Adjusting prices to reflect shifts in demand is hardly a new concept. However, the concept seems to have gained an increase in visibility with Uber’s introduction of “surge pricing”, an effort to match demand with the availability of drivers. Unlike traditional enterprises, Uber depends on their driver’s making themselves available. Presumably, surge pricing would encourage additional drivers to hit the road, while discouraging price sensitive users.
Most employers have the ability to adjust staffing to reflect anticipated requirements. For example, retailers and package delivery services add temporary help for Christmas.
Uber seems to be adopting a rational approach to allocating a temporarily scarce resource, which is quite similar to hotels raising prices when a major event comes to town. On the flip side, hotels often offer seasonal discounts, when appropriate.
While pricing to reflect demand and availability seems to be the norm, there is at least one notable exception: gas stations. Whenever shortages of gasoline develop, for a variety of reasons, including weather, refinery issues, or pipeline problems, and gas station operators respond with price increases, the political class begins a round of denunciations and threats of investigations and legal action.
Investors should be alert to pricing dynamics when considering potential investments. Pricing power is a material positive, while extensive competition and ease of entry may be a warning signal.
All comments and suggestions are welcome.
Walter J. Kirchberger, CFA®