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Benefits and Drawbacks of Dynamic Pricing for a Company

Select a company that uses (or has used) dynamic pricing. Explain how the company you have chosen uses dynamic pricing. Discuss the benefits and drawbacks of dynamic pricing for that particular company. Conclude with a summary of your findings (Perloff, 2007)

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As discussed in Perloff's text, Dynamic Pricing is an extreme form of price discrimination, where each consumer is charged the most they would be willing to pay. See Perloff.

Since Perloff does not explicitly define dynamic pricing, you can discuss examples of fluid pricing or online auctions. It would be good to make the distinction between extreme, individualized price discrimination and fluid pricing. They are distinctly different practices. The former is predatory. The later is welfare enhancing.

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Dynamic pricing is an extreme form of price discrimination where organization charges the maximum it can charge to customers. Dynamic pricing is used by most of the airlines, and this price discrimination is quite opaque to customers. The concept of dynamic pricing applies to American Airlines which flies around 50,000 passengers per day, and revises around half a million prices per day. When a customer purchases an airline ticket, customer's willingness to pay is not known to the airline. American Airlines has a network of multiple origins, and destinations, and price for each hub is different. Dynamic pricing is important for American Airlines as there is an increasing influx of new customers, hence dynamic pricing is driven by customer dynamics rather than price discrimination for an existing set of customers.

American Airlines have as many as 15 different prices for the same seat depending on whether the fare is restricted or unrestricted. If the ticket is booked 2 days in advance, fare would be highest and when it is booked 2 months in advance, fare would probably be the cheapest. The airline analyzes the demand for seats for duration of time and redefines its strategies to maximize yield across channels.

Benefits of dynamic pricing:

- Pricing, just to sell out all seats is inefficient. Through dynamic pricing, American Airlines is able to maximize its profits as well as maximize its services.

- Dynamic pricing performance for American Airlines increases when the airline is facing increased demand due to seasonality. American Airlines has been able to encourage travel in slow periods and discourage it in high demand season.

- Airlines' adoption of dynamic pricing coupled with increase in bookings over internet has added to company's margin.

Drawbacks ...

Solution Summary

This solution discusses the benefits and drawbacks of dynamic pricing for a company.