Dynamic Pricing

This week we talk about surge pricing, Walmart, and the Robinson-Patman Act.

We also discuss personal data, AC settings, and Delta’s earnings call.

Recommended Book: How the World Became Rich by Mark Koyama and Jared Rubin

Transcript

The US Robinson-Patman Act of 1936 is also called the Anti-Price Discrimination Act, and it was passed to make it illegal for a product supplier to charge different prices to different customers.

So a company that makes candy bars wouldn’t be allowed to charge one price to most of their customers, all the smaller and mid-sized convenience stores and mom-and-pop grocery stores, for instance, and then a lower price to the big stores, the Walmarts and Amazons of the world.

The concern was that these larger players, which at the time this law was passed were burgeoning grocery stores like A&P, would be able to achieve a monopolistic position in the market for these goods, these slightly lower prices giving them one more advantage over their smaller competitors.

During the four decades or so of this Act’s enforcement, small grocery stores has prices that were, on average, about 1% higher than those offered by their large competitors, and the eight largest grocery store chains only captured about 25% of all grocery sales in the US—essentially every city and town of any size had at least one small grocery store, and most had several of them, during this period. It was a very competitive market.

During the Reagan administration in the 80s, though, enforcement was abandoned, as the folks in charge of that enforcement were convinced this Act was holding back growth; they saw it as a handout to small businesses at the expense of big business, so while it technically remained on the books, they just stopped enforcing it, and the big businesses in these spaces got the message pretty quickly.

Walmart was the first big business to really lean into the new powers afforded them by this fresh governmental stance, and that led to it becoming the country’s largest grocery store chain by 2001, and other big grocery brands, like Kroger and Safeway, began to do the same, consolidating all their buying so they could put in huge orders like Walmart was able to put in, and that allowed them to demand lower prices, which in turn allowed them to dramatically increase profits and gobble up their smaller competition.

All of which led to the emergence of food deserts across the country, a term that was coined in 1995 to refer to areas where there are simply no grocery stores within a reasonable distance of relatively large populations of people, because smaller grocery stores can no longer compete, even when they’re the only player in town; folks have to travel to the larger chain stores, and have no real options closer to home, which can result in food precariousness, and situations in which the only nearby food options are unhealthy ones—the snacks at gas stations, for instance.

This same general pattern played out across all retail spaces, including pharmacies and bookstores and athletic supply stores, and between 1982 and 2017, the total market share of independent retailers in the US dropped from 53% to 22%.

Which in some ways is great at the federal level, as—and this is what the Reagan administration seemed to want, back in the 80s—big businesses can grow a lot faster and bigger than small businesses, and that can lead to outsized GDP numbers, and other such macro-scale figures.

Unfortunately, while independent retailers tend to keep nearly half of the revenue they pull in within their local community, major chains only keep something like 14% in the local community—so the shift from independent to chain retailers has had a deleterious impact on communities across the US, in the sense of having less competition, having food and other sorts of product deserts, and in terms of tax revenues and overall economic wealth being sapped from these areas and moved to other places, creating some relatively few winners and a whole lot of losers, in the process.

What I’d like to talk about today is another type of variable pricing, this one more directly aimed at consumers, and enabled, at least in its modern incarnation, by big data and the devices we use every day.

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Dynamic pricing refers to changing the price of goods or services based on all sorts of variables.

Demand or surge pricing, for instance, might see the price of a bus ticket or rideshare ride with Uber cost more during rush-hour, the idea being that there are only so many bus seats and only so many available rideshare rides to go around, and when everyone’s either trying to get to work or get home from work, there will be a lot more people wanting these finite number of seats and rides than there are seats and rides available.

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