The idea of a dynamic pricing is nothing new to us in pensions. For instance the price we pay to exit a pension fund “swings” with the demand for sales on an individual day. If we are all running to the door at the same time, the price we pay to get out increases, if there is equilibrium between buyers and sellers, the price is seen to be fair value, if you are selling at a time of demand but weak supply, you benefit from the single swinging price.
Not many of us are aware that every time we do a fund or pension switch , buy new units or sell units to drawdown cash, we are entering into a bargain with a counterparty. The single swinging price is legal because the market has convinced Government that it is fair, cynics call it price-rigging.
Price rigging?
The complaints of those who did or didn’t buy Oasis tickets after waiting all day is that
- they didn’t know about dynamic pricing
- they had invested so much time that they felt they had no choice but to pay up or suffer regret risk.
I have sympathy for their plight, though I’ve made it clear on this blog , they were mad to waste the last day of summer on such a foolish enterprise as the Oasis online queue
Ticketmaster, whose screen is displayed above, argue that dynamic pricing reduces the value of secondary markets created by Vividseats ,Stubhub et al.
The FT explains
Raising prices to combat scalping is a tactic that has been used for years. During a 2016 frenzy to get seats for the musical Hamilton, producers raised ticket prices to $849 — a Broadway record but still well below prices in the secondary market, which had surged to thousands of dollars.
A Financial Times analysis found that the price rise was effective, almost halving the number of tickets resold on StubHub.
By making tickets unattractive to scalps by reducing re-sell margins, Ticketmaster claims it is a force for good. But the consumers simply see it as a “less-bad” version of the scalpers.
Let’s apply this logic back to pensions
Let’s look at annuities, generally thought of as a bad product in terms of VFM. Let’s say that they occupy a place in the public mind akin to Stubhub or Vividseats They provide a service that only about 10% of people use, mainly because of price.
Let us look at drawdown, as offered by the wealth management market, here there is dynamic pricing on offer. The more money you put into the wealth management market, the less you pay for it to be managed (tiered pricing) and even the highest price can be justified with reference to the poor value of alternatives – cash-out and annuitisation. Think of drawdown as the Ticketmaster of the process, a means to avoid the worst bu not exactly good value either!
Finally let’s look at occupational pensions, which pay annuity like income streams till the day you die. They are generally considered a good thing as they avoid dynamic pricing through sound management using a collective approach, sound fund trading (not getting caught by the single swinging price and they do not price gouge as annuities are seen to do. This is a little unfair on annuities which are not able to invest with the freedom of occupational pensions but there is still an enormous gap between the cost of an annuity and that of an occupational pension, (you only have to look at conversion and computation factors for that).
Finally , and very importantly, the smallest pension is calculated on the same basis as the largest. There is no dynamic or tiered pricing entitling the richer pension to get better value than the smallest one.
The simple approach to ticketing, that happens when dynamic pricing doesn’t. is that everyone gets the same deal , whether they are at the front or back of the queue and people aren’t impacted by the timing of their purchase.
The unfairness of the Oasis ticket pricing was and is entirely predictable So long as supply so outstrips demand, there will continue to be secondary markets for those too rich and lazy to queue. So long as there are secondary markets (formal or informal), Ticketmaster and their owners Live Nation will go on dynamically pricing (and arguing it is a public service).
The answer to all this is to buy good products at good prices. It may be we need regulation of ticket pricing and we may need to have an intervention into the “DC decumulation market”. We may also need an intervention into the DB market (as the Government is trying to do with consolidation vehicles). It’s because we aren’t clever buyers and we choose poor and over-priced products out of herding and hype. Dynamic pricing is behaviouralist; the essence of marketing is to understand the fallibility of human behavior and exploit it.
