Almost everyone is aware of the concept of peak hours pricing. If you buy a train ticket to travel during rush hour it costs more than at other times. Few people object to this. Indeed, most of us think it helps. It means that people who don’t need to travel in that period will pick another time instead, so there’s space on the train for the people that do need to travel then. Peak hours pricing is just one very simple example of what economists call ‘dynamic pricing’ or ‘surge pricing’ – a system in which the prices paid vary according to how much demand there is. Dynamic pricing has become the latest object of suspicion following its high-profile use in the allocation of tickets for the Oasis reunion tour. The government is investigating imposing caps on how much prices can rise, with the probe extending beyond tickets for concerts and sports events.
The government is investigating imposing caps on how much prices can rise
Sir Keir Starmer has said he is looking at ‘a number of things’ to reduce concert prices, and that ‘we’ll grip this and make sure that tickets are available at a price that people can actually afford.’ Education secretary Bridget Phillipson says she wants to stop airlines raising prices during school holidays.
If the government’s investigation sticks to the issue of transparency, perhaps it would be legitimate. Getting people to queue on the basis of an apparently fixed price that then turns out to be much higher could be a form of false advertising. But these statements by ministers question the entire principle of dynamic pricing. The government appears to see restrictions on dynamic pricing as a tool to address other policy concerns, such as parents taking children out of school for holidays in term-time. But this approach could easily backfire.
Despite the outrage at the manner in which Oasis tickets were sold, dynamic pricing is fairly common. Everyone knows that plane ticket prices vary depending on how many people are trying to travel on a certain day at a certain time. As information has become more freely available and analytical tools have improved, dynamic pricing has become more widespread. Anyone with an Uber app knows that the price of a ride home might be much higher on some days than others, and rise suddenly if, for example, a train breaks down.
In much the same way, tickets for big concerts and sports events these days are often priced dynamically. The higher the demand, the more you’re likely to have to pay, unless you managed to get in early.
It’s even arguable that people who buy tickets first should pay the least. Those that buy first are taking the risk that an event will be poorly attended, which ruins the atmosphere, so the value of a ticket is lower than if you buy later when there is more guarantee that a show will be full.
There can be abuses of dynamic pricing, of course. If a company selling plane tickets advertised them at £10 and didn’t tell you the price might rise until you’d sat in a queue for three hours, whereupon the price offered was £100, that would be sharp practice. It makes people feel like they have to pay an inflated price, given they’d gone to the trouble of queuing for so long.
But although (like any pricing) dynamic pricing can be abused, in general it enhances economic efficiency.
Alas, in the past few years governments in Britain and the US have become suspicious of prices in many contexts – leading to what US-based economist Ryan Bourne calls ‘The war on prices’.
The UK authorities attempted to discourage companies from raising prices for products such as hand sanitiser during Covid, leading to shortages. In the current US election there are debates about limits on price rises for food and for rent. Prices going up or being high have come to be regarded as ‘market failures’ in themselves, regardless of their justifying context or their economic efficiency.
If hotels, ride home apps, events ticket sellers and airlines cannot adjust their prices dynamically, there will be two types of bad consequences for consumers. First, tickets and bookings will be sold out when some consumers most need them, even though some of those with tickets or bookings would have been willing to attend another time. Second, those willing to be flexible will nonetheless end up paying a higher price, because the restricted single price will have to be high enough to cover both the high-demand and low-demand cases.
If done transparently, dynamic pricing is efficient and in consumers’ interests. It remains to be seen whether we can trust ministers to focus on the transparency and accept the dynamic nature of the rest.