Question

Compare and contrast surge pricing and congestion pricing. Give an example of each currently in use.

Answer 1

Congestion Pricing

Congestion pricing is a dynamic pricing strategy designed to regulate demand by increasing prices without increasing supply. The word "congestion" comes from using this strategy as a way to regulate roadway traffic.Congestion pricing is a way of adding a surcharge for services that are subject to temporary or cyclic increases in demand. Companies that engage in excess pricing are trying to regulate excess demand by applying higher prices during peak demand cycle.

Congestion pricing is often used in public transportation and roadways, where a higher price at peak periods is used to encourage more efficient use of the service or time-shifting to cheaper or free off-peak travel.

For example, the San Francisco Bay Bridge charges a higher toll during rush hour and on the weekend, when drivers are more likely to be travelling.

The London congestion charge discourages automobile travel to Central London during peak periods.

Surge Pricing

Congestion price is further broken down on basis of certain functionality. Dynamic pricing, also referred to as Surge pricing, demand pricing, or time-based pricing is a pricing strategy in which businesses set flexible prices for products or services based on current market demands. Businesses are able to change prices based on algorithms that take into account competitor pricing, supply and demand, and other external factors in the market.

Surge Pricing or Dynamic Pricing is a common practice in several industries such as hospitality, tourism, entertainment, retail, electricity, and public transport.

Uber uses the concept of surge pricing or dynamic pricing. The rates are high when supply of the transport service in a particular area is less as compared to demand.

Brands use concept of surge or dynamic pricing. Some third-party sellers in the Amazon Marketplace use software to change prices more frequently than would be feasible for people to do, in order to compete for business on price.