James Plunkett :
Imagine strolling with a neighbour to the corner shop, only to be charged more than her for buying the same box of cornflakes. You’d better get used to that feeling of unfairness because “price discrimination” could be a big part of the future of retail. In fact, it’s already here. On some websites, online prices now bounce up and down in ways that are specific to you – depending on what you’ve bought before, what you paid for it and even what you’ve previously browsed and not bought. Big data, the cascade of digital traces we all leave in the networked age, allows firms to gather information on customers, and they can use that information to figure out, with unprecedented accuracy, how much we’re each willing to pay – and, therefore, the maximum they can charge.
Put like this, price discrimination sounds unappealing, and there’s no doubt it offends the expectations we’ve developed in the mass consumer markets of the last 70 years. We’ve grown used to prices not varying for the simple reason that companies haven’t known the maximum their customers were willing to pay – their so-called reserve price.
Price discrimination is neither entirely new nor all bad news. Some fish and chip shops offer “pensioner specials” on the same basis; and coffee shops in Belgravia charge more than cafés in Bootle – not just because the rent is higher, but also because they have a hunch that the locals will be willing to pay more. Prices also vary on an individual basis in sectors like secondhand cars, where haggling survives.
So how big a change are we in for? And how worried should we be? Well, tech-savvy companies can already use data analytics to estimate the reserve price of individual shoppers. Furthermore, they can act on that information, using cookies left on a laptop or phone, to present different prices when different people visit their online stores. And because data sources like a customer’s browsing history are far better predictors of price sensitivity than yesterday’s simple demographic data, the discrimination itself gets far more precise, and so far more profitable.
Prices can also be varied to reflect the cost of serving individual customers. Big data makes it easier for firms to identify high-cost customers – such as people who are less likely to pay back their debts – and charge them more. You may not even know why you’re paying more than someone else.
To grasp the full implications of big data, however, you have to look at price discrimination alongside a second trend: the incredible power of behavioural insights. Companies can now nudge consumers, in ever more subversive ways, into parting with their money. Retailers are, of course, old masters at these knowing winks: Think of the sweets by the checkout counter to encourage impulse purchases.
If a market functions well, with little regret, then the fact that you bought something in itself reveals it was worth buying. That premise has long been relied on to show that markets lead, a priori, to better outcomes. When behaviuoral tricks come into play, however, that argument goes weak at the knees. Does the fact that you’re paying for a monthly subscription, after a free trial ended, mean you want the subscription? What if you haven’t switched because the process was made deliberately burdensome? Are you choosing these outcomes?
A few things still seem clear. Big data will only become more ubiquitous; computational power and speed will keep soaring; retail will continue to move online and out of physical stores. All of this means that tomorrow’s consumer economy will look a lot like today’s tech sector, and regulatory policy simply isn’t ready for that.
Governments will need to scrutinise prices for particular groups of consumers more closely – and, if need be, step in to protect them.
There is a moral dimension to thrash out too – what are the ethics of price discrimination? What is okay, and what is not okay? Whose job is it to solve these challenges? Can a new relationship between the market and the state be settled technically, out of the hands of politicians, by the experts at our big utility regulators? That’s a nice idea, but when technology and public opinion move so fast, there’s every danger regulators will be caught short.
(James Plunkett is director of policy and advocacy at Citizens Advice. Courtesy: NYT Syndicate)
