Transitioning to dynamic prices: Should pricing authority remain with the company or be delegated to the service employees instead?

Abstract

Dynamic pricing is typically implemented via pricing algorithms that react to varying levels of supply and demand. Some companies, such as Uber, also vary prices for different offers, such as standard cars or limousines for a ride. However, companies usually do not proceed to the next logical step and delegate pricing authority to their employees. This is astonishing as service employees often vary in service quality, possess unique business knowledge, hold close relationships with customers, and influence the overall customer experience. The authors investigate the consequences of delegating pricing authority to employees. They also investigate the responses of customers who face a situation where their firm transitions from fixed to dynamic prices set by the firm (control group) or service employees (treatment group). The findings demonstrate that the actual dynamic price paid affects customers’ distributive fairness perceptions, which influence their behavioral responses. The authors find support for pricing authority (firm vs. employee) acting as a second-stage moderator. The results provide supporting evidence for the stylized fact that firms keep the pricing authority with the company and do not delegate it to service employees instead.