The Efficient Queue and the Case Against Dynamic Pricing

• Author: Ramsi A. Woodcock
• Position: Assistant Professor, University of Kentucky Rosenberg College of Law, Secondary Appointment, Department of Management, University of Kentucky Gatton College of Business and Economics
• Pages: 1759-1797

1759

The Efficient Queue and

the Case Against Dynamic Pricing

Ramsi A. Woodcock*

ABSTRACT: From surge pricing by Uber to last-minute fare increases by

airlines, the use of price hikes to determine who should gain access to scarce

resources has swept the business world in recent years, enabled by the easy

access to information on what consumers are willing to pay, and the power of

algorithms to act on that information, that characterize the information age.

This practice, often euphemistically called dynamic pricing, has been defended

on the ground that higher prices are required to equilibrate supply and

demand. Lower prices, the argument goes, would lead to wasteful queuing.

In fact, the same technological advances that have enabled dynamic pricing

have also driven the cost of queuing nearly to zero, by allowing consumers to

place orders online, which amounts to standing on instantaneously-self-

clearing queues. Today, firms engage in dynamic pricing not because the

practice is better at rationing access to scarce resources, but because charging

higher prices is more profitable. Antitrust enforcers do not normally prosecute

the charging of high prices, but they have an opportunity to do so here, because

the harmfulness of dynamic pricing to consumers is clear and the remedy

—prohibiting dynamic pricing—would be relatively easy to administer.

I.INTRODUCTION ........................................................................... 1760

II.WELFARE EFFECTS AND ANTITRUST CONSEQUENCES ................. 1766

A.DYNAMIC PRICING AND ITS SPREAD ........................................ 1766

B.EXPLOITING AN ANTITRUST LOOPHOLE TO HARM

CONSUMERS .......................................................................... 1770

C.THE CASE FOR PER SE ILLEGALITY UNDER THE ANTITRUST

LAWS .................................................................................... 1774

*

Assistant Professor, University of Kentucky Rosenberg College of Law, Secondary

Appointment, Department of Management, University of Kentucky Gatton College of Business

and Economics. Harry First, Niklas Dürr, and participants at the 13th Academic Society for

Competition Law Conference at New York University School of Law, a May 2018 meeting of the

Mannheim Competition Policy Forum at the University of Mannheim, and a May 2018 CMA

Academy session at the United Kingdom’s Competition and Markets Authority, provided helpful

comments.

1760 IOWA LAW REVIEW [Vol. 105:1759

III.THE ALLOCATION PROBLEM ....................................................... 1782

A.DYNAMIC PRICING AS RATIONING WITH PRICE ........................ 1782

B.THE WEAKNESS OF THE CASE FOR RATIONING WITH PRICE ...... 1784

1.Willingness to Pay vs. Place in Line as Proxies

for Desire ..................................................................... 1784

2.Queues as Markets and Markets as Queues .............. 1787

C.THE LOW COST OF QUEUING IN THE INFORMATION AGE ......... 1789

IV.BEYOND DYNAMIC PRICING ......................................................... 1793

V. CONCLUSION .............................................................................. 1796

I. INTRODUCTION

Generations of introductory economics students have been taught that

prices clear markets, ensuring that the number of units of a good or service

demanded by consumers precisely equals the number of units supplied.1 And

yet the real world has always been rather obviously messier, as anyone who has

ever waited on line for a table at a restaurant, or found a child’s favorite toy

sold out at Christmas, can attest. Firms sometimes accidentally set their prices

considerably below the level required to equilibrate supply and demand,

resulting in too many buyers given available supply, because firms have always

lacked sufficient information to identify that magic market-clearing price with

certainty.2 The archetypical example of undershooting is the old Communist

state-run enterprise, which charged prices so low that anyone could buy,

leading to interminable lines.3 But underpricing has always been pervasive in

all capitalist countries as well, though to a far lesser degree, with waiting lists,

preordering, reservations systems, sold out notices, and indeed lines a familiar

experience for shoppers everywhere.4

Waiting lists, preordering and the like are species of the same basic

solution to the problem of how to ration a resource for which price has been

set too low to equilibrate supply with demand. That solution is queuing, the

granting of access based on the principle of first-come-first-served.5

1. See, e.g., HAL R. VARIAN, INTERMEDIATE MICROECONOMICS: A MODERN APPROACH

289–90 (7th ed. 2006) (“The equilibrium price of a good is that price where the supply of the

good equals the demand. Geometrically, this is the price where the demand and the supply curves

cross.”).

2. See STEVEN ORLA KIMBROUGH, AGENTS, GAMES, AND EVOLUTION: STRATEGIES AT WORK

AND PLAY 193–98 (2011).

3. See JÁNOS KORNAI, THE SOCIALIST SYSTEM: THE POLITICAL ECONOMY OF COMMUNISM 287

(1992).

4. See Andrew Ross Sorkin, Hurricane Price Gouging Is Despicable, Right? Not to Some Economists,

N.Y. TIMES (Sept. 11, 2017), https://www.nytimes.com/2017/09/11/business/hurricane-price-

gouging.html [https://perma.cc/62NX-VK2C].

5. See Yoram Barzel, A Theory of Rationing by Waiting, 17 J.L. & ECON. 73, 73, 75 (1974).

2020] THE EFFICIENT QUEUE AND DYNAMIC PRICING 1761

Economists have long lamented the waste associated with queuing, from time

spent on lines that could have been spent on labor, to the resources wasted

by firms in managing reservations systems.6 The arrival of the information age

has therefore seemed a godsend, giving firms the power to put an end to

shortages and queuing by allowing firms at last to identify the market-clearing

price. Vast amounts of data on consumers, generated by firms themselves

based on records of their own interactions with consumers, and purchased

from third-party data aggregators, allow firms to determine how many

consumers are able to pay each possible price for a product, and therefore to

identify the price that just clears the market.7

Charging that price empties all lines, sending a magical signal to

consumers that encourages hopefuls who cannot afford the price to disperse,

and beckons those who can afford the price to come forth to buy.8 In this

spirit, economists have celebrated the spread in recent years of dynamic

pricing throughout the economy, from Disney World, which now uses higher

prices to reduce lines during periods of peak demand, to commuter highways,

which are dynamically pricing their fast lanes, to cities considering charging

a “congestion price” for access to downtown, to Uber, which uses surge pricing

to handle the rush after concerts and games, and to Amazon, which varies

prices on thousands of products hundreds of times per day.9

The irony of the information age is that at the same time that information

makes the finding of market-clearing prices easier, information also reduces

the waste associated with queuing, eliminating the problem that the charging

of market-clearing prices was intended to solve. The information age has

greatly reduced the cost of selling based on the principle of first-come-first-

served, by allowing consumers to determine instantaneously, via online retail

platforms, whether an item is available for purchase or sold out. As an

increasing amount of commerce moves online from brick-and-mortar

6. See id. at 73; VARIAN, supra note 1, at 308.

7. See Akiva A. Miller, What Do We Worry About When We Worry About Price Discrimination? The

Law and Ethics of Using Personal Information for Pricing, 19 J. TECH. L. & POL’Y 41, 44–54 (2014).

8. See VARIAN, supra note 1, at 7–8, 306–07 (“At this price, each consumer who is willing to

pay at least p* is able to find an apartment to rent, and each landlord will be able to rent

apartments at the going market price. Neither the consumers nor the landlords have any reason

to change their behavior.”).

9. Sorkin, supra note 4; see Winnie Hu, Congestion Pricing Falters in New York , Again, N.Y.

TIMES (Mar. 31, 2018), https://www.nytimes.com/2018/03/31/nyregion/congestion-pricing-

new-york.html [https://perma.cc/Z7KQ-6454]; S.K., Disney Discovers Peak Pricing, ECONOMIST

(Feb. 29, 2016), https://www.economist.com/free-exchange/2016/02/29/disney-discovers-

peak-pricing [https://perma.cc/UP8A-3XWM]; Ben Popper, Uber Surge Pricing: Sound Eco nomic

Theory, Bad Business Practice, VERGE (Dec. 18, 2013, 11:34 AM), https://www.theverge.com/2013

/12/18/5221428/uber-surge -pricing-vs- price-gougin g-law [https://perma.cc/CH6D-J6DM];

Harry Wallop, How Online Giants Like Amazon Can Rip You off by Changing Prices up to 300 Times a

Year (And if You’re Rich, Some Websites Could Soon Charge You Even More!), DAILY MAIL, http://

www.dailymail.co.uk/~/article-4935422/index.html [https://perma.cc/X2RT-8NZZ] (last

updated Oct. 2, 2017, 7:56 AM).