Deep Bhattacharyya

Professor Teital

Financial Accounting

26 September 2017

Demand Pricing

Demand pricing, simply put, is when the pricing method for a good is determined by

consumer demand. In fact, more specifically, demand pricing is the umbrella term for the

numerous concepts it encompasses such as price skimming and value based pricing principal.

Price skimming is when the producer sets the highest possible price on the product and then

slowly reduces it to another price point and then eventually to a lower one effectively capturing

the consumer surplus. This is done at each price point by capturing each consumers exact

willingness to pay, which then effectively eliminates any consumer surplus allowing them to

acquire greater profits. Similarly, value based pricing is when the producer attempts to sell a

given product based on its value to customers or their exact willingness to pay. These definitions

in turn are what make up the true essence of demand pricing which is the constant updating of

prices based on a consumer’s demand and willingness to pay. Often times theses prices can

change in a matter or seconds or minutes. Demand pricing is an acceptable method of pricing

and should be utilized in all situations due to the benefits it offers both producers and consumers.

Demand pricing provides numerous advantages to both the consumer and producer. Uber

is one of the most notorious companies to use surge pricing at times, but the reason why they use

surge pricing is more important to understanding the significant benefits it offers. For example,

Wharton Ph.D., Daniels, states that ‘Surge pricing allows service to expand to customers. But

also it allows Uber to offer lower prices to consumers in a normal demand setting such as your
average Monday morning, and that’s actually where the benefit comes from.” Uber

started introducing surge pricing to incentivize more drivers to drive Uber since they would get

paid a higher percentage of the ride. The subtle effect of this guaranteed that there would always

be enough Ubers to meet the needs of their customers. On the other hand, a reason this would

benefit producers of a product or service is because it could actually increase their revenue by

setting closer competitive prices with their competitors. For example, Amazon continuously

updates the prices of their products to remain extremely competitive and receive more business

than their competition. In addition, according to Jawad Khan, a successful marketing consultant,

it also allows a company to save costs even further since all the documenting of these updated

price changes would occur digitally removing the need for a person to physically go through all

the changes.

On the contrary, opponents of surge pricing may argue that when the demand for a good

becomes inelastic it can truly cripple people financially. For example, during Hurricane Irma

people were trying to fly out of Florida to get to safety but most airlines raised prices to

astronomical levels which made it very difficult for people to leave during a declared state of

emergency. Another potential counter-argument to the benefits of surge pricing may be the idea

that as companies continue to engage in this practice they slowly lose the loyalty of their

customers leading them to have a weak consolidated base of consistent buyers. Jet Blue, for

example, did the exact opposite during Hurricane Irma in order to secure loyal customers so that

in the future when prices go back to normal they can make a greater profit since they would have

a larger base of guaranteed and loyal consumers.

Although they’re maybe drawbacks from using surge pricing, its advantages significantly

out wight its disadvantages to both consumers and producers . Surge pricing is a complicated
issue and it’s understandable why consumers don’t always see the benefits that come after

paying the higher rice.

 Works Cited

Business Radio Research Strategic Management Global FocusNorth America, K@W. “Hate

Surge Pricing? Here's How It Actually Benefits You.” Knowledge@Wharton, K@W, 5

June 2016, knowledge.wharton.upenn.edu/article/the-unexpected-long-term-benefits-of-

surge-pricing/.

Dholakia, Utpal M. “A Quick Guide to Value-Based Pricing.” Harvard Business Review,

Harvard Business Review, 9 Aug. 2016, hbr.org/2016/08/a-quick-guide-to-value-based-

pricing.

Kokemuller, Neil. “The Advantages and Disadvantages of Fixed Pricing and Dynamic

Pricing.” Your Business, Azcentral , yourbusiness.azcentral.com/advantages-

disadvantages-fixed-pricing-dynamic-pricing-13188.html.

Lumen. “General Pricing Strategies.” General Pricing Strategies | Boundless Marketing, Lumen,

courses.lumenlearning.com/boundless-marketing/chapter/general-pricing-strategies/.

Zhang, Benjamin. “JetBlue Is Selling $99 Tickets so People Can Escape Hurricane Irma.”

Business Insider, Business Insider, 6 Sept. 2017, www.businessinsider.com/hurricane-

irma-evacuation-jetblue-discounts-flights-99-dollars-2017-9.