includes North Sea oil and gas firms – increased from 9.8% in the last quarter of 2022 to 9.9% in the first quarter. That shows margins remained consistent through one of the worst winters for cost of living rises and cuts in disposable incomes for several generations.

However, excluding North Sea oil and gas firms, which showed a slump in profitability in the first quarter as energy prices fell from their peaks, dragging down the average, the level of profitability for most firms jumped from 9.6% in the last quarter of 2022 to 10.6% in the first quarter of 2023.

Richard Murphy, a professor of accounting at the University of Sheffield, said low wage rises in most sectors outside financial services meant large companies were probably doing much better than smaller ones.

Murphy said half of all UK company profits were generated by small and medium-sized companies and the other half by a few thousand larger firms.

Another interest rate rise is expected next month and the main reason given by the Bank will be that wages are rising too quickly, not that profits are rising too quickly. It is a stance that is going to become increasingly contentious.

A Level Economics 86: Zero or Low Inflation?

Governments target low levels of inflation instead of aiming for zero inflation (no inflation) for several reasons:

1. Price Stability: Low levels of inflation provide a degree of price stability, allowing businesses and individuals to plan and make economic decisions with more certainty. Moderate inflation encourages spending and investment, as consumers and businesses are motivated to avoid holding onto cash that loses value over time.

2. Avoiding Deflationary Spirals: Targeting a low, positive rate of inflation helps prevent deflation, which can be harmful to the economy. Deflation can lead to falling demand, reduced business profits, and negative expectations about the future, triggering a deflationary spiral that can be difficult to reverse.

3. Interest Rate Management: Having a small positive inflation rate allows central banks to use interest rates more effectively to control economic conditions. When inflation is too low or negative, central banks may reach the "zero lower bound," limiting their ability to further lower interest rates during economic downturns.

4. Nominal Wage Flexibility: Moderate inflation helps facilitate nominal wage adjustments in the labor market. Wages are typically sticky downward, meaning that employees are reluctant to accept nominal wage cuts. With moderate inflation, real wages (wages adjusted for inflation) can adjust downward more smoothly without actual cuts in nominal wages, allowing labor markets to respond to changes in economic conditions.

5. Balancing Debt Burdens: Low inflation helps reduce the real burden of debt. In economies with significant public and private debt, moderate inflation allows debtors to pay back loans with money that has lower purchasing power, easing the overall debt burden.

Winners of Low Inflation:

1. Savers and Lenders: Savers and lenders benefit from low inflation as the real value of their savings and lending returns is better preserved. They avoid the erosion of purchasing power that occurs during periods of high inflation.

2. Debtors: Borrowers benefit from low inflation as it reduces the real burden of their debts. They can pay back loans with money that is worth less in real terms, effectively reducing the real cost of borrowing.

Losers of Low Inflation:

1. Fixed-Income Earners: Individuals with fixed incomes, such as retirees living off pension funds, may struggle to maintain their purchasing power during periods of low inflation. Their incomes do not keep pace with rising prices.

2. Central Banks in Deflationary Situations: When inflation is too low or negative, central banks may face challenges in stimulating the economy through conventional monetary policy tools. This can limit their ability to address economic downturns effectively.

3. Economies in Deflationary Spirals: Low inflation can increase the risk of deflationary spirals, which negatively affect businesses and consumers. Falling prices can lead to postponed spending and reduced investment, perpetuating economic stagnation.

In summary, governments target low levels of inflation to maintain price stability, avoid deflationary risks, and enable more effective monetary policy management. While low inflation benefits savers and lenders and reduces the real burden of debt, it may adversely affect fixed-income earners and pose challenges for central banks and economies experiencing deflationary pressures. Striking a balance between price stability and supporting economic growth is essential for achieving sustainable economic performance.

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Yes,in theory, zero inflation would offer more price stability than a low level of inflation. With zero inflation, the general price level of goods and services would remain constant over time, providing the most stable prices for consumers and businesses. However, achieving and maintaining exactly zero inflation can be challenging and may not always be the most desirable target for central banks and governments. Here's why:

1. Deflation Risk: The pursuit of zero inflation can increase the risk of deflation, which is a sustained decrease in the general price level. Deflation can be harmful to the economy, as it can lead to falling demand, reduced business profits, and negative expectations about the future. Deflationary spirals can be challenging to reverse and can result in economic stagnation.

2. Nominal Wage Stickiness: Wages in the labor market are often sticky downward, meaning that employees are reluctant to accept nominal wage cuts. In a scenario of zero inflation, real wages (nominal wages adjusted for inflation) could be more rigid and unable to adjust downward. This may lead to higher unemployment, as businesses may not be able to adjust labor costs efficiently during economic downturns.

3. Interest Rate Management: In a low-inflation or deflationary environment, central banks may face difficulties in using interest rate policy effectively. Interest rates already near or at zero, known as the "zero lower bound," can limit the central bank's ability to further lower rates to stimulate economic activity during downturns.

4. Avoiding Economic Stagnation: A small positive rate of inflation, often targeted by central banks (e.g., 2% inflation target), can provide some buffer against deflation and help avoid stagnation. Moderate inflation encourages spending and investment, as consumers and businesses are motivated to avoid holding onto cash that loses value over time.

5. Monetary Policy Flexibility: A low, positive rate of inflation allows central banks to use interest rates more effectively to manage economic conditions. They can implement conventional monetary policy tools to adjust interest rates in response to changes in the economy.

In practice, many central banks aim for a low, positive rate of inflation rather than zero inflation. They typically target inflation rates around 2%, which allows for some price stability while providing a buffer against deflationary risks. A moderate and stable rate of inflation can facilitate nominal wage adjustments, allow for more flexible interest rate management, and avoid the adverse effects of deflation. Striking a balance between price stability and supporting economic growth is a key consideration for monetary policy and inflation targeting.

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The definition of "low inflation" is not fixed and can vary depending on the context and the specific economic conditions of a country. It is not a scientific term with a standard numerical value universally applicable to all economies. Instead, what constitutes "low inflation" is often a normative judgment made by policymakers and economists based on the desired economic outcomes and the prevailing economic circumstances.

Subjectivity of Low Inflation: What may be considered low inflation in one country or at a particular time may not be deemed as such in another context. Policymakers, central banks, and economists typically consider various factors, such as historical inflation trends, long-term economic growth objectives, and the overall stability of prices, when determining the target level of inflation.

Examples of Target Inflation Rates:

1. United States: The Federal Reserve, the central bank of the United States, has a dual mandate of promoting maximum employment and stable prices. It has typically targeted an inflation rate of around 2% as conducive to economic growth and stability.

2. European Central Bank (ECB): The ECB, responsible for monetary policy in the Eurozone, aims to maintain inflation below, but close to, 2% over the medium term. This target is based on the belief that a moderate level of inflation is beneficial for economic activity and helps avoid deflationary risks.

3. Japan: The Bank of Japan (BOJ) has had difficulty achieving its target of 2% inflation amid decades of deflationary pressures. In response, the BOJ has implemented aggressive monetary policies to combat deflation and boost inflation expectations.

Evaluating the Normative Nature of Low Inflation: The normative nature of low inflation means that there is ongoing debate and differing viewpoints on what the ideal inflation rate should be. Some arguments in favor of low inflation include:

1. Price Stability: Low inflation contributes to price stability, making it easier for households and businesses to plan and make economic decisions without significant concerns about rapidly changing prices.

2. Wage and Price Stability: A moderate and stable inflation rate allows for nominal wages and prices to adjust more smoothly, facilitating labor market flexibility and resource allocation.

3. Avoiding Deflation: A target for low inflation helps avoid deflationary pressures, which can be harmful to economic growth and can lead to negative expectations and delayed spending.

On the other hand, some economists and policymakers argue that there are potential drawbacks to persistently low inflation:

1. Deflationary Risks: If inflation consistently falls too close to zero or turns negative, it can increase the risk of deflationary spirals, leading to economic stagnation and challenges in policymaking.

2. Monetary Policy Constraints: Extremely low inflation can reduce the effectiveness of conventional monetary policy tools, such as lowering interest rates, especially when interest rates are already close to zero (zero lower bound).

3. Real Debt Burden: Very low inflation can increase the real burden of debt, making it more challenging for borrowers to service their debts.

In conclusion, the definition of "low inflation" is subjective and varies across countries and economic circumstances. It is typically a normative judgment based on the desired economic outcomes and the prevailing economic conditions. While low inflation is generally viewed as conducive to economic stability, there are ongoing debates on the ideal inflation rate and the potential drawbacks of persistently low inflation, such as deflationary risks and limitations in monetary policy effectiveness. Striking the right balance between price stability and supporting economic growth remains a key challenge for policymakers.

A Level Economics 64: Maximum and Minimum Price

Maximum and minimum prices are government-imposed price controls (regulations) aimed at influencing the market price of goods and services. These controls are typically implemented to achieve specific economic or social objectives. The rationale behind maximum and minimum prices can vary, but their primary purposes are to protect consumers, ensure fair wages for workers, stabilize markets, or control inflation.

Maximum Prices: A maximum price, also known as a price ceiling, is the highest price that can be legally charged for a specific good or service. The government sets the maximum price below the market equilibrium price to protect consumers from excessively high prices. The goal of a maximum price is to make essential goods more affordable for consumers, especially during times of crises or shortages.

Example of Maximum Price: During a severe drought, the government may set a maximum price on bottled water to prevent sellers from charging exorbitant prices due to increased demand. By capping the price, the government ensures that consumers can access water at a reasonable cost during the crisis.

Minimum Prices: A minimum price, also known as a price floor, is the lowest price that can be legally charged for a good or service. The government sets the minimum price above the market equilibrium price to provide producers with a fair income or to ensure minimum wages for workers. The objective of a minimum price is to support producers and workers in industries where they may face challenges in earning a living wage or fair returns on their products.

Example of Minimum Price: In the agricultural sector, the government may set a minimum price for certain crops to support farmers and stabilize their incomes. If the market price for a crop falls below the minimum price, the government may step in to purchase the surplus at the set minimum price, ensuring that farmers receive a fair income.

Working of Maximum and Minimum Prices:

• Maximum Price: When a maximum price is set below the market equilibrium price, it creates a situation of excess demand or shortage. At the maximum price, consumers are willing to buy more of the good than producers are willing to supply. This can lead to long queues, black markets, and reduced availability of the product.

• Minimum Price: When a minimum price is set above the market equilibrium price, it creates a situation of excess supply or surplus. At the minimum price, producers are willing to supply more of the good than consumers are willing to buy. This can lead to unsold inventories, wastage, and potential inefficiencies in the market.

Example of Maximum Price in Action: During a housing crisis, the government may set a maximum rent price for apartments to protect tenants from unaffordable rent increases. While this measure benefits renters, it may discourage landlords from maintaining or offering additional rental properties due to reduced profit margins.

Example of Minimum Price in Action: In the labor market, the government may set a minimum wage to ensure that workers are paid a fair wage. While this measure benefits workers, it may lead some employers to reduce hiring or cut back on labor-intensive activities to offset increased labor costs.

In conclusion, maximum and minimum prices are government interventions in the market to achieve specific economic or social objectives. Maximum prices are aimed at protecting consumers from high prices, while minimum prices are intended to support producers and workers. While these price controls can have positive effects, they may also lead to unintended consequences and distortions in the market. The success of such interventions depends on the government's ability to strike a balance between achieving the desired objectives and avoiding potential market disruptions.