Merlin Entertainments introduces surge pricing

You may well have experienced a pricing method called surge or dynamic pricing if you are taking an Uber taxi. After a major concert, sporting event or just the city centre ‘rush-hour’ time in the evening Uber will increase its taxi fares as demand rises and becomes more price inelastic. 

Now surge pricing has started in theme parks with the entertainment company, Merlin, introducing surge pricing at its attractions across the world. Merlin’s Famous brand names such as Legoland, Sea Life aquariums and Madame Tussaud’s will vary their prices based on the local demand conditions at a particular attraction. For example, a sunny, warm day in New York City during the summer holidays will mean an increase in prices at Merlin’s Legoland New York and a rainy day in winter would mean a decrease in prices. 

In many ways, surge pricing is nothing new because many service-based industries such as airlines and hotels have used a theory called price discrimination when setting prices. At peak times when demand is price inelastic, an airline will raise prices which will increase its revenues and at off-peak times when demand is price elastic it will reduce prices which will also increase revenues. 

Merlin wants to use surge pricing in a similar way and use its understanding of the changing price elasticities of demand at different times at its theme parks to increase its revenues and profits. Technological development enables a business like Merlin to more accurately predict and model changes in demand as local market conditions change.

It is also possible to look at surge pricing as a way for a business, in this case Merlin, to capture consumer surplus in the theme park market. Merlin will know that different consumers are willing to pay different prices to visit, for example, Legoland. A traditional pricing model would mean Legoland charging a single market price to everyone in the market which allows those consumers willing to pay a higher price above the market price level to enjoy a consumer surplus. Surge pricing gives Merlin the opportunity to capture some of this surplus and transfer it to its producer surplus. 

On the face of it, the use of surge pricing may mean Merlin increases its profits at the expense of its consumers. Merlin’s management has argued, however, that surge pricing will improve their customers' experience because increasing price at peak times will stop their attractions from becoming too crowded and reduce queuing times. They have also argued that by reducing prices at off-peak times less well-off consumers can enjoy their attraction who otherwise would not be able to afford them.

The advance in technology in many service-based markets, such as cinemas and restaurants gives businesses more opportunities to use surge pricing and this is something consumers are probably going to have to face more of in the future.

Some possible questions to discuss with a class

1. Why do you think demand in theme parks becomes more inelastic at peak times?

2. How can Merlin use price elasticity of demand to increase its revenues?

3. How does surge pricing allow a theme park to capture consumer surplus?

4. Discuss the view that surge pricing is bad for consumers.