How much would you pay for a glass of cool tap water? Nothing, perhaps, if a faucet is within easy reach. A small amount, most likely, if you're playing tennis at a park with no drinking fountain. And, if you've been lost in the desert for days, quite a bit.

Today, such variability in pricing shows up in certain business-to-business transactions and in a few types of consumer purchases, such as cars. In most transactions, though, customers assume that what they buy has a single, hard-and-fast, one-size-fits-all price.

That is changing quickly. In industries ranging from heavy industry to consumer services, advances in information technology mean that prices can now change automatically with the time of day, time of year, demand, supply, the customer's desperation to buy, the supplier's desperation to sell, or whatever else becomes relevant.

Already, a vanguard of companies ranging from electric utilities to airlines is abandoning the traditional business plans that use pre-set, mass pricing. Instead, these companies are experimenting with pricing that can be negotiated on the fly by buyers and sellers—or by computer programs instructed to act on their behalf. If the experiments succeed—and the initial results look promising—it could change the dynamics of commerce in coming years.

"What we have traditionally had are prices set based on costs," says Peter Drucker, the management guru. "We have to learn how to get them determined by the customer" and his particular needs.

The reason that pricing is finally starting to become more dynamic is that buyers and sellers have access to so much more information. For instance, sophisticated databases let suppliers track the buying patterns of individual customers. "Companies that capture data about customers can behave much more efficiently," says Valda Lief, an analyst at Forrester Research, a technology market research firm. "They can get rid of their inventory at the highest price the market can bear" for each item, rather than setting a single price for the whole lot.

In addition, suppliers know more about their own situations. A relatively new class of software called ERP, or Enterprise Resource Planning, lets suppliers keep track of inventory, component prices, etc., as never before.

From the viewpoint of customers, the spread of the Internet has given them broad access to services that tell them about the costs of companies they buy from. Some customers have even figured out how to use technology to band together and improve their bargaining power with suppliers.

In general, the spread of the Internet also lets suppliers line up more buyers and lets buyers find more suppliers—either helping drive prices up or down depending on which side manages to control the transaction, but, in any case, making prices more variable. The availability of ever-cheaper processing power also makes it possible for buyers and sellers to have computers negotiate for them, theoretically even for items as mundane as tap water or soda.

"Now that the technology is here, it's reasonable to attempt negotiation whenever possible," says Stuart Feldman, director of International Business Machines' Institute for Advanced Commerce. "This is simply the opening gun of dynamic pricing."

The gun has already sounded for businesses selling to other businesses. Many companies now auction goods over the Internet, simply establishing a deadline and then letting customers post their bids. Already, more than 200 commercial Web sites hold auctions for everything from lab equipment to used factory equipment to airplanes. Media Auction and Adauction both auction off unsold advertising space at the last minute so that media companies can unload unbooked space.

While used or perishable goods lend themselves to auctions because the value of what's being sold is so uncertain or can change as the deadline nears, the idea is being extended. General Electric, for instance, has a Web site that lists supplies it needs, such as steel for turbine blades in airplane engines. Any supplier can bid to sell to GE. Because auctions are more likely than negotiations to yield the best price and because GE has opened the bidding to so many more suppliers. GE saves tens of millions of dollars a year.

Similarly, shipping companies are experimenting with Web sites that would let them use auctions to line up extra cargo capacity when they need it. These companies expect that they'll not only get a better price but will be able to find capacity within minutes rather than spend a whole day making several rounds of phone calls to other shippers.

For companies that don't have the capacity to set up their own auctions, Freemarkets Online will handle things for them. Freemarkets simply lists what companies want to buy and lets potential suppliers bid.

Forrester Research predicts that on-line auctions of business-to-business goods will account for some $8.7 billion of sales this year, expanding to $52.6 billion in 2002. Within a few years, the company says, nearly a third of all sales on the Internet will occur via auction.

In addition to auctions, there are electronic exchanges, which operate much like stock exchanges traditionally have. A middleman—in this case, a new breed of entrepreneur—helps an individual supplier and a buyer find each other and settle on a price, in return for a percentage of the transaction.

Exchanges have proved particularly popular in the energy industry, where the deregulation of the utilities industry in California, Pennsylvania, and elsewhere has created a more entrepreneurial spirit. The Automated Power Exchange matches wholesalers and producers of natural gas and electricity with wholesale buyers. Exchange spokesman Jack Ellis says that, already, the Internet is being used to negotiate the price for as much as 80% of natural gas sold in California.

General Electric Information Services operates a similar exchange. Southern California Gas has an exchange, called Energy Marketplace, which it plans to open to residential customers looking for lower prices.

In telecommunications, ArbiNet, matches corporate long-distance customers with the cheapest possible carrier for a particular phone call. On the fly, it monitors rates on all carriers, based on time of day, the day of the week, the destination of the call, etc. ArbiNet hopes to expand into the consumer market eventually.

Even leaving aside the pricing possibilities created by the Internet, many companies are finding that they can price more intelligently by using their internal information systems better. Wells Fargo, for instance, used to make a simple go/no-go decision on loans to small businesses. If a business qualified, it got the same interest rate whether the loan received marginal approval or whether the business was deemed to carry almost no risk. Now, Wells Fargo takes advantage of the myriad information sources on small business and uses a sophisticated credit-scoring model to set interest rates on loans based on risk. Wells Fargo can now make many more loans than in the past—because the higher interest rates more than offset the additional defaults—and has become the national leader in small-business lending.

While pricing to consumers isn't as dynamic as business-to-business pricing in many areas, the consumer market is blazing other trails. Even before the era of networked computers, some consumer companies were offering a variety of prices for the same service. Car rental companies, for instance, raise rates on the most popular weekends. Credit-card companies also have long made a practice of charging different interest rates for different customers.

Airlines, of course, led the way in the consumer market. In part by using sophisticated yield-management software to raise rates on business travelers, who have little choice but to pay up, and to lower prices on seats that would otherwise fly empty, airlines have collectively gone from billions of dollars of losses in the early 1990s to billions of dollars in profits. Airlines are now going the next step, using their systems to set even lower fares on many seats at the last minute and sending e-mail bargain offers to members of their frequent-flier programs. In addition, a Web-based business called PriceLine is setting up a sort of auction for airline seats. Customers can name the maximum price they would pay for a ticket, and PriceLine searches for a carrier willing to sell at that price. Recently, travelers looking for inexpensive fares to London from New York in high season obtained round trip tickets for $600 each—some 40% below the lowest fare quoted by a travel agent.

The company says it plans to expand into selling cars and, eventually, home mortgages and long-distance calls.

Meanwhile, others in the travel industry are following the airlines' lead. Holiday Inn, for example, is testing yield-management software developed by Sabre, the airline reservations system, that will inform the hotel when to raise or lower room rates to keep both prices and occupancy high. Other hotels have experimented with cruder systems that encourage high occupancy by lowering prices based on how many rooms are still available and how much time is left to fill the rooms.

In Norway, the operator of a toll road raises and lowers tolls according to the traffic volume and even the weather. A private stretch of highway in Southern California takes a simpler approach, setting rush-hour and non-rush-hour prices. Plans for I55 call for the installation of technology to allow large cities to levy tolls on trucks based on the time of day they travel. (The technology involves a roadside fiber-optic network that uses radio signals to recognize passing trucks carrying so-called smart cards in their windshields.) The idea is to encourage trucks to travel at off-peak times.

While companies so far are more likely to find ways to benefit from variable pricing, consumers can benefit, too. Web sites such as Jango will search the Internet and find the prices for any product, then list them from lowest to highest. The site pushes suppliers into an auction to buy consumers' business. NetMarket, a membership-based service offered by Cendant, checks competitors' prices at their Web sites and guarantees it will beat them. [See Technosynthesis.]

Some experts think consumers could even use the Internet to form cartels and increase their buying power. The concept is a simple one, much like that used by the 1960s era food co-ops that used to buy their grains and beans in bulk. Small business owners and groups of industry professionals already often band together to increase their bargaining clout. But the reach of the Internet is letting more diverse groups form—for instance, helping patients negotiate as a group with doctors and hospitals.

Even when a negotiation doesn't occur over the Web, the spread of information made possible by the Internet gives customers more power because they can easily learn about the true costs of the companies they buy from. For instance, Edmund's, which tracks car companies, tells visitors to its Web sites about current promotions that are being offered to dealers to move certain kinds of cars.

It's easy to see how dynamic pricing could spread. Retailers could follow the airlines and raise prices as they see demand increasing or inventory falling for, say, a particular Beanie Baby or even a certain size of a specific kind of dress. Computer companies could make PC prices vary day-by-day, rather than underpricing some types and running out or overpricing others and eating a bunch of inventory at the end of the quarter—which is how most computer companies have been operating for years. Coca-Cola could program its highly intelligent new vending machines to price sodas based on how hot it is outside at that moment (although the company says it won't).

Some economists even argue that the idea of variable pricing could be implemented nationwide to alleviate much of the congestion on roads. Much as happens on the one road in Norway, smart cards would be installed in every windshield, and travelers would know that they would pay lower tolls at night, more at rush hour, and either more or less depending on local traffic patterns at other times of the day. Someone wanting to use the express lane would simply pay more, rather than have to have two or three people in the car.

To Jerry Kaplan, who runs the Internet's leading auction site, OnSale, one-to-one negotiation is the heart of electronic commerce. Mr. Kaplan says he can picture the day when people will carry smart cards, which they will swipe across a product or display to find any item's price at that moment.

There are plenty of human reasons for thinking that dynamic pricing will proceed in fits and starts, rather than immediately changing the nature of pricing. Imagine the outcry if a variable-toll system were implemented nationally tomorrow. Civil rights groups, among others, would shout that the poor were being cleared off the roads to make room for the rich. Imagine the charges of gouging that Toys R Us would face if it made Grandma bid up to $400 to buy the last Dotty Beanie Baby for her granddaughter. Imagine the discontent if Coca-Cola actually reprogrammed its vending machines. Already, governments prosecute scalpers, who are really just charging a market price for set-price tickets to popular concerts or ballgames.

Still, the idea of flexible pricing has been around for a long time in many forms. Variable pricing is what makes stock markets, commodities markets, and other financial markets work, for instance. By some counts, the shift to flexible pricing is really just a return to the good old days when merchants and artisans would negotiate a price with each customer. In fact, fixed pricing only came into widespread usage during the Industrial Revolution. It was only when factories began churning out thousands or millions of identical items that it began to make sense to charge identical prices.

It's not hard to imagine, then, that the psychological objections to highly variable pricing will gradually go away. And, with companies shifting from making millions of identical items to making exactly what each individual customer wants, why pay the same price for each item? So, how much would you be willing to pay for that ice-cold Diet Coke?