Dynamic Pricing in Sports and Entertainment

Generations ago, prices were typically printed on pieces of paper, ranging from restaurant menus to newspaper advertisements, and changing them thus meant reprinting the papers.  This took time and money itself, limiting how quickly sellers could change their prices.  It also created the economic term menu costs, which indicated that adjusting prices required a substantial change in supply and/or demand to make it worthwhile.  Today, thanks to modern technology, most sellers can change their prices instantly - customers only see prices on apps, websites, or electronic signs.

The ability to rapidly change prices to take advantage of market conditions is known as dynamic pricing.  When done specifically for predictable, brief periods of significantly increased demand, such as a mealtime rush for restaurants, it is also known as surge pricing.  Historically, consumers were most aware of dynamic pricing in regard to tickets and timing: the closer it was to the fixed-time event, such as a flight, concert, or sporting event, the higher the ticket price.  This relationship was relatively predictable, even in the era before apps and online purchasing.  Today, sellers can use complex algorithms to adjust prices based on numerous variables, ranging from weather conditions to the prices of competing substitutes.

History of Dynamic Pricing

Dynamic pricing began in the 1980s with airline flights as airlines came to realize that they could reliably continue to sell as many tickets closer to flight times, and during peak travel seasons - such as holidays - even while raising prices.  Hotels joined the movement around 2000, using similar reasoning: when demand is high, such as during the holidays, rates can rise without causing substantial decreases in sales.  This early dynamic pricing, from the 1980s to the early 2000s, relied on historic trends rather than real-time data.  Its success led more businesses to look at the possibility of adjusting prices to meet periods of higher demand.

Modern surge pricing began in 2011 with the Uber rideshare app, which also discovered that it could maintain quantity demanded during times of peak demand after raising rates.  Online delivery services, such as UberEats and Instacart, began using surge pricing a few years later.  In 2024, fast food chains and grocery stores began experimenting with dynamic pricing, moving the practice from entirely online to brick-and-mortar stores where prices on electronic boards and labels could be changed from minute to minute.  This created significant controversy, with many criticizing the move toward dynamic pricing for goods in brick-and-mortar stores as price gouging.

How Modern Dynamic Pricing Works

Thanks to the tremendous volumes of data constantly being collected, algorithms can find links between variables that affect consumer demand.   For example, when the temperature falls during a cold front, consumer demand for certain foods increases.  Modern dynamic pricing can take this into account along with more traditional variables like surges of demand based on “rushes,” income effects related to rising GDP and stock market values, and substitution effects related to the prices of rival goods.  In real time, prices could go up or down by the minute based on changes in scores of variables, meeting consumer demand precisely at market-clearing price.

In markets like sports and entertainment, the quantity and quality of substitutes would be a major factor in dynamic pricing.  On weekends when no other major entertainment events are occurring in a city, ticket prices to the big game will rise.  During weeks where no new movies are hitting theaters, ticket prices will fall to attract more customers while marginal costs are low - the projectors and concession stands are being run anyway.  If a competing event is ongoing, such as a music festival, its performance can affect the pricing for rivals’ tickets: these prices will fall if the music event is proving popular to lure away potential customers and will rise if the music event is a dud to take advantage of a money-spending demographic seeking better entertainment.

Equity Concerns of Dynamic Pricing

Critics of dynamic pricing argue that the practice will harm those with less income due to their less flexible schedules.  Many workers who do not have white-collar jobs may have little ability to change their work schedules to avoid being hit with surge pricing.  By contrast, educated professionals are more likely to be able to make some adjustments so they can take advantage of off-peak times and lower prices.  These workers are also more likely to have greater transportation options, letting them take advantage of lower prices for certain entertainment venues.  For example, an upper-middle-class family likely has the scheduling ability, electronic alerts, and personal transportation to take advantage of a sudden drop in concert or theme park ticket prices.  

When it comes to physical goods, dynamic pricing can be even more harmful to those with lower income due to their limited storage space.  Those in small apartments likely do not have the large refrigerators, freezers, pantries, and closets that can store goods purchased when on sale.  Wealthy families have the capacity, and savings, to stock up on sales and avoid surge pricing.  For example, an upper-middle-class family can buy in bulk months ahead of a seasonal increase in demand for certain groceries and consumer goods and simply store it.  A working-class family, however, has to buy those same goods at higher seasonal prices or go without.

Regulations of Dynamic Pricing?

Although controversial, dynamic pricing is legal as long as it does not become anti-competitive.  This could occur when sellers use dynamic pricing to intentionally disadvantage rival firms, such as by undercutting them on prices.  Sellers could also use dynamic pricing to engage in illegal price discrimination by charging different groups of consumers different prices, such as by race, sex, or other protected class.  Dynamic pricing could also be misrepresented by sellers in advertising and marketing, which would violate truth in advertising laws.  As a result of these potential scenarios, dynamic pricing is likely watched closely by government regulators.  Competitors who do not yet use dynamic pricing will almost certainly be looking for opportunities to accuse their rivals of violating the law, hoping for fines and restrictions to be imposed.

Nevertheless, given trends over the past decade, dynamic pricing is likely to expand in coming years as a way for sellers to make greater profits.