The holiday season is upon us, and shoppers are in the homestretch of their search for gifts that pack a punch of (jingle) bells and whistles for friends and loved ones who made the nice list this year.

But what role will the economy, dynamic pricing, and shrinkflation play in consumers’ ability — or even interest — to cross items off their wish lists? 

We checked in with UNLV professor and economist Mark Tremblay for the lowdown on factors that might influence gift-giving gaffes. 

Rise of Dynamic Pricing

Have you noticed digital price signage popping up at your favorite retail store as proprietors phase out physical price tags? Paid top dollar for that last-minute plane ticket? Closed your Uber or Lyft app in frustration upon seeing prices surge as revelers make their way to the latest entertainment offering in town? 

It’s all part of a growing phenomenon known as dynamic pricing, said Tremblay, who’s at the forefront of research into the burgeoning field. 

The concept, broadly defined as “prices that change over time,” isn’t new. But, “with a lot of people buying products online, where prices can update by the second, you’re seeing higher frequencies in price changes. The technology that makes dynamic pricing possible is becoming more and more readily available.”

News reports have documented concerns among sticker-shocked social media users who worry the tactic could be used to exploit natural disasters or other emergencies, or to simply raise prices on a whim before a shopper can make it from the shelf to the checkout register. 

But companies and economists say it all boils down to supply and demand. Take the example of gas stations, which use third-party software to frequently update prices based on weather and other conditions. “If I run out of gas, I can’t sell gas. So for whatever reason everyone’s coming to the gas station on this corner of this day, they jack the price up to deter some consumers and maintain inventory so they don’t run out,” Tremblay said. 

Prior to the rise in online shopping, Tremblay said, businesses used dynamic pricing to essentially market test — figuring out which products would sell best and how much customers were willing to pay. Circa the mid-1990s dot-com boom, airlines became early adopters of using the tech to customize pricing. “And it makes sense,” Tremblay said, “because there are only so many seats on a plane. So they were always faced with this supply restriction — allowing them to adjust prices more frequently than other goods.” 

Since then, dynamic pricing has become status quo for consumers accessing products digitally, from rideshares and vacation home rentals to concert tickets and Amazon shopping. 

And now, brick-and-mortar retailers are starting to follow suit by adopting digital price tags: “Physical tags require a worker to go through and change them every time the price changes, which is very costly. So the whole point of the digital price tags is to allow for these changes in prices more frequently using software that accounts for inventory and potentially some demand factors too,” said Tremblay.

What does this all mean for holiday shoppers? Tremblay predicts that wild dynamic pricing fluctuations are unlikely because many retail sectors scale up supply to meet the increased demand — and the overabundance is more likely to result in markdowns relegated to the clearance rack.

“Historically, November and December have been the biggest months for video game sales because it’s a classic gift you give to kids,” he cited as an example. “And I think retailers and manufacturers across the board anticipate sales volume so they stock accordingly. Part of the story of dynamic pricing is that you increase your price because your inventory is low. But during the holiday season, there’s going to be higher demand for products in general. And, as you get later on in the holiday season, items with a ton of leftover supply start to go on sale because it wasn’t a popular holiday gift.” 

But there’s a catch, Tremblay says. “It’s also a time when retailers could potentially destroy the most goodwill for consumers and harm their brands if they egregiously raise prices to make extra profit on holiday items. People take their holiday season seriously.”

A Fine Line

To cut down on shopping cart costs, many consumers take up retailers on their offer of personalized coupons often available on phone apps. 

But could handing over all those personal details and intel on household habits be used to target certain shoppers with price discrimination?

Tremblay says there’s a fine line between dynamic pricing and price discrimination, broadly defined as charging two different people or groups different prices. The most prevalent instance observed in the wild is third-degree price discrimination — think of movie theaters using ID verification to charge adults, students, and seniors differently. But first-degree price discrimination, or personalized pricing, where every single consumer is potentially charged a different price, is becoming increasingly common with digitalization. 

In 2000, shoppers accused Amazon of displaying different prices to long-time versus new customers viewing the same DVD or MP3 products on different computer screens, presumably based on historical purchase patterns. But the company said the discrepancies were part of a dynamic price testing experiment to figure out how discounts impact sales. 

“This is where it can get tricky,” Tremblay said, offering an example from another industry.

“Imagine all of the grocery stores jack up their prices between 5 and 7 p.m. when people are popping in after work to grab something quick. The shopper’s probably not very price sensitive because they want to get in and out,” he said. “On the surface, it could be called dynamic pricing because it’s higher demand during that time of day. Or is it targeting one specific kind of consumer that they know is probably going to pay more?”

When Big Things Come In Little Packages

One increasingly popular – yet equally as controversial – way for retailers to curtail price hikes is through shrinkflation.

Tremblay cited a recent Marketing Science study that showed that when product packaging changed, those changes were five times more likely to reduce size rather than expand it.

“Firms are intentionally shrinking the product — and charging the same price for less — because it works,” he said. “If your competitor’s prices are going up but you keep your price the same, even in a smaller package, you benefit.”

International Perspective

As technology and consumer data gathering advances, Tremblay says “there’s no question” that consumers will see more inter-blending of dynamic and personalized pricing. He anticipates more U.S. policymakers to eventually set parameters, especially as consumer awareness grows through social media. 

The European Union, he said, is already active in regulating how firms set prices to prevent discrimination, restricting the data companies can collect on consumers, and making it easier for consumers to opt out or request information on which of their personal details have been gathered. But for both countries, there’s not much structure around how companies are allowed to use personal information to set or adjust dynamic prices.

“I wouldn’t be surprised if we see an evolution where consumers push back as a means of keeping firms in check, and firms may self-regulate because of that,” Tremblay said. “Often, a lot of policy change stems from the constituents wanting it. And we’ve seen this already: Apple has restricted how Uber and Lyft access data on your phone and use it to influence pricing.” 

Consumer backlash has similarly resulted in groundbreaking price transparency legislation surrounding AirBnB cleaning fees, Ticketmaster processing fees, and hotel-resort junk fees, he said.

“This isn’t an issue for Democrats or Republicans, it’s an issue for both,” Tremblay said, adding how both the Biden and Trump administrations helped push through the Federal Trade Commission ruling on bait-and-switch junk fees. “This is something that consumers care about, and politicians on both sides of the aisle seem to be interested in — which is great.”