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The cost going up: AI makes surge pricing possible across industries

Ahtra Elnashar shows how the results of surge pricing vary depending on the industry, Sept. 18, 2023. (TND)
Ahtra Elnashar shows how the results of surge pricing vary depending on the industry, Sept. 18, 2023. (TND)
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Consumers pinched by inflation sometimes face a one-two punch with surge pricing. The proliferation of artificial intelligence could make it a more common occurrence.

Surge pricing — also known as dynamic pricing — has come to be expected for airfare, hotel rooms, and rideshare apps like Uber and Lyft. As firms in other industries implement algorithms to analyze supply and demand to set prices in real time, the results have been mixed.

Earlier this year, AMC Theatres announced a new price initiative called Sightline to charge more for preferred seats during peak times, and less for front row seats. After testing the initiative in select theaters in three U.S. markets, the company canceled Sightline and said it would try out a different program for front row seating.

AMC said it chose to end the program to keep its ticket prices competitive, saying its competitors did not match AMC's changes while its customers did not noticeably adjust purchasing habits to take advantage of the initiative.

Rob Shumsky, a professor of operations management at Tuck School of Business at Dartmouth said he expects more movie theaters to try out dynamic pricing models, but it's difficult for companies to do it alone.

“Especially in a particular service where there’s a long tradition of predictable, transparent pricing, it’s hard to be the first mover to make that leap. But if everyone in an industry does it together, then I think an economist would say that it’s better for everybody, actually.

People will pay more for what they really, really need and pay less when they’re more flexible," Shumsky said.

Retail, particularly e-commerce, has been able to implement dynamic pricing more seamlessly. Levi Strauss & Co. has credited machine learning for helping guide its decision-making — like understanding trends and issuing discounts strategically — which has helped revenue.

Shumsky said retail is a more natural space for dynamic pricing, largely because people have come to accept frequent price changes. He doesn't, however, foresee the practice take off in areas where trust is central to a service.

So in health care, for example, you can imagine dynamic pricing might not go so well for example, for appointments with therapists," Shumsky said.

In the United States, there is a patchwork of state price-gouging laws protecting consumers from excessive price increases during times of emergency. Shumsky said market forces should preempt the need for new legislation to further protect consumers, even as artificial intelligence makes it more commonplace.

“I think consumers will revolt and not be willing to play into that game," Shumsky said.

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