Dynamic pricing is a collection of pricing strategies used by firms and organizations to enhance profits. You will begin by exploring pricing techniques that operate in the market in real-time. Then you will explore how auctions are employed in the search to find the value of goods and services.
The following is a great resource for additional research to complete your assignment, see Chapters 11 and 12.
For your convenience, the following resource is provided by the Strayer Library at no cost. Links to the online library resources are also available in Canvas via the Course Information page. You may also search by title in the online Strayer Library.
McAfee, R. P. (2009). Competitive Solutions: The Strategist's Toolkit. Princeton University Press.
Instructions
Write a 5-7 page paper in which you:
Compare and contrast surge versus congestion pricing. Provide a specific example of each currently in use.
There are many types of auctions, each with strengths and weaknesses in uncovering the real price/value of an item. Compare and contrast how each of the following uncovers value and provide a specific example of how each uncovers value:
The English auction and the Dutch auction.
The sealed-bid first-price auction and the Vickery Auction.
Auctions are widely used. Analyze an actual auction employed by each of the following:
A state or federal government or an agency of a state or federal government.
A for-profit business.
For each, explain what type of auction is employed and how the auction solves the problem of finding the best price for the good or service.
Read the Letter from Senator Warren to Fed on Wells Fargo FHC StatusLinks to an external site.[PDF].
Explain how an auction to sell the Wells Fargo consumer-facing banking division might be used to determine the value of the division.
Include a recommendation on what type of auction might be used.
Use five sources to support your writing, and include a minimum of three quality resources. Choose sources that are credible, relevant, and appropriate. Cite each source listed on your source page at least one time within your assignment.
Full Answer Section
Surge Pricing vs. Congestion Pricing:
Surge Pricing: Surge pricing, also known as peak pricing, involves raising prices during periods of high demand. This strategy is commonly employed by ride-hailing services like Uber and Lyft, where prices fluctuate based on factors like time of day, weather conditions, and traffic volume. For example, Uber may charge significantly higher rates during rush hour or on weekends when demand for rides is high.
Congestion Pricing: Congestion pricing, often implemented for traffic management, aims to reduce demand during peak hours by charging drivers a fee to access congested areas. This strategy is used in cities like London and Singapore, where drivers entering specific zones during peak hours are required to pay a congestion charge. The goal is to discourage unnecessary travel and incentivize alternative modes of transportation, thereby reducing traffic congestion and improving air quality.
Table 1: Comparison of Surge Pricing and Congestion Pricing
Examples:
- Surge Pricing: Uber charges higher rates for rides during rush hour and on weekends.
- Congestion Pricing: London charges drivers a congestion charge for entering the central zone during weekdays from 7am to 6pm.
Unveiling Value through Auctions:
Auctions are a market mechanism where buyers compete for the right to purchase a good or service, ultimately revealing the true value that buyers place on it. Different auction formats offer varying degrees of efficiency and price discovery.
English Auction vs. Dutch Auction:
- English Auction: In an English auction, the price starts low and gradually increases until only one bidder remains. This format encourages competition and often results in a high price, but it may take longer to reach a conclusion.
- Dutch Auction: In a Dutch auction, the price starts high and gradually decreases until a buyer accepts the price. This format is quicker but may result in a lower price than an English auction.
Sealed-Bid First-Price Auction vs. Vickrey Auction:
- Sealed-Bid First-Price Auction: Bidders submit their bids in secret, and the highest bidder wins the item at the price they bid. This format encourages bidders to be strategic but may lead to overbidding.
- Vickrey Auction: Similar to the first-price auction, bidders submit sealed bids. However, the winner pays the second-highest bid price. This format discourages overbidding and encourages bidders to bid closer to their true valuation.
Table 2: Comparison of Auction Formats
Auctions in Practice:
Government Auctions: Governments frequently use auctions to dispose of surplus assets, issue licenses, and allocate resources. For example, the US Treasury Department utilizes auctions to sell government bonds, maximizing revenue and achieving efficient price discovery.
Business Auctions: Businesses may employ auctions for various purposes, such as selling off inventory, raising capital, or acquiring assets. eBay, an online marketplace, utilizes a hybrid auction format, combining elements of both English and Dutch auctions, to facilitate efficient trading between buyers and sellers.
Sample Answer
Dynamic pricing, a pricing strategy that adjusts prices in real-time based on market conditions, has gained significant traction in recent years. By dynamically adjusting prices based on supply and demand, businesses can optimize their revenue and enhance profitability. This paper will explore two types of dynamic pricing: surge pricing and congestion pricing, followed by an analysis of various auction formats and their effectiveness in revealing the true value of goods and services. Finally, the paper will examine the potential use of an auction to determine the value of Wells Fargo's consumer-facing banking division.