Dynamic Pricing

Dynamic pricing maximises benefit to buyer and seller. It enables transactions to occur that otherwise would not.

The tradition in retail is for prices to be fixed. Historically the UK regulated prices through a mechanism called Retail Price Maintenance. This ensured that different retailers offered the same item for sale at the same price. An example - the Nett Book Agreement, finally abolished in 1995 and made illegal in 1997, which forced all booksellers to sell books at the same price. The lack of a free market does no favours for buyer and seller and acts to prevent sales that would otherwise take place.

Other than in traditional retail, dynamic pricing has been the tradition. Take the umbrella salesman outside the London tube stations. Their prices vary according to the weather. If you really need an umbrella right now because it is pouring with rain you will probably have to pay more than you would on a Summer's day.

John Nash, the famous mathematician featured in the film A Beautiful Mind, derived an optimal strike price for transactions and this is now called the Nash Equilibrium. It is optimal for buyer and seller.

Ebay, perhaps unwittingly, implements (close to) the Nash Equilibrium when its users give a reserve price. The successful bidder does not pay the reserve, but instead pays the next highest bidder's reserve plus a small margin (the bidding increment). This is equivalent to what is called a Vickrey Auction and fulfills the Nash Equilibrium. Ebay is remarkably successful in matching buyers to sellers and enabling transactions to occur.

The vast majority of commodities are amenable to dynamic pricing. Particularly perishable commodities. Stelios has shown this to be the case with airline seats. Many people disbelieved him when he suggested buyers would be prepared to change their buying habits and use the Internet to gain a better deal. But they were proved wrong. The airline industry has been transformed by the emergence of cut price airlines using dynamic pricing. The load factor (the fullness of a plane) has increased from less than 50% to approaching 100%.

Neural Solutions specialises in implementing dynamic pricing systems on the Internet.