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What Is Dynamic Pricing? Why Airfare Results Could Soon Depend on Who You Are

There’s a mounting possibility of a big shake-up in how you purchase your airfare, some travel outlets report: Major airlines might soon employ a new technology called dynamic pricing to assign different fares to different types of air passengers without their knowledge.

[st_content_ad]In fact, sources say, some airlines are probably using a rudimentary version of dynamic pricing already. It seems any time an airline thinks it can squeeze more money out of each passenger, you can bet it will. Here are nine questions you might have about dynamic pricing, answered to reveal how the technology could affect you.

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What is dynamic pricing?

The fundamentals of dynamic pricing are simple: When you search for an airfare, an airline uses information like your search history to display prices based on which fare class it believes you’re most likely to prefer, and how much it calculates you’re willing to pay. The fares you see might be very different than the ones shown to other customers searching exactly the same trip at the same time.

Does that mean the airline has to know who I am?

Yes. In order to tailor the prices displayed to you, an airline has to recognize you and have some data about your travel-buying history. If you’ve ever bought anything on Amazon, you’ve seen how it works: Log on, and suggested items reflect your purchase and browsing history with the site.

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How does an airline recognize me?

That depends on how you’re searching. If you log onto an airline’s site directly from one of the devices you use most frequently, that device probably already has a cookie (tracking technology) that identifies you to the airline.

Even without a cookie, your device’s unique IP address can provide a key to trace your identity. If you enter your frequent flyer number, the airline has even more information about you. According to trade reports, an airline can identify you even if you’re logged in through an online travel agency such as Expedia, although the exact mechanism isn’t completely clear.

How does an airline set dynamic prices?

At any given time, most airlines currently maintain up to 26 fare groups for their flights, ranging from bare-bones basic economy to first class. Several of the economy groups are base fares, plus extras like seat choice, a checked bag, and an in-flight meal. Airlines can change both the fares in, and number of seats allocated to, each fare group several times a day. They may also leave them at a set level for several days.

At its most basic approach, an airline sets a dynamic price by selecting which established fare group to show you, based on what its system believes you’re likely to buy.

At a more advanced approach, an airline can tweak the price for each bucket in real time, again based on assessment of your buying history, selecting what to present to you at a unique price, and in real time.

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Does dynamic pricing offer any consumer benefits?

Airlines and their pricing consultants claim that dynamic pricing is used, as Travel Weekly puts it, “to offer discounts to customers with loyalty status and to generate bundled fare offerings that fit the customer’s profile.” That sounds harmless enough, but it’s not the whole story.

How do airlines benefit from dynamic pricing?

Despite outwardly focusing on supposed customer benefits, airlines know that dynamic pricing adds to their bottom line. According to the Travel Weekly report, it achieves “incremental revenues in the 7 percent to 10 percent range.” Simply put, that means travelers buying through a dynamic pricing system pay 7 to 10 percent more than travelers buying through the conventional pricing system.

Loyalty discounts, or increased revenue? You can decide the motive for yourself.

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What could deter airlines from dynamic pricing?

Basically, changing their legacy information systems. For a big airline, modernizing its technology is a lot more complicated than downloading the latest version of Windows or MacOS on a few thousand computers. Merging information systems has been a primary barrier to full integration in several airline mergers.

Beyond that, technological communication between airline systems and internet booking sites isn’t exactly strong. Most big airlines still have a long way to go in developing more modern information systems and integrating outside ones, but they and their consultants are working feverishly to do it.

What are the “gotchas” of dynamic pricing?

Overall, dynamic pricing makes airfare less transparent. An airline does not display all of the options that fit your search. Most problematic of all, it may not show the lowest available fare at all.

A more pernicious gotcha is that an airline might present you with a fare option that’s higher than an identical bundle offered to other consumers, because the system says you might pay more than the average customer.

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How can I avoid a dynamic pricing gouge?

For now, you will have to search airfares for any trip at least twice.

Start by logging onto the airline’s own website, and see what dynamic pricing has in store for you. Then do the same search through a metasearch system like TripAdvisor (SmarterTravel’s parent company) or Google Flights, without logging in to anything or identifying yourself in any way. For even more isolation, you can also search an airline’s site using one of the private search services, such as DuckDuckGo or Ixquick’s StartPage. Or if you’re a real geek, you can establish a virtual private network (VPN). These options will effectively hide your identity from any website you visit.

Then with all the results in hand, select the one that you, not the airline, think fits you best.

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Consumer advocate Ed Perkins has been writing about travel for more than three decades. The founding editor of the Consumer Reports Travel Letter, he continues to inform travelers and fight consumer abuse every day at SmarterTravel.

By Ed Perkins

A nationally recognized reporter, writer, and consumer advocate, Ed Perkins focuses on how travelers can find the best deals and avoid scams.

He is the author of "Online Travel" (2000) and "Business Travel: When It's Your Money" (2004), the first step-by-step guide specifically written for small business and self-employed professional travelers. He was also the co-author of the annual "Best Travel Deals" series from Consumers Union.

Perkins' advice for business travelers is featured on MyBusinessTravel.com, a website devoted to helping small business and self-employed professional travelers find the best value for their travel dollars.

Perkins was founding editor of Consumer Reports Travel Letter, one of the country's most influential travel publications, from which he retired in 1998. He has also written for Business Traveller magazine (London).

Perkins' travel expertise has led to frequent television appearances, including ABC's "Good Morning America" and "This Week with David Brinkley," "The CBS Evening News with Dan Rather," CNN, and numerous local TV and radio stations.

Before editing Consumer Reports Travel Letter, Perkins spent 25 years in travel research and consulting with assignments ranging from national tourism development strategies to the design of computer-based tourism models.

Born in Evanston, Illinois, Perkins lives in Ashland, Oregon with his wife.

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