Over the last four years we have seen consumers embrace the idea of paying more for a different type of experience when it comes to their consumption. For instance, some people are happy to pay more for having their groceries delivered instead of having to pick them up, pay Bolt a surcharge to go to a party in Paceville, and pay Wolt a fee to have their croissant and coffee delivered to the office.
Similarly, whether it is a last-minute flight to Naples, a hotel for an unplanned holiday in Rome, or a taxi ride after a huge concert at the Granaries, we have all been burned by higher-than-normal prices due to excess demand. My son-in-law’s girlfriend paid €20 more than him for her flight to Zurich recently, even though they made their bookings simultaneously on their respective laptops.
Different prices are normal across the travel industry when demand is buoyant. Have you noticed that, if you make, say, three searches for the same flight on the same day anywhere with Ryanair within a few minutes of each other, you will most likely get a higher price on your third try than you would the first time round? The only way of avoiding this is if you make your search incognito.
Now, consumers in many parts of the world are beginning to see the same ‘surge prices’ in more sectors. In the UK, a nationwide pub chain announced it would start charging more for beer during peak hours. A Barclays Bank survey of more than 2,000 UK consumers revealed that 47% of British people had noticed examples of surge pricing, while 32% actually had to pay a higher price for food and drink in pubs and bars during peak times.
If you have had such experiences, you have seen what is known as ‘dynamic pricing‘ in action. Though it is not an entirely new concept, dynamic pricing is very prevalent in e-commerce. The concept is simple: if demand for certain goods or services increases considerably and they become scarcer, that makes them more valuable. So companies increase their prices. Whether the surge continues depends on whether demand stays high.
Dynamic pricing is based on various other external factors. Apart from current market demand, it can also be triggered by the season, supply changes (due to war-caused disruptions in supply chains) and price bounding (upper or lower limits on prices). Product prices continuously adjust in response to real-time supply and demand.
Amazon is one of the largest retailers that uses dynamic pricing. Its algorithms continuously adjust and evaluate prices. On Amazon.com, millions of price changes occur within a day – that is a price change approximately every ten minutes for each product. A 2016 study showedthat the price of a Nikon camera on Amazon changed within hours from €700 to €1,687 – a difference of 240%. Changes like these also occur on shein.com, which is very popular with Maltese online shoppers.
Such frequent price changes have become possible due to the development of algorithms that incorporate the approach into business models. AI-enabled tools can source changes in inventory levels or derive optimal prices via machine learning algorithms. They can also track and learn competitor and customer responses to price changes based on previous shopping patterns and social media interactions.
And in Malta?
One can expect more of such dynamic pricing in Malta too. Private consumption expenditure accounted for around 42 percent of our GDP in 2022, still below the pre-Covid level. It is therefore understandable that businesses will want to use their understanding of the major forces at work behind developments in this variable to increase their turnover and obtain better profits.
Household consumption is, of course, strongly influenced by disposable income which has risen considerably over the last decade. But the magnitude and nature of consumption is also influenced by a number of other factors, some of which are not readily observable – cultural, psychological and institutional. As living standards increase, households tend to spend less on their basic needs but more on recreation, entertainment, education, and other services.
I am talking here about the medium to long-term trend, because it is obvious that if there are any sudden shocks – the Covid pandemic, the Ukraine war or the recent surge in inflation – households may adjust their consumption and start spending more again on food and drinks, rather than on eating out in restaurants. Such shocks may also lead to long-term changes in consumption patterns reflecting life-style changes.
One could safely say that a good many supermarkets in Malta have adopted an element of dynamic pricing as prices of goods are changing depending on the volumes of goods going through the cash tills or on consumer preferences. It was definitely the case recently when, faced with consumers looking for every cent to beat the inflation in prices, some supermarkets offered deals on fast-moving items, even while they increased prices of other up-market ones.
I cannot say that I have noticed any surge pricing occurring, though. This is bound to change as businesses look at their margins and whether they can manage them better in a highly-competitive environment. Surge pricing will likely expand to more industries and more companies in the long term, but just because a product may be popular does not mean that customers are willing to turn a blind eye to being charged more. Surge pricing could cause customers to lose faith in a company if they believe they are being overcharged.
Not exclusively profit-driven
By the way, dynamic and surge pricing is not exclusively profit-driven. Some retailers may also genuinely want to offer a competitive price to consumers and make sure that customers are able to purchase a product at an affordable, highly-appreciated price point. But to do that, retailers have to find their margins on other products, or in other locations.
This leads me to another important point. Consumer shopping behaviour tells retailers whether customers are willing to pay more in one area rather than in another. For example, a shopper in Tower Road, Sliema might be willing to pay more than one in Marsascala. Or one buying pasta might be willing to pay the higher price at Marks & Spencer than the lower one at Lidl.
Another factor in pricing is cost structure. A clothing store in Republic Street, Valletta is going to have higher rent than one in Misraħ il-Knisja, Mqabba and therefore a higher cost structure. Not to mention that the one in Valletta is probably competing with another dozen similar stores in the area, while the one in Mqabba might be the only one in the area.
Competition in certain sectors of the retail trade is very keen. A chart published by Malta Today two years ago shows the extent of competition between supermarkets, though one could say that Lidl had a leading position with a 22 percent share of overall supermarket turnover. This is far from what one would call a dominant position, which is normally between 40% and 45%. Since then, other operators have entered the market.
Are there de facto monopolies and anti-trust violations?
Recently, MEP Alex Agius Saliba created a stir when he asked the European Commission to investigate whether there could be anti-trust violations by Maltese food importers. He argued that Malta’s size and geographical limitations led to “the formation of de facto monopolies where a handful of importers dominate the market”. It is rather ironic that the MEP’s request was implicitly supported by author Mark Camilleri, who has been such a thorn in the PL’s side.
I cannot imagine that the European Commission will agree that there is a monopoly in food importation in Malta. A monopoly is a market structure characterised by a single seller or producer that excludes viable competition from providing the same product. This is clearly not the case, as there are dozens of food importers. So, there is certainly no monopoly, though there could be an oligopoly (three or more monopolistic suppliers). Oligopolies can be found in all countries and across a broad range of sectors. Some oligopoly markets are competitive, while others are significantly less so, or can at least appear that way. As to whether any of Malta’s food importers has a dominant position, it is unlikely that it is the case, given the high number of importers and the 40%-45% guideline.
Mr Agius Saliba also referred to the possibility of anti-trust violations. This could be the case if any of the market operators were engaged in verbal or written agreements to restrict competition and to abuse dominance. I am not aware that the MEP has submitted any evidence of anti-competitive behaviour by food importers, nor of any contacts between undertakings behaving in a parallel fashion that infer the existence of a concerted anti-trust practice.
It is true that the European Commission’s Competition Directorate General can start an investigation on receipt of a complaint, but the fact that the MEP did not request the Competition Authority in Malta to conduct its own investigation first could be a problem.
Irrespective of this, the thing that astounded me was the position of the Opposition, which accused Mr Agius Saliba of “attacking Maltese businesses”. Now, given that it was a Nationalist government which set up the Competition Authority in Malta to conduct such investigations, it is legitimate to ask whether that was just a PR exercise. Is the PN against such investigations, or does it object to them only when conducted by the EU Commission? If the latter, why should MEP David Casa, who regularly requests the Commission to investigate this and the other, be so hot under the collar about Agius Saliba’s request?
Cartoon: Klaus Meinhardt/Getty Images