To surge or not to surge?

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by: Christopher Tang

On June 24, three largest supermarkets in the United Kingdom (Tesco, Sainsbury’s and Morrisons) announced that they are working on secret plans to install “surge pricing” systems in order to “smooth” customer demands over the course of a day. For instance, these supermarkets can replace the traditional paper tags on shelves with electronic labels so that the stores can change their prices several times per day at the click of a button. This way, the store can charge a higher price during rush hours and a lower price during non-peak hours.

Many customers are used to the idea of surge pricing adopted by Uber. Therefore, it is natural to think that surge price should enable stores to segment their customers: time-sensitive customers pay a higher price during peak hours and less time-sensitive customers and pay a lower price during non-peak hours. This seems fair and reasonable. Hence, many would think that all supermarkets should adopt surge pricing, right?

I am not so sure. Here are two reasons why not all supermarkets should adopt surge pricing:

1. If all stores adopt surge pricing, then it will definitely create the incentives for time insensitive and price sensitive to shop during non-peak hours and let those time sensitive consumers to shop during the peak hours. However, what will happen if one of the stores decided not to surge? In this case, this store may absorb some of those time insensitive and price sensitive to shop.

2. Habitual shopping behavior. Even though some customers are time insensitive and price sensitive, they have developed their habits to shop during certain time windows. Unlike take a ride from Uber that is more spontaneous, shopping at a supermarket is more habitual. As such, the store who decided not to surge can get these shoppers to shop without changing their habits. Once these customers develop a new habit to shop at this store, they are unlikely to switch back. In that case, stores who adopt surge pricing may end up losing some of their customers to stores that do not surge.

Therefore, it is not obvious that all supermarkets should adopt surge pricing to obtain a higher profit. And we shall see.

Link to material: http://blogs.anderson.ucla.edu/global-supply-chain/

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