Dynamic Pricing and Brand Image

Abstract

The potential benefits of dynamic pricing – charging different prices to different consumers for essentially the same offering – have been widely documented (e.g. Garbarino and Lee 2003; Iyer et al. 2002; Sahay 2007; Truffelli 2006; Weisstein et al. 2013), some of which include enhanced segmentation, improved inventory and supply chain management, capacity optimization, improved demand management, increased sales volume, and increased profitability. Furthermore firms are able to implement dynamic pricing practices much more easily than ever before due to the advent of online technologies that allow for enhanced data collection, instant and low cost changes to price menus and increased buyer identification (Gelbrich 2011; Grewal et al. 2004; Valentino-Devries et al. 2012).

Although dynamic pricing holds great potential for firms, many companies have been reluctant to fully implement the practice. One reason for such hesitation may be incidents of consumer backlash towards firms attempting to utilize dynamic pricing. For example, in a highly publicized incident Amazon experimented with dynamic pricing and experienced substantial consumer criticism and negative publicity as many customers were outraged upon the discovery that they paid different prices for the exact same product (Klosowski 2013). In another instance, Coca-Cola was considering the utilization of dynamic pricing by way of vending machines that would raise prices when outside temperatures increased (Reinartz 2002). When this idea became public however, it received an extremely negative reaction, eventually leading to the abandonment of any such programs (Odlyzko 2003).

In the academic literature, many scholars have suggested that while dynamic pricing holds great potential to improve firm efficiency and economic performance it does carry with it significant risks prompting caution in the use of the practice (e.g. Garbarino and Lee 2003; Iyer et al. 2002; Kung et al. 2002; Sahay 2007). Investigations of consumers’ reactions to dynamic pricing have also shown that if dynamic pricing is conducted improperly it can negatively impact perceptions of fairness, trust and intention to purchase (Garbarino and Maxwell 2010; Gelbrich 2011; Grewal et al. 2004; Hawes and Bearden 2006). While these consequences along with reactions to the Coca-Cola and Amazon instances are extremely important, they take a more short-term perspective regarding the effects of dynamic pricing. However, the long-term implications of dynamic pricing are much less clear.

One area of investigation that will illuminate these long-term implications is the study of how dynamic pricing impacts brand image. Therefore, this paper explores whether dynamic pricing practices adversely impact a firm’s brand image in order to contribute to a more long-term perspective of its effects. A thorough review of the extant literature on dynamic pricing is presented which includes discussions on the potential benefits and risks of dynamic pricing for both firms and consumers alike. In addition, a number of intervening variables that could serve to increase consumer acceptance of dynamic pricing in certain situations are also discussed. Finally, a conceptual model depicting the relationship between dynamic pricing and brand image is developed and presented along with propositions to be tested in a future empirical study.