Firms could avoid consumer backlash with pricing that works both ways, says Wharton marketing professor John Zhang.
2 min. read
The controversy over plans by Delta Airlines to use AI for “dynamic pricing” of fares comes at a time of heightened price-sensitivity among consumers as higher import tariffs threaten to affect everything from orange juice to gasoline.
Dynamic pricing, where firms fix prices based on shifting demand for their products or services, is not new. But the specter of higher import tariffs changes consumer sentiment in ways that embolden firms to use dynamic pricing to raise prices, says Wharton marketing professor Z. John Zhang.
“A lot of companies take advantage of what’s going on with tariffs and raise their prices,” Zhang said. “The reason is when tariffs go up, we as consumers tend to be more tolerant of price increases simply because we know that firms are struggling [with higher costs]. Their costs have increased, and therefore we probably cut them some slack. And firms know that.”
In a scenario where firms do not face external pressures such as stiffer tariffs, they avoid unilaterally raising prices because they would then lose market share to competitors who maintain prices, Zhang says. But in the current scenario where higher tariffs will increase costs for all firms, they are not as worried about how their competitors might respond, he noted. “They probably have more of an incentive in this environment to raise prices. [For firms that] have always been thinking about doing dynamic pricing, this might be their chance to use it.”
“Dynamic pricing doesn’t necessarily mean that you have to raise prices,” Zhang advises firms that may consider that route. “You could have a startup with a high price and offer dynamic discounts. Dynamic discounting probably would be a more palatable way to implement dynamic pricing.”
“[As a firm], you just want to make sure that when consumers are price-insensitive at a certain time, you charge a higher price,” Zhang says. “And when consumers are price-sensitive, you will charge a lower price.”
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