In September 2023, the Stonegate Group, the largest pub company in the UK with around 4,500 premises, announced that it was going to start increasing the pint of beer by 20p during busy periods. There was an immediate backlash on social media with many customers calling on people to boycott Stonegate’s pubs such as the Slug & Lettuce and Yates.
This announcement is an example of dynamic pricing, where firms with market power adjust prices relatively quickly in response to changing market conditions: i.e. to changes in demand and supply.
Traditionally, prices set by firms in most retail markets have been less flexible. They may eventually adjust to changing market conditions, but this could take weeks or even months. If a product proves to be popular on a particular day or time, firms have typically left the price unchanged with the item selling out and customers facing empty shelves. If the product is unpopular, then the firm is left with unsold stock.
One business that makes extensive use of dynamic pricing is Amazon. Prices for popular items on Amazon Marketplace change every 10 minutes and can fluctuate by more than 20 per cent in just one hour.
Conditions for dynamic pricing to operate
The Amazon example helps to illustrate the conditions that must be in place for a firm to implement dynamic pricing successfully. These include:
- The capacity to collect and process large amounts of accurate real-time data on the demand for and supply of particular items i.e. the number of sales or the interest in the product.
- The ability to adjust prices in a timely manner in response to changing market conditions indicated by the data.
- Effectively communicating the potential advantages of the pricing strategy to consumers.
Consumer attitudes
The last point is an interesting one. As the Stonegate example illustrates, consumers tend to dislike dynamic pricing, especially when price rises reflect increases in demand. A previous article on this website discussed the unpopularity of dynamic pricing amongst fans in the ticket market for live musical events.
The precise reason for the increase in demand, can also have an impact on consumer attitudes. For example, following a mass shooting at a subway station in New York in April 2022, the authorities shut down the underground system. This led to a surge in demand for taxis and this was picked up by the algorithm/software used by Uber’s dynamic pricing system. Fares for Uber cars began to rise rapidly, and people started to post complaints on social media. Uber responded by disabling the dynamic pricing system and capping prices across the city. It also announced that it would refund customers who were charged higher prices after the subway system shut down.
There is a danger for businesses that if they fail to communicate the policy effectively, annoyed customers may respond by shopping elsewhere. However, if it is implemented successfully then it can help businesses to increase their revenue and may also have some advantages for consumers.
The growing popularity of dynamic pricing
It has been widely used in airline and hotel industries for many years. Robert Cross, who chairs a revenue management company predicts that ‘It will eventually be everywhere’.
More businesses in the UK appear to be using dynamic pricing. In a consumer confidence survey undertaken for Barclays in September 2023, 47 per cent of the respondents had noticed more examples of companies raising prices for goods/services in response to higher demand at peak times.
It has traditionally been more difficult for bricks-and-mortar retailers to implement dynamic pricing because of the costs of continually changing prices (so-called ‘menu costs’). However, this might change with the increasing use of electronic shelf labels.
It will be interesting to see if dynamic pricing becomes more widespread in the future or whether opposition from consumers limits its use.
Articles
Questions
- Explain the difference between surge and dynamic pricing.
- Using a diagram, explain how dynamic pricing can increase a firm’s revenue.
- Discuss both the advantages and disadvantages for consumers of firms using dynamic pricing.
- How might dynamic pricing influence consumer behaviour if it alters their expectations about future price changes.
- There is some evidence that the use of dynamic pricing is less unpopular amongst 18–24-year-olds than other age groups. Suggest some possible reasons why this might be the case.
- Using the concept of loss aversion, consider some different ways that a business could present a new dynamic pricing policy to its customers.
Tickets for Beyonce’s 2023 UK Renaissance tour went on general sale via Ticketmaster’s website at 10am on Tuesday 7 February. Throughout the day, social media were full of messages from fans complaining about technical issues, long online queues and rising prices. This is not the first time this has happened. Similar complaints were made in 2022 when tickets went on sale for tours by Bruce Springsteen, Harry Styles and Taylor Swift.
With the general sale of tickets for Beyonce’s tour, many fans complained they were waiting in online queues of over 500 000 people. Others reported their frustration with continually receiving ‘403 error’ messages.
Market dominance
In November 2022, Ticketmaster’s website in the USA constantly crashed during the pre-sale of tickets for Taylor Swift’s tour. This led to the general sale of tickets being cancelled.
In response to the public anger that followed this decision, the Senate’s antitrust subcommittee organised a hearing with the title – ‘That’s The Ticket: Promoting Competition and Protecting Competition and Protecting Consumers in Live Entertainment.’
Senator Amy Klobuchar, the Chair of this committee, stated that
The issues within America’s ticketing industry were made painfully obvious when Ticketmaster’s website failed hundreds of thousands of fans hoping to purchase tickets for Taylor Swift’s new tour, but these problems are not new. For too long, consumers have faced long waits and website failures, and Ticketmaster’s dominant market position means the company faces inadequate pressure to innovate and improve.
Ticketmaster merged with Live Nation in 2010 to become the largest business in the primary ticket market for live music events. Some people have accused the firm of abusing its dominant market position by failing to invest enough money in its website, so leading to poor customer service.
Dynamic pricing
Fans have also been complaining about the system of dynamic pricing that Ticketmaster now uses for big live events. What exactly is dynamic pricing?
Firms with market power often adjust their prices in response to changing market conditions. For example, if a business experiences significant increases in demand for its products in one quarter/year it may respond by raising prices in the following quarter/year.
With dynamic pricing, these price changes take place over much shorter time periods: i.e. within minutes. For example, in one media report, a Harry Styles fan placed £155 tickets in their basket for a concert at Wembley stadium. When the same fan then tried to purchase the tickets, Ticketmaster’s website sent a message stating that they were no longer available. However, in reality they were still available but for £386 – the price had instantly jumped because of high demand. Continually monitoring market conditions and responding to changes so quickly requires the use of specialist software and sophisticated algorithms.
Arguments for dynamic pricing
With ticket sales taking place months/years in advance of most live events, it is difficult for artists/promotors to predict future levels of demand. Given this uncertainty and the importance for the artist of playing in front of a full venue, event organisers may err on the side of caution when pricing tickets.
If the demand for tickets proves to be much stronger than initially forecast, then resellers in the secondary market can take advantage of the situation and make significant amounts of money. Dynamic pricing enables sellers in the primary market, such as Ticketmaster, to adjust to market conditions and so limits the opportunities of resale for a profit.
Ticketmaster argues that without dynamic pricing, artists will miss out on large amounts of revenue that will go to re-sellers instead. A spokesperson for the company stated that
Over the past few years, artists have lost money to resellers who have no investment in the event going well. As such event organisers have looked to market-based pricing to recapture that lost revenue.
Critics have claimed that Ticketmaster’s use of dynamic pricing is simply an example of price gouging.
No doubt the controversy over the sale of tickets for live music events will continue in the future.
Articles
- Beyoncé tour: UK fans snap up tickets despite Ticketmaster glitches
BBC News, Ian Youngs (7/2/23)
- Beyoncé Fans Are Going to Extreme Lengths to Secure Renaissance Tour Tickets
Time, Mariah Espada (10/2/23)
- Live music: How buying concert tickets could be made better
BBC News, Mark Savage (26/1/23)
- Ticketmaster demand-based pricing system criticised
BBC News, Annabel Rackham (10/10/22)
- Did Ticketmaster’s Market Dominance Fuel the Chaos for Swifties?
Yale Insights, Florian Ederer (23/11/22)
Taylor Swift ticket sale problems spark widespread criticism of TicketmasterPBS NewsHour on YouTube, Diana Moss and John Yang (17/11/22)
- Springsteen tickets are going for a whopping $4,000 – what else are we paying dynamic prices for?
The Guardian, Arwa Mahdawi (27/7/22)
- Will the Taylor Swift-Ticketmaster Senate Hearing Actually Change Anything?
Variety, Dean Budnick (1/2/23)
- Beyonce fans scramble for Renaissance tickets as sellers warn availability is already ‘extremely limited’
Sky News, Bethany Minelle (3/2/23)
Questions
- Explain the difference between the primary and secondary market for ticket sales for live events.
- Draw a demand and supply diagram to illustrate the primary market for tickets. Using this diagram explain how below market clearing prices in the primary market enable re-sellers to make money in the secondary market.
- What are the limitations of using demand and supply diagrams to analyse the primary market for tickets?
- Who has the greater market power – Ticketmaster or artists such as Taylor Swift and Beyonce?
- Try to provide a precise definition of the term ‘price gouging’.
- What other sectors commonly use dynamic pricing?
Competition authorities across the globe have recently been paying close attention to the activity of large firms in high-tech markets, in particular Google, Amazon, Facebook and Apple. One estimate suggests that 30 cases have been opened by the authorities since 2010, and a third of these were launched in 2020.
One of the most prominent recent cases in the US courts concerns a complaint made by Epic Games, producer of the popular Fortnite game, against Apple. The background to the case is Apple’s standard practice on its App Store of taking a 30% cut of all paid app and in-app purchases. Therefore, a Fortnite player purchasing $10 worth of in-game currency would result in $7 for Epic and $3 for Apple.
However, in August 2020 Epic decided, contrary to Apple’s terms and conditions, to offer players an alternative way to purchase in-game currency. Gamers would see a choice screen giving them the option to buy currency through the Apple App Store or to buy it directly from Epic. Crucially, purchasing directly from Epic would be cheaper. For example, the same $10 worth of in-game currency on the App Store would cost only $8 if purchased directly from Epic.
It is clear to see why Epic was in favour of direct payments – it earns revenue of $8 instead of $7. However, note that the benefits for gamers are even larger – they save $2 by buying directly. In other words, Epic is passing on 2/3 of the cost saving to consumers.
Apple very quickly responded to Epic’s introduction of the direct purchase alternative by removing Fortnite from the App Store. Epic then filed a complaint with the US District Court.
The Epic v Apple court case
The case concerned Apple restricting game developers’ ability to promote purchasing mechanisms outside the App Store. However, more broadly, it also examined Apple’s complete control of the iOS app market since all apps must be distributed through the Apple App Store. Epic had previously disrupted PC games distribution by launching its own platform with lower fees. The setup of iOS and Apple’s actions against Epic make this an impossible way to reach users.
The Court’s analysis of the Epic v Apple case depended upon several key factors. First, the market definition. To be found to have breached competition law Apple must have a significant share of the market. If the market is defined as that for iOS apps, this is clearly the case. However, if, as Apple argues, it is broader, encompassing the options to play Epic games through web browsers, gaming consoles and PCs, then this is not the case.
Second, even if the market is narrowly defined, Apple argues that its control of the app distribution market is essential to provide user friendly and secure provision of apps. Furthermore, revenue extracted from app producers can enable more investment in the iOS. Without Apple controlling the market, app producers would be able to free-ride on the visibility the App Store provides for their apps.
The ruling
The US Court announced its ruling on 10 September 2021. The judge decided that the market was broader than just iOS and thus Apple is not considered to be a monopolist. This has been touted as a major success for Apple, as it will allow the company to maintain its control of the app distribution market. However, the Court also ruled that Apple must allow game developers to link and direct users to alternative purchasing methods outside the App Store.
The Court’s decision in the Epic v Apple case closely follows concessions recently made by Apple for so called ‘reader apps’ such as Spotify and Netflix. Following an investigation by the Japanese authorities, these concessions allowed such apps to promote and receive purchases directly from consumers as long as they were made outside the app. These apps could be treated differently, as digital goods are consumed on multiple devices. However, the decision in the Epic case now extends such concessions to gaming apps.
It is unclear whether Apple will appeal the decision in the case Epic brought. If not, Apple stands to lose considerable revenue from its 30% share of in-app purchases. It will be very interesting to see how this ruling affects how Apple runs the App Store. Epic, on the other hand, has already made clear it will appeal the decision, aiming to prevent Apple gaining a share of any payment users make outside the app.
Matt Olczak and Jon Guest
Articles
Questions
- Why might a firm involved in a competition case, such as Apple, try to convince the authorities to define the relevant market as broadly as possible?
- Using the example of the Epic v Apple case, explain how Apple’s actions could be seen as both exclusionary and exploitative abuses of a dominant position.
When did you last think about buying a new car? If not recently, then you may be in for a surprise next time you shop around for car deals. First, you will realise that the range of hybrid cars (i.e. cars that combine conventional combustion and electric engines) has widened significantly. The days when you only had a choice of Toyota Prius and another two or three hybrids are long gone! A quick search on the web returned 10 different models (although five of them belong to the Toyota Prius family), including Chevrolet Malibu, VW Jetta and Ford Fusion. And these are only the cars that are currently available in the UK market.
But the biggest surprise of all may be the number of purely (plug-) electric cars that are available to UK buyers these days. The table below provides a summary of total registrations of light-duty plug-electric cars by model in the UK, between 2010 and June 2016.
Source: Wikipedia, “Plug-in electric vehicles in the United Kingdom”
In 2010 there were nly 138 electric vehicles in total registered in the UK. They were indeed an unusual sight at that time – and good luck to you if you had one and you happened to run out of power in the middle of a journey. In 2011 this (small) number increased sevenfold – an increase that was driven mostly by the successful introduction of Nissan Leaf (635 electric Nissans were registered in the UK that year). And since then the number of electric vehicles registered in the country has increased with spectacular speed, at an average rate of 252% per year.
There is clearly strong interest in electric vehicles – an interest likely to increase as their price becomes more competitive. However, they are still very expensive items to buy, especially when compared with their conventional fuel-engine counterparts. What makes electric cars expensive? One thing is the cost of purchasing and maintaining a battery that can deliver a reasonable range. But the cost of batteries is falling, as more and more companies realise the potential of this new market and join the R&D race. As mentioned in a special report that was published recently in the FT:
The cost of lithium-ion batteries has fallen by 75 per cent over the past eight years, measured per kilowatt hour of output. Every time battery production doubles, costs fall by another 5 per cent to 8 per cent, according to analysts at Wood Mackenzie.
There is no doubt that more research will result in more efficient batteries, and will increase the interest in electric cars not only by consumers but also by producers, who already see the opportunity of this new global market. 
Does this mean that prices will necessarily fall further? You might think so, but then you have to take into consideration the availability and cost of mining further raw materials to make these batteries (such as cobalt, which is one of the materials used in the making of lithium-ion batteries and nearly half of which is currently sourced from the Democratic Republic of Congo). This may lead to bottlenecks in the production of new battery units. In which case, the price of batteries (and, by extension, the price of electric cars) may not fall much further until some new innovation happens that changes either the material or its efficiency.
The good news is that a lot of researchers are currently looking into these questions, and innovation will do what it always does: give solutions to problems that previously appeared insurmountable. They had better be fast because, according to estimates by Wood Mackenzie, the number of electric vehicles globally is expected to rise by over 50 times – from 2 million (in 2017) to over 125 million by 2035.
How many economists does it take to charge an electric car? I guess we are going to find out!
Articles
Information
Questions
- Using a demand and supply diagram, explain the relationship between the price of a battery and the market (equilibrium) price of a plug-in electric vehicle.
- List all non-price factors that influence demand for plug-in electric vehicles. Briefly explain each.
- Should the government subsidise the development and production of electric car batteries? Explain the advantages and disadvantages of such intervention and take a position.
OPEC, for some time, was struggling to control oil prices. Faced with competition from the fracking of shale oil in the USA, from oil sands in Canada and from deep water and conventional production by non-OPEC producers, its market power had diminished. OPEC now accounts for only around 40% of world oil production. How could a ‘cartel’ operate under such conditions?
One solution was attempted in 2014 and 2015. Faced with plunging oil prices which resulted largely from the huge increase in the supply of shale oil, OPEC refused to cut its output and even increased it slightly. The aim was to keep prices low and to drive down investment in alternative sources, especially in shale oil wells, many of which would not be profitable in the long term at such prices.
In late 2016, OPEC changed tack. It introduced its first cut in production since 2008. In September it introduced a new quota for its members that would cut OPEC production by 1.2 million barrels per day. At the time, Brent crude oil price was around $46 per barrel.
In December 2016, it also negotiated an agreement with non-OPEC producers, and most significantly Russia, that they would also cut production, giving a total cut of 1.8 million barrels per day. This amounted to around 2% of global production. In March 2017, it was agreed to extend the cuts for the rest of the year and in November 2017 it was agreed to extend them until the end of 2018.
With stronger global economic growth in 2017 and into 2018 resulting in a growth in demand for oil, and with OPEC and Russia cutting back production, oil prices rose rapidly again (see chart: click here for a PowerPoint). By January 2018, the Brent crude price had risen to around $70 per barrel.
Low oil prices had had the effect of cutting investment in shale oil wells and other sources and reducing production from those existing ones which were now unprofitable. The question being asked today is to what extent oil production from the USA, Canada, the North Sea, etc. will increase now that oil is trading at around $70 per barrel – a price, if sustained, that would make investment in many shale and other sources profitable again, especially as costs of extracting shale oil is falling as fracking technology improves. US production since mid-2016 has already risen by 16% to nearly 10 million barrels per day. Costs are also falling for oil sand and deep water extraction.
In late January 2018, Saudi Arabia claimed that co-operation between oil producers to limit production would continue beyond 2018. Shale oil producers in the USA are likely to be cheered by this news – unless, that is, Saudi Arabia and the other OPEC and non-OPEC countries party to the agreement change their minds.
Videos
OPEC’s Control of the Oil Market Is Running on Fumes Bloomberg (21/12/17)
Oil Reaches $70 a Barrel for First Time in Three Years Bloomberg, Stuart Wallace (11/1/18)
Banks Increasingly Think OPEC Will End Supply Cuts as Oil Hits $70 Bloomberg, Grant Smith (15/1/18)
Articles
Oil prices rise to hit four-year high of $70 a barrel BBC News (11/1/18)
Overshooting? Oil hits highest level in almost three years, with Brent nearing $70 Financial Times, Anjli Raval (10/1/18)
Can The Oil Price Rally Continue? OilPrice, Nick Cunningham (14/1/18)
Will This Cause An Oil Price Reversal? OilPrice, Olgu Okumus (22/1/18)
The world is not awash in oil yet
Arab News, Wael Mahdi (14/1/15)
‘Explosive’ U.S. oil output growth seen outpacing Saudis, Russia CBC News (19/1/18)
Oil’s Big Two seeking smooth exit from cuts The Business Times (23/1/18)
Saudi comments push oil prices higher BusinessDay, Henning Gloystein (22/1/18)
Report
Short-term Energy Outlook U.S. Energy Information Administration (EIA) (9/1/18)
Questions
- Using supply and demand diagrams, illustrate what has happened to oil prices and production over the past five years. What assumptions have you made about the price elasticity of supply and demand in your analysis?
- If the oil price is above the level at which it is profitable to invest in new shale oil wells, would it be in the long-term interests of shale oil companies to make such investments?
- Is the structure of the oil industry likely to result in long-term cycles in oil prices? Explain why or why not.
- Investigate the level of output from, and investment in, shale oil wells over the past three years. Explain what has happened.
- Would it be in the interests of US producers to make an agreement with OPEC on production quotas? What would prevent them from doing so?
- What is likely to happen to oil prices over the coming 12 months? What assumptions have you made and how have they affected your answer?
- If the short-term marginal costs of operating shale oil wells is relatively low (say, below $35 per barrel) but the long-term marginal cost (taking into account the costs of investing in new wells) is relatively high (say, over $65 per barrel) and if the life of a well is, say, 5 years, how is this likely to affect the pattern of prices and output over a ten-year period? What assumptions have you made and how do they affect your answer?
- If oil production from countries not party to the agreement between OPEC and non-OPEC members increases rapidly and if, as a result, oil prices start to fall again, what would it be in OPEC’s best interests to do?