Dynamic Pricing in the Wake of Tariffs: How Firms Can and Should Use It

Delta Airlines' use of AI for dynamic pricing raises concerns as higher import tariffs make consumers more price-sensitive. Firms can use dynamic pricing to raise prices, but it could backfire if not framed appropriately. Wharton marketing professor Z. John Zhang suggests that firms could offer dynamic discounts as a more palatable approach to dynamic pricing. Consumers can also influence firms by being price-sensitive at certain times and tolerant of price increases when tariffs are high.

Delta Air Lines has announced plans to expand the use of artificial intelligence (AI) in ticket pricing, a move that has raised concerns among lawmakers and consumers alike. The airline aims to use AI to set prices on about one-fifth of its domestic flights by the end of 2025, a strategy that could lead to more personalized pricing but also raises questions about fairness and transparency.

The use of AI in dynamic pricing is not new to the airline industry. Delta has been using dynamic pricing models for decades, but the introduction of AI is expected to enhance the efficiency of these models. AI can analyze vast amounts of data to predict demand and adjust prices accordingly. However, the concern is that this technology could be used to charge customers more based on their individual "pain points," potentially increasing fares for those who are most price-sensitive.

Delta has faced scrutiny from U.S. senators who worry that AI-driven pricing could use personal data, such as social media activity or financial status, to set prices. The airline has assured that it will not use personal data for individual offers, but the senators have requested more transparency regarding the data the airline collects.

The timing of Delta's AI expansion is significant given the current economic climate. Higher import tariffs, including a 25% U.S. tariff on Indian imports announced by President Donald Trump, have made consumers more price-sensitive. Firms can use dynamic pricing to raise prices, but it could backfire if not framed appropriately. Wharton marketing professor Z. John Zhang suggests that firms could offer dynamic discounts as a more palatable approach to dynamic pricing. Consumers can also influence firms by being price-sensitive at certain times and tolerant of price increases when tariffs are high.

The broader industry response to the U.S. tariff has been to diversify further, not retreat from India. Companies are exploring alternative manufacturing hubs in Vietnam and Mexico. For Apple, the challenge is to balance its India investment with contingency plans in Southeast Asia or North America.

The use of AI in dynamic pricing is a complex issue that raises important questions about fairness, transparency, and consumer trust. As Delta and other airlines expand the use of AI, it will be crucial for them to address these concerns and ensure that their pricing strategies are fair and transparent. The success of AI-driven dynamic pricing will depend on how well airlines can balance the needs of consumers and investors in a changing economic landscape.

References:
[1] https://www.npr.org/2025/08/01/nx-s1-5479180/use-of-ai-in-airlines-ticket-pricing-raise-concerns
[2] http://www.econotimes.com/Delta-Airlines-Rejects-AI-Based-Personalized-Ticket-Pricing-Amid-Lawmaker-Concerns-1717845