Surge pricing is coming to a supermarket near you

When demand increases, the standard economic model of supply and demand tells us that the price will increase. However, most businesses don't dynamically adjust prices in this way. For instance, ice cream stores don't raise prices on hot days, and umbrellas don't go up in price when it rains.

There are a few reasons that sellers don't automatically adjust prices in response to changes in demand. The first reason is menu costs - it might be costly to change prices (they're called menu costs because if a restaurant wants to change its prices, it needs to print all new menus, and that is costly). The second reason is that changing prices creates uncertainty for consumers, and if they are uncertain what the price will be on a given day, perhaps they choose not to purchase (in other words, the cost of price discovery for consumers makes it not worth their while to find out the price). The third reason is fairness. Research by Nobel Prize winner Daniel Kahneman (and described in his book Thinking, Fast and Slow) shows that consumers are willing to pay higher prices when sellers face higher costs (consumers are willing to share the burden), but consumers are unwilling to pay higher prices when they result from higher demand - they see those price increases as unfair.

Despite this, there are examples of sellers dynamically adjusting prices. For example, Alvin Roth's book Who Gets What - And Why (which I reviewed here) relates a story about how Coke ran a short-lived experiment, where their vending machines increased prices in hot weather. And many of us will be familiar with Uber's surge pricing (which, as noted in this post, is used to manage excess demand).

It seems that soon Uber may not be the only local example that we will see of this. The New Zealand Herald reported a couple of weeks ago:

On demand surge-pricing is making its way to New Zealand.

The country could soon be in the same boat as the UK, Europe and America, with stores and supermarkets adopting digital e-pricing - prices that change hour to hour, based on demand.

Retail First managing director Chris Wilkinson said variants of surge-pricing had already hit New Zealand, particularly around the Lions tour, with accommodation and campsites prices soaring.

While on demand surge-pricing is not a new phenomenon, Wilkinson said the way it was being administered, overseas, was.

"What is new is the ability to manage on-shelf pricing dynamically and tie this to key commercial opportunities - such as busy times, events, weather or other responsive opportunities," he said.

Asked if he thought it would become standard practice in New Zealand supermarkets and on shelves anytime soon, Wilkinson said it would likely hit service stations first.

"We'll likely see this in service stations first, as they will be able to maximise potential around higher margin products such as hot drinks, bakery and other convenience items," he said.

I'd be interested to know how a supermarket would deal with a customer who picks up an item observing one price at the shelf, but then finds that the price has changed by the time they get to the checkout. Would that breach the Fair Trading Act? As Consumer notes here:

In the past, a supermarket has been convicted and fined for charging higher prices at the checkout than were on display.

Despite that particular problem, surge pricing is coming. When you see the traditional price sticker replaced by a small LCD or LED display, you'll know it has probably arrived.