Charging an extra 20p at rush hour might reel in a bit of extra cash, but it will kill of the loyalty people have for their local pub, writes Paul Ormerod.
Britain’s largest pub group, Stonegate, caused outrage last week with its proposal to charge 20p a pint more at peak times at some 800 of its outlets. It is but the latest example of what has become known as “dynamic pricing”. Basically, charging more when demand is high.
Many can surely empathise with the concept, and even wish its use to be extended. Arriving at a bar over the weekend, choking with thirst, I was held back by someone ordering four pints of Guinness. If only what economists term a complete market had existed in this situation. Either the price of the Guiness would have risen, or the person ordering could have compensated me for the time involved in my wait.
Of course, the economy is very far from having a complete set of markets where prices can be set instantaneously in response to demand.
Until recently it has been difficult to implement in practice. Now it happens around us constantly.When you go on almost any website, an auction is conducted in a mere fraction of a second for the right to display the adverts on the page you are about to see.
In more familiar contexts, the idea has been used by airlines, railways, hotels and rental car companies. Everytime you order an Uber, the cost is decided by dynamic pricing.
Even though it is surprisingly widespread, consumer rights groups instinctively kick into gear and call for curbs on dynamic pricing, ostensibly to protect customers.
The great mediaeval philosopher Thomas Acquinas would have been delighted. He developed the concept of the “just price”, a theory of ethics which attempts to set standards of fairness in economic transactions. This idea still seems to be deeply ingrained amongst substantial sections of the population.
But it is by no means obvious that dynamic pricing is inherently a bad thing. When we assess the potential for exploitation, the real question is not whether the price is too high at any given moment but when it is averaged over time. In this context, “too high” means a price which generates profits above what would be expected in a competitive market. Provided that the price when averaged out is reasonable, then the company is acting fairly.
An alternative is to restrict demand not by price but by means of a queue. An August package to Ibiza could go to those willing to pay the price, or to those who are sharp enough to book first, leaving everyone else in the queue waiting for a cancellation.
If a business depends upon an ongoing relationship with many of its customers, then dynamic pricing is a flawed business decision. Loyalty is a prize in itself, and so lots of companies will not take the risk of introducing dynamic pricing.
Calls for greater regulation always need to be treated with suspicion. Indeed, in this case there is a much simpler solution. Rather than involve yet more bureaucrats, objectors to dynamic pricing could simply vote with their wallets and not buy things from offending firms.