Dynamic Pricing on the Internet: Importance and Implications for Consumer Behavior

The pricing of products and services sold over the Internet channel is becoming more dynamic. In part this is due to the increasing use of auction models in business and consumer markets to sell commodities, excess inventories, used merchandise, rare items collectibles, and other items. Marketers are resorting to dynamic prices even for goods and services sold at posted prices, spurred partly by the lower menu cost of changing prices on the Internet and partly as a response to consumer use of price-comparison bots. This paper explains the relevance of dynamic pricing in the digital economy by comparing the physical value chain with the virtual-information-based value chain. It explores the implications of certain aspects of dynamic pricing in consumer markets (e.g., dynamic pricing of posted prices, reverse auction pricing of goods and services as used by Priceline) from the perspective of consumer price expectations, the role of information and consumer learning, and their impact on consumer responses to prices across different product categories. Several propositions are developed, and issues for research are identified.