Christopher Tang’s research seeks to predict how time-based price discrimination might spread
The ability of many businesses to charge premium prices during peak demand is obvious to anyone who has taken Uber during a rainy rush hour, booked a flight for the Tuesday before Thanksgiving, or reserved a hotel room during Super Bowl weekend.
Time-based pricing is now gaining a foothold in a wider swath of business and society. London imposes a "congestion charge" for vehicles in the city's center during the weekday and some toll roads and bridges feature variable (surge) pricing. Disney uses it to price admission at its theme parks. At brick-and-mortar retailers, printed prices are giving way to electronic shelf pricing that enables intra-day price changes. Three U.K. supermarkets have announced plans to use the technology to roll out surge pricing.
The ability to surge price doesn't ensure utility, however. Misread a customer's loyalty — especially in the face of competition — and the extra revenue from customers impervious to higher pricing can be undermined if enough price-sensitive customers take their business elsewhere.
UCLA Anderson's Christopher S. Tang and Onesun Steve Yoo of University College, London, constructed a model to explore the circumstances best suited to surge pricing. They focused on essential consumer needs (food, transportation) whose purchase can't be indefinitely delayed and applied time-based pricing for peak and non-peak periods, with the assumption that the consumer will not patiently suffer through periods of high congestion.
Their model looked at the interplay of product pricing, and how consumer preferences to shop at specific times of day (peak versus non-peak) and stomach congestion (long lines when stores are slammed) drive the ability to successfully surge price. They also factored in whether consumers have an implicit "loyalty" to one store over another.