Maryland is about to become first in the nation for all the wrong reasons. The state’s Assembly recently passed a bill that would ban an algorithmic tool used by businesses called “dynamic pricing.”
It’s not just Maryland. This year, lawmakers across the country have introduced more than 70 bills that would crack down on dynamic pricing.
Dynamic pricing sounds like something new and sinister — algorithms quietly deciding what people pay. That framing is politically convenient, but it’s also misleading and, ultimately, not in the consumer’s interest.
Prices are a way to balance supply and demand, and make markets function. They don’t just affect the seller’s margins; they also signal whether to encourage (or discourage) production of new products and innovation.
Dynamic pricing is not a new invention. It is simply prices adjusting to supply and demand. The real question is whether we want prices to move or prefer them to stay stuck as market conditions change.
Start with something concrete: groceries. Stores deal with products that are about to expire daily. If prices cannot adjust, those goods are thrown away. If they can, prices drop — sometimes sharply — to clear the shelf. One study found that dynamic pricing reduced food waste by 20 percent while increasing the availability of discounted items. That is cheaper food that would otherwise never reach consumers.
Anyone who has walked through a supermarket in the evening has seen markdowns on meat, dairy, salads and bakery items that match prices to reality. Consumers with tighter budgets benefit while stores recover value from goods that would otherwise be lost.
The same is true at clothing stores, where retailers routinely mark down inventory up to 80 percent to clear the aisles for new products. High prices do more than extract revenue: They signal to producers to increase supply or to develop new products that better fit market needs.
The same dynamic plays out online, just faster. On large retail platforms, prices change constantly because sellers compete in real time. When one platform cuts a price, others follow. The result is often not higher prices; it is quicker price cuts. In a traditional store, prices might stay fixed for weeks because the menu costs of changing prices are too high. Online, they can fall within hours.
Electricity offers an even clearer case. In parts of the United States, households can opt into time-of-use pricing, in which electricity costs less during off-peak hours. People shift usage and save money. In many pilot programs, households reduced their bills by 5 percent to 10 percent without using less energy, only by changing when they use it.
In housing, property management software that uses algorithms helps cut rental prices faster when demand begins to decline. That means more affordable housing costs for Americans of all stripes.
Air travel and hotels work similarly. When demand is weak, prices fall to fill empty seats and rooms. When demand rises, prices increase. That may frustrate consumers booking late, but it also allows lower prices at other times rather than a single uniformly higher rate.
None of this is complicated. Prices that can move tend to fall faster when demand softens. Fixed prices tend to remain higher.
So why the backlash? Because people notice price increases more often than price decreases. A surge price during a busy hour feels unfair. A lower price later barely registers. Banning dynamic pricing does not solve that problem. It removes the mechanism that allows prices to adjust downward.
This carries a real risk. If businesses cannot adjust prices downward quickly, they adjust in other ways. They limit supply. They keep prices higher for longer. They become less responsive to competition.
At a time when households are already under pressure from higher grocery, housing and energy costs, removing mechanisms that help prices adjust downward would move the economy in the wrong direction.
Banning dynamic pricing would not make prices fairer. It would make them stickier, and, in many cases, higher. Lawmakers should reverse course while they still can.
Hemant K. Bhargava is a distinguished professor and associate dean at UC Davis. He wrote this for InsideSources.com.
