Algorithmic Pricing

If you are like me, you may have a Google alert set up for drops in airfare prices. Airline (and hotel) prices can change dramatically based on advanced purchase time, demand, inventory, and countless other factors. The practice of yield management, maximizing revenue or profits from a fixed resource, took off (no pun intended) in the airline industry in the 1980s. Since then, we’ve been conditioned to wait, or book immediately, based what Google recommends. 

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Today, this has evolved even further with much greater reach. AI-driven price adjustments based on demand, inventory, buyer behavior, location and even time of day, is spreading beyond e-commerce to the “real world” with some major retailers replacing static price tags with digital screens. As such, the market for algorithmic pricing is expected to grow significantly in the next decade (see chart below).

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Some of the benefits of algorithmic pricing include: 

 

• Near Instant Price Adjustments: Matching supply and demand to maximize revenue and profit margins when demand surges, and offering discounts when demand softens to boost volume

• Competitive Agility: Retailers can respond to competitors’ price changes or market shifts in real time rather than waiting for a manual price review

• Optimize Inventory: Adjusting prices based on inventory levels and demand forecasts to avoid overstocking or stockouts.

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While there is concern about fairness and transparency, the consumer can also see benefits from this strategy:

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• More Frequent Promotions: Algorithms can identify when demand is soft or inventory is high and automatically offer price reductions, meaning savvy or flexible shoppers may score better deals more often.

• Increased Competition: Algorithmic pricing can intensify price competition in crowded digital markets (e.g., Amazon marketplace), driving prices down in categories with many sellers.

• Real-time Price Matching: Consumers may benefit when retailers use pricing algorithms to automatically match or beat competitors' prices.

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Companies poised to benefit most include digitally native retailers, e-commerce platforms, travel & hospitality firms, ride-sharing/gig-economy players and any business with volatile demand or large inventory swings. These firms gain new levers to manage demand, optimize profits, and respond swiftly to market changes.

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On the flip side, those who may be hurt include traditional brick-and-mortar retailers slow to adopt dynamic pricing, firms reliant on fixed-price models, and of course, consumers. For consumers, pricing algorithms can lead to opaque, unpredictable prices, potential price discrimination, and even “algorithmic collusion” (firms’ automated pricing nearly matching or mirroring competitors in a way that pushes prices upward). It is therefore not surprising to see regulation already being implemented as these models take hold. New York just implemented an AI-pricing disclosure law that requires retailers to disclose when personal data has been used to set prices. 

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As investors, we’re watching this transformation closely. Algorithmic pricing can be a foundational change in how value is captured across industries. Those who do it well, capturing the upside without alienating consumers, are poised to do very well from this innovation. 

 

-Pedro Ramos
 

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