Surge pricing: algos lift margins and challenge trust busters

Setting prices to match demand and supply once involved hefty guesswork. Now algorithms are taking charge. They help companies adopt “surge pricing” — making quick changes to maintain or lift margins. Late adopters risk losing out. But the threat that trust busters must address is to fair and free markets.

Machine learning lets companies make timelier use of data on everything from input costs to the weather. For example, the adoption of “dynamic pricing” by Hewlett Packard Enterprise helped lift the fourth-quarter operating profit margin of its core server division to 14.7 per cent. That was more than a tenth higher than the long-term target. It can now change list prices in response to commodity price fluctuations over a weekend.

Last year, California jeans maker Levi Strauss said artificial intelligence software had helped it push up prices by a tenth without reducing demand.

Dynamic pricing can also guide companies on how best to pass on cost reductions to expand their market share. Nonetheless, the impact of algorithmic pricing on competition is under scrutiny. A study published by the National Bureau of Economic Research, a US think-tank, found that algorithmic price-matching tended to push up prices over time. There is little incentive for retailers to lower prices they know will be swiftly equalled.

Critics suspect companies are marking up prices by more than necessary. Clinton administration labour secretary Robert Reich has argued that domestic inflation is driven by profits and not wages.

The UK Competition and Markets Authority has reported emerging evidence of “rocket and feather” pricing in the fuel retail market. Tesco chair John Allan recently angered suppliers when he said they might be using inflation as an excuse to raise prices.

The opacity of pricing algos makes it harder for regulators to build data sets that support interventions. But the possibility that algos weaken competition deserves close scrutiny. With consumer budgets buckling under higher living costs, expect surge pricing to stir growing controversy.