Highlights:
As a general rule, once politicians decide they want to micromanage the economy, they don’t let basic economics get in the way of a good panic.
Take Senator Elizabeth Warren’s recent social media declaration: “We should all be worried about ‘dynamic pricing,’” complaining that algorithms allow companies to “change their prices in real time.” Her warning is that if it’s hot out, the price of ice cream might go up – characterizing basic supply-and-demand economics as a way for corporations to squeeze customers.
“Dynamic pricing” is a commonly-used tool that allows businesses to adjust prices based on demand in real time. When a restaurant wants to fill seats on a slow Tuesday afternoon, it offers a lunch special. When a store has too much inventory, it puts items on sale. Prices going up and down based on supply and demand is not some nefarious scheme – it’s how markets have always worked. It’s also, ironically, the very mechanic behind happy hours, which offer discounted drinks during off-peak hours to drive traffic. Except in Warren’s home state of Massachusetts, where happy hour is actually banned.
Dynamic pricing is not price gouging – and that distinction matters. Price gouging is the practice of charging unconscionably high prices during an emergency, and is already illegal in most states. “Dynamic pricing” is something else entirely: a market mechanism that provides efficiency in the market and, more often than not, that results in lower costs for consumers.
A 2023 study on airline pricing found that this system works as intended. Prices climb as the departure date nears, so leisure travelers who book early pay less, and business travelers who need last-minute seats can still get them.
The pattern holds outside airlines too. A 2024 study from Harvard and the University of Helsinki looked at food delivery pricing and found that constant algorithmic adjustments pushed average prices down, not up. Target and Walmart cut prices more often than they raise them once they switched to dynamic pricing. Wharton professor John Zhang put it plainly: dynamic pricing sharpens competition, and lower-income consumers gain the most from it.
Despite the economic reality, many states are currently considering legislation to regulate or ban various forms of dynamic pricing. While seemingly well-intentioned, these price controls make it just as difficult for retailers to drop prices during a mid-day lull or supply surplus as it does to raise them.
The government itself is the biggest practitioner of personalized pricing. As The Washington Post recently noted:
“The personal information collected by the Education Department’s Free Application for Federal Student Aid form allows universities to charge families at exactly the level they are willing to pay. Welfare and public housing programs are keyed closely to the recipient’s means and family characteristics.”
If Senator Warren’s logic were applied consistently, lower-income students would face steep increases for tuition and families receiving need-based aid could lose access to those programs.
Consumers do not need federal bureaucrats setting prices or dictating how often or when a store can offer a discount. They need a competitive market. If a business pushes dynamic pricing too far, consumers will do what they have always done – take their money elsewhere. Politicians should try trusting the American people to comparison shop, rather than trying to regulate the free market out of existence.
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