Defining and measuring the growth of auctions and dynamic pricing

Dynamic pricing is the practice of changing prices based on demand, supply, and customer behaviour rather than fixing a single national price (a so-called menu cost). In traditional retail, changing prices was expensive, so one national price was the norm. The Internet eliminates most menu costs and enables real-time price changes, so dynamic pricing has come to the fore.

There are a number of different kinds of dynamic pricing mechanisms. Auctions are the most well-known: buyers bid against one another and the price is established by the highest bidder. eBay, the online auction site utilised by both businesses and consumers, is the classic example.

Surge pricing is a kind of dynamic pricing used by companies such as Uber. Uber uses a dynamic pricing algorithm to optimise its revenue, raising prices when demand outstrips supply (e.g. rush hour or rain). But surge pricing, like most dynamic pricing schemes, is controversial because consumers feel they are being charged unfairly.

A third dynamic pricing technique is flash marketing, which has proved extraordinarily effective for travel services, luxury clothing goods, and other goods. Using e-mail and short time-limited offers, flash sales create urgency and move inventory quickly. In 2011, Amazon used its new cloud music service to offer a flash sale, illustrating how dynamic pricing can be applied to digital goods too.

The growth of auctions and dynamic pricing is measured by transaction volume and revenue. eBay's $6.1 billion in 2015 net revenues from its Marketplaces segment and ~$78 billion worth of goods sold or auctioned are key metrics. The growth of mobile P2P payment systems also signals the growth of dynamic pricing platforms.