Tag: dynamic pricing

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Disgruntled Oasis fans react to dynamic pricing

On Saturday 31 August, tickets for the much-heralded Oasis reunion tour went on sale through the official retailer, Ticketmaster. When the company sells tickets, the acts or their promoters can choose whether to use a static pricing system, where each type of ticket is sold at a set price until they have all been sold. Or they can use a dynamic pricing system (‘in-demand’ or ‘platinum’ tickets, as Ticketmaster calls them), where there is a starting price quoted, but where prices then rise according to demand. The higher the demand, the more the price is driven up. Acts or their promoters have the option of choosing an upper limit to the price.

Dynamic pricing

The Oasis tickets were sold under the dynamic pricing system, a system previously used for Harry Styles, Bruce Springsteen, Coldplay and Blackpink concerts, but one rejected by Taylor Swift for her recent Eras tour. Standing tickets for the Oasis concert with a face value of around £135 were quickly being sold for over £350. There were long online queues, with the prices rising as people slowly moved up the queue. When they reached the front, they had to decide quickly whether to pay the much higher price. Some people later suffered from buyer’s remorse, when they realised that in the pressure of the moment, they had paid more than they could afford.

Dynamic pricing is when prices change with market conditions: rising at times when demand exceeds supply and falling when supply exceeds demand. It is sometimes referred to as ‘surge pricing’ to reflect situations when price surges in times of excess demand.

Dynamic pricing is a form of price discrimination. It is an imperfect form of first-degree price discrimination, which is defined as people being charged the maximum price they are willing to pay for a product. Pricing in an eBay auction comes close to first-degree price discrimination. With dynamic pricing in the ticket market, some people may indeed pay the maximum, but others earlier in the queue will be lucky and pay less than their maximum.

Ticketmaster justifies the system of dynamic pricing, saying that it gives ‘fans fair and safe access to the tickets, while enabling artists and other people involved in staging live events to price tickets closer to their true market value’. The company argues that if the price is below the market value, a secondary market will then drive ticket prices up. Ticket touts will purchase large amounts of tickets, often using bots to access the official site and then resell them at highly inflated prices on sites such as Viagogo and Stubhub, where ticket prices for popular acts can sell for well over £1000. The day after Oasis tickets went on sale, Viagogo had seats priced at up to £26 000 each!

Oasis and Ticketmaster have tried to stamp out the unofficial secondary market by stating that only tickets bought through the official retailers (Ticketmaster, Gigsandtours and SeeTickets) will be valid. If fans want to resell a ticket – perhaps because they find they can no longer go – they can resell them on the official secondary market though Ticketmaster’s Fan-to-Fan site or Twickets. These official secondary sites allow holders of unwanted tickets to sell them for anything up to the original face value, but no more. Buyers pay a 12% handling fee. It remains to be seen whether this can be enforced with genuine tickets resold on the secondary market.

Examples of dynamic pricing

Dynamic pricing is not a new pricing strategy. It has been used for many years in the transport, e-commerce and hospitality sectors. Airlines, for example, have a pricing model whereby as a flight fills up, so the prices of the seats rise. If you book a seat on a budget airline a long time in advance, you may be able to get it at a very low price. If, on the other hand, you want a seat at the last minute, you may well have to pay a very high price. The price reflects the strength of demand and its price elasticity. The business traveller who needs to travel the next day for a meeting will have a very low price sensitivity and may well be prepared to pay a very high price indeed. Airlines also learn from past behaviour and so some popular routes will start at a higher price. A similar system of dynamic pricing is used with advance train tickets, with the price rising as trains get booked up.

The dynamic pricing system used by airlines and train companies is similar, but not identical, to first-degree price discrimination. The figure below illustrates first-degree price discrimination by showing a company setting the price for a particular product.

Assume initially that it sets a single profit-maximising price. This would be a price of P1, at an output of Q1, where marginal revenue (MR) equals marginal cost (MC). (We assume for simplicity that average and marginal costs are constant.) Total profit will be area 1: i.e. the blue area ((P1 – AC) × Q1). Area 2 represents consumer surplus, with all those consumers who would have been prepared to pay a price above P1, only having to pay P1.

Now assume that the firm uses first-degree price discrimination, selling each unit of the product at the maximum price each consumer is willing to pay. Starting with the consumer only willing to pay a price of P2, the price will go on rising up along the demand with each additional consumer being charged a higher price up to the price where the demand curve meets the vertical axis. In such a case, the firm’s profit would be not just the blue area, but also the green areas 2 and 3. Note that there is no consumer surplus as area 2 is now part of the additional profit to the firm.

Although dynamic pricing by airlines is similar to this model of first-degree price discrimination, in practice some people will be paying less than they would be willing to pay and the price goes up in stages, not continuously with each new sale of a ticket. Thus, compared with a fixed price per seat, the additional profit will be less than areas 2 + 3, but total profit will still be considerably greater than area 1 alone. Note also that there is a maximum quantity of seats (Qmax), represented by a full flight. The airline would hope that demand and its pricing model are such that Qmax is less than Q2.

Dynamic pricing also applies in the hospitality sector, as hotels raise the prices for rooms according to demand, with prices at peak times often being considerably higher than off-season prices. Rather then pre-setting prices for particular seasons, dates or weekends/weekdays, many hotels, especially chains and booking agents, adjust prices dynamically as demand changes. Airbnb offers property owners what it calls ‘Smart Pricing’, where nightly prices change automatically with demand.

Another example is Uber, which uses dynamic pricing to balance demand and supply location by location. In times of peak demand on any route, the company’s algorithm will raise the price. This will encourage people to delay travelling if they can or use alternative means of transport. It will also encourage more Uber drivers to come to that area. In times of low demand, the price will fall. This will encourage more people to use the service (rather than regular taxis or buses) and discourage drivers from working in that area.

Where dynamic pricing varies with the time or date when the purchase is made, it is sometimes referred to as inter-temporal pricing. It is a form of second-degree price discrimination, which is where a firm offers consumers a range of different pricing options for the same or similar products.

Another example of dynamic pricing, which is closer to first-degree price discrimination is the use of sophisticated algorithms and AI by Amazon, allowing it to update the prices of millions of products many times a day according to market conditions. Another is eBay auctions, where the price rises as the end date is reached, according to the willingness to pay of the bidders.

Attitudes to dynamic pricing

Consumers have grown accustomed to dynamic pricing in many industries. People generally accept the pricing model of budget airlines, for example. What makes it acceptable is that most people feel that they can take advantage of early low-priced seats and can compare the current prices on different flights and airlines when making their travel plans. Pricing is transparent. With the Oasis concert, however, there wasn’t the same degree of price transparency. Many people were surprised and dismayed to find that when they got to the front of the online queue, the price had risen dramatically.

People are familiar of dynamic pricing in the context of price cuts to shift unsold stock. Supermarkets putting stickers on products saying ‘reduced for quick sale’ is an example. Another is seasonal sales. What is less acceptable to many consumers is firms putting up prices when demand is high. They see it a profiteering. Many supermarkets are introducing electronic shelf labels (ESLs), where prices can be changed remotely as demand changes. Consumers may react badly to this if they see the prices going up. The supermarket, however, may find it a very convenient way of reducing prices to shift stock – something consumers are hardly likely to complain about.

Returning to the Oasis tour, the UK government responded to the outrage of fans as ticket prices soared. Culture Secretary, Lisa Nandy, announced that the government will investigate how surge pricing for concert tickets is used by official retailers, such as Ticketmaster. This will be part of a planned review of ticket sales that seeks to establish a fairer and more transparent system of pricing.

The problem is that, with some fans being prepared to pay very high prices indeed to see particular acts and with demand considerably exceeding supply at prices that fans would consider reasonable, some way needs to be found of rationing demand. If it is not price, then it will inevitably involve some form of queuing or rationing system, with the danger that this encourages touts and vastly inflated prices on the secondary market.

Perhaps a lesson can be drawn from the Glastonbury Festival, where prices are fixed, people queue online and where security systems are in place to prevent secondary sales by ticket touts. The 2024 price was set at £355 + a £5 booking fee and purchasers were required to register with personal details and a photo, which was checked on admission.

Update

On 5 September, the CMA announced that it was launching an investigation into Ticketmaster over the Oasis concert sales. Its concerns centred on ‘whether buyers were given clear and timely information, and whether consumer protection law was breached’. This followed complaints by fans that (i) they were not given clear and timely information beforehand that the tickets involved dynamic pricing and warned about the possible prices they might have to pay and (ii) on reaching the front of the queue they were put under pressure to buy tickets within a short period of time.

Meanwhile, band member stated that they were unaware that dynamic pricing would be used and that the decision to use the system was made by their management.

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Questions

  1. What is the difference between dynamic pricing and surge pricing?
  2. What is buyer’s remorse? How could dynamic pricing be used while minimising the likelihood of buyer’s remorse?
  3. Distinguish between first-degree, second-degree and third-degree price discrimination. Do the various forms of dynamic pricing correspond to one or more of these three types?
  4. Distinguish between consumer and producer surplus. How may dynamic pricing lead to a reduction in consumer surplus and an increase in producer surplus?
  5. Should Ticketmaster sell tickets on the same basis as tickets for the Glastonbury Festival?
  6. Is Oasis a monopoly? What are the ticket pricing implications?
  7. Are there any industries where firms would not benefit from dynamic pricing? Explain.
  8. What are the arguments for and against allowing tickets to be sold on the secondary market for whatever price they will fetch?
  9. How powerful is Ticketmaster in the primary and secondary ticket markets?
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The increasing use of dynamic pricing strategies

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.

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Questions

  1. Explain the difference between surge and dynamic pricing.
  2. Using a diagram, explain how dynamic pricing can increase a firm’s revenue.
  3. Discuss both the advantages and disadvantages for consumers of firms using dynamic pricing.
  4. How might dynamic pricing influence consumer behaviour if it alters their expectations about future price changes.
  5. 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.
  6. Using the concept of loss aversion, consider some different ways that a business could present a new dynamic pricing policy to its customers.
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The continuing controversy over the sale of tickets for live music events

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.

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Questions

  1. Explain the difference between the primary and secondary market for ticket sales for live events.
  2. 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.
  3. What are the limitations of using demand and supply diagrams to analyse the primary market for tickets?
  4. Who has the greater market power – Ticketmaster or artists such as Taylor Swift and Beyonce?
  5. Try to provide a precise definition of the term ‘price gouging’.
  6. What other sectors commonly use dynamic pricing?