Dynamic pricing is the practice of charging consumers different prices for the same product or service depending on either distinguishing characteristics of the transaction or of the consumers themselves. A simple example is the use of the time of the transaction as a guide to the level of demand. For example, if a highway authority charges more for a toll across a bridge during peak hours than it would at 2 a.m., this is dynamic pricing.
Amazon was found to be employing dynamic pricing in 2000 with regard to the sale of DVDs. Its version of the practice was a good deal more complicated than a peak-pricing rule for tolls. It used its software to analyze a customer's past purchase history, place of residence, and other factors to adjust price to ability to pay. The company received much negative publicity for this and backed off. So far as is known to the public, Amazon is not now engaged in this practice with regard to the products it sells.
Robert Weiss and Ajay Mehrotra, in an article in the Virginia Journal of Law and Technology, make the point that there is a reasonable economic justification for the practice. "Proponents of personalized pricing contend that prices based on value, and not cost, benefit not only companies, but also those consumers who are offered relatively lower priced goods and services, since these customers pay only as much as they value the good or service." Yet there is a visceral reaction, also noted by Weiss and Mehrotra, that such price discrimination is unfair.
Dynamic pricing has made a comeback at Amazon, but with regard to a service, not a product. In December 2009, Amazon announced a program it called "Spot Instances," under which it lets customers bid on unused Amazon computing capacity, so long as their bids exceed the existing Spot Price. These "Spot Instances," it said, will be "complementary to On-Demand Instances and Reserved Instances, providing another option for obtaining compute capacity." This amounts to selling "the cloud" at a range of prices specific to different buyers.
Storable and Non-Storable
The difference between the two cases of dynamic pricing, the DVDs and the Cloud, is the difference long recognized in economic theory between storable and non-storable commodities. A DVD can be stored indefinitely and shipped out when a buyer is found. But the capacity of a server over a given hour must be employed during that hour or it is wasted forever. Price discrimination ("dynamic" or otherwise) has long been regarded as a rational and perhaps necessary practice in the case of non-storable commodities.
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