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Dan Loney: Well, as tariffs remain
an important talking point in and around the US economy right
now, we are seeing the price
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impact in stores, even really
before the impacts hit companies. I have noticed, myself,
at my local grocery store, the
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prices on things like orange
juice and milk going up recently. And we've seen gas
prices go up even before the
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latest conflict in the Middle
East took place. So the question is, will companies raise prices
faster than the tariffs
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themselves? It brings up some
unique components of what is called dynamic pricing. And a
pleasure to be joined by John
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Zhang, who is Assistant
Professor of Business Economics and Public Policy here at the
Wharton School. Hi, John, great
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to talk to you again. Yeah, good to be with you,
Dan. Thank you. This element of dynamic
pricing that you have talked
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about, it becomes important to
discuss, in this scope of how companies kind of react to some
of the things that are going on
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in the economy right now. There are two separate things I
think that you mentioned. Number
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one, when tariffs goes up as a—
let's suppose, retailer. Do you want to raise your prices? And I
think what you observe is
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definitely right on the
money, which is that a lot of companies do take advantage
of what's going on with the
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tariffs to raise their
prices. The reason is because when tariffs goes up, for
instance, you can imagine
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that as consumers, we tend to be
more tolerant of the price increases. We tend to be more
receptive to price increases
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simply because we know the firms
are struggling, their costs have increased, and therefore that we
probably cut them some slacks.
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And firms actually know that,
right? And also that— the other reason why, as a firm, we don't
want to raise price normally
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aggressively, is simply because
the competition may stay put and they're probably not going to
increase their price. But in
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this kind of a situation, you
can imagine that tariffs will increase the cost for just about
everybody. So when you raise
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your price, you're not so
worried that the competition is not going to raise their price.
So because of that, you can see
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that as a firm, you probably
have more incentive in this environment to raise prices. But
the second issue you mentioned
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is really about dynamic pricing.
And firms always want to, if they could, if they don't upset
their customers, they want
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to do dynamic pricing. And many
people began to think that these tariffs really could have
created the environment where,
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if you have always been thinking
about doing dynamic pricing, this might be your chance
to initiate it.
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And dynamic pricing is
something that we have had in and around us for a long time.
It is a challenge, just as you
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mentioned, that if you're going
to use it, you don't want to upset your customers in the
process of using it.
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Absolutely. I think that dynamic
pricing is something that firms will never forget about. And the
reason is because there are lots
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of people out there. And for
exactly the same product, they're willing to pay different
prices. You can imagine, as a
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firm, you always have incentive
to charge those people who are willing to pay a high price, a
high price, and those people who
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are not willing to pay a high
price a low price, right? In order for you to do that, of
course, there are so many
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different ways to do it. Dynamic
pricing is one way to implement that. And you just want to make
sure that at a time when
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consumers are price insensitive,
a certain time, you charge a higher price, and when consumers
are price sensitive, sometimes,
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you will charge a low price.
And definitely, as a firm, you want to implement dynamic
pricing in some way. But of
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course, there is always a good
way to do it and also a bad way to do it. I think what we tend
to observe in the marketplace is
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that a lot of firms have not
thought through, what's the impact of dynamic pricing on
consumers, how consumers may
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react to it, how you should
frame your pricing practice in such a way that consumers are
receptive to what are you doing.
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So the companies see it as an
opportunity to pad their bottom line a little bit?
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Well, they always want to do
that. And this is definitely a good opportunity to use the
dynamic pricing to do it.
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But of course, you notice that
many firms mess it up. Like Wendy's, at one point, was
talking about dynamic pricing,
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talking about surge pricing and
for the lunch menu, right? And when you do something like
that, of course, the customers,
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you can imagine, they will be
really upset. Somebody— because at noon there are more
people buying your hamburgers,
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and I'm hungry at that point in
time, and all of a sudden you say, "Well, I'm going to charge
you, let's say, 10% or 20%
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more." Right? But there is
actually a better way to do it. You should—what you should do
is that— dynamic pricing doesn't
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necessarily mean that you're
gonna have to raise the price. You could have started with a
high price and offer dynamic
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discounts, okay? Dynamic
discounting probably will be a more palatable way to
implement dynamic pricing.
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Similar to when we go
out at happy hour and there's a— there's always a discount on
appetizers or drinks,
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whatever it is, because the company
really understands that they want to have as many people in
their door as possible. It's
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better to have full seats than
it is to have empty seats. Right. Remember, they can
offer the happy hour discount
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pricing simply because their
price, the menu price is very high in the first place, right?
So you can imagine that in this
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particular case, you can
easily keep your menu price very high and offer dynamic
discounting.
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But is the expectation of the
consumer, when they see prices go up—and let's just say that it
is dynamic pricing— that the
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consumer expects that price to
come back at some point as well? Well, when you do dynamic
pricing, that definitely should
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be— that definitely should
be something that happens, right? So if you keep just
raising your price over time,
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never bring the price down, of
course, that's not dynamic. And also, that destroys the whole
purpose of doing dynamic
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pricing. And you do dynamic
pricing simply because you want to make sure that at the times
when consumers are price-
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insensitive, you charge a
high price, and when consumers are price sensitive, you
want to charge a low price. When
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consumers become more price
sensitive— for instance, during happy hours— simply because
you've got a lot of choices. You
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don't have to go to a particular
bar, right? So in that case, the happy hour would definitely
generate a lot more sales. And
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so that's why you want to draw
them in. And of course, once they get in, they're going to
buy a lot of other things where
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you're going to make money. So then the best way for the
consumer to somewhat hold a
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company accountable, if they are
using a version of dynamic pricing, is either using their
competition or using, if they're
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going to the grocery store,
using a— you know, not a name brand product, to be able to
save a little money in that manner.
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Well, consumers can always
discipline firms by voting by your feet. By their feet, right?
You can just walk away and go
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somewhere else to buy the
buy the drinks or the food, like in Wendy's case. They, for—
one year ago, they
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implement the prices surge at
lunch time. You can imagine that the lunch crowd is not
going to show up at the Wendy's,
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and they're going to go
somewhere else. And also, in most cases, firms are
disciplined by the
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competition. So if you charge
too high a price, the competition doesn't, and
obviously you're gonna lose
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your customers, lose your market share. How prevalent is dynamic
pricing, do you think, right now,
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and potentially, how long— I
mean, is this something that consumers should get used to
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dealing with as we move forward
here? Well, it used to be the case
that it's pretty rare, right? If
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you look at the history, I would
say that dynamic pricing has become more and more popular
today. And it first started with
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the airline industry after
deregulation, of course, that they change the prices all the
time. And then, of course,
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you notice that nowadays for
hotel rentals there is dynamic pricing, and for car rentals, it
is dynamic pricing. You talk
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about theater tickets, they are
dynamic pricing. Baseball tickets, in many cases, they are
also dynamic pricing, and so on
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and so forth. There are more and
more industries that are looking into this. And they definitely
have incentive, economic
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incentive, to embrace this
particular practice. It just would— it will just take some time
for them to figure it out. By
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the way, as customers, you
probably don't want to hate the dynamic pricing in general. The
reason is because if a price
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goes up and down like this,
right, you can imagine that if you really care about the
prices, if you are really price-
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sensitive and you have a chance
to pay low prices, you can become more vigilant and take
advantage of low prices. For
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instance, if you really care
about the pricing for their drinks, of course, you always
just show up at the happy hour,
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right? Imagine that if you take
that away. And then, of course,
you don't show up at all.
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Yeah. Hey, John, great to talk
with you and get your insight. Thanks very much. Thank you, Dan.
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You got it. John Zhang, who is Assistant Professor of
Business, Economics and Public
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Policy here at the Wharton
School.