CDT has previously written about the increased risks of collusion enabled by the growing power and capabilities of data supercharged by artificial intelligence.[1]<\/p>\n\n\n\n
A corollary exposure to consumers courtesy of untrammeled data collection and powerful algorithms is enabling a seller to tailor the price it offers to what the seller knows about the particular consumer\u2019s identity, preferences, and situation.\u00a0This practice has been variously referred to as \u201cindividualized pricing\u201d \u2013 or \u201cdynamic pricing,\u201d of which the practice is a subspecies \u2013 by those who wish to emphasize its potential benefits, or as \u201csurveillance pricing\u201d by those who want to highlight its invasiveness and its potential to be weaponized against vulnerable consumers without their awareness, let alone their consent.[2]<\/p>\n\n\n\n
A more apt name might be \u201cbespoke pricing,\u201d as the price is being custom-tailored by the seller to fit the particular customer \u2013 made-to-measure.<\/p>\n\n\n\n
Bespoke pricing is not entirely new.\u00a0Some products and services innately require the seller to charge different prices to fit the particular consumer\u2019s situation.\u00a0Insurance and credit are two prominent examples, where underwriting is used to determine the price to charge the particular buyer based on the risk posed \u2013 because the actual cost to the seller \u2013 for the claims made on the policy, or for the default on the credit \u2013 cannot be determined until after the sale.[3] And it is also customary for larger consumer purchases like homes and cars, where prices are typically the result of negotiations between buyers and sellers.<\/p>\n\n\n\n
Dynamic pricing in the broader sense includes charging different prices based on a seller\u2019s sensitivity to fluctuations in supply and demand, which can have the effect of discerning different categories of buyers expected to be willing to pay different prices.\u00a0One example is airline tickets that for the same flight are priced lower when purchased in advance \u2013 more likely by individuals and families planning travel for personal reasons, on a budget \u2013 and priced higher when purchased closer to the time of the flight \u2013 more likely by persons traveling for business, on a corporate expense account, or persons with an urgent, last-minute need to travel, and no flexibility.<\/p>\n\n\n\n
Bespoke Pricing\u2019s Ancient Origins<\/strong><\/p>\n\n\n\n Bespoke pricing has ancient antecedents, hearkening back to the beginning of commerce and trade.[4]\u00a0Even in prehistoric times, we can imagine that every exchange that did not occur by force was between two individuals who knew each other, or came to know each other, based on a recognition of each other\u2019s needs and wants.\u00a0Importantly, it was presumably a mutual <\/em>recognition.\u00a0<\/p>\n\n\n\n Similarly, in a medieval marketplace, merchants exercised their own form of bespoke pricing, sizing up each prospective customer for how much they\u2019d be willing to pay, and testing them with a higher, even exorbitant price initially. But customers could similarly size up the merchant, and could exercise their own recourse, not just to refuse to pay until the price seemed reasonable, but to walk through the marketplace to see what price other merchants were asking and what price they would accept. There was still mutuality, with a rough equivalence of transparency, and of bargaining power \u2013 especially when there were competing merchants.<\/p>\n\n\n\n Arrival of the Anonymous Buyer<\/strong><\/p>\n\n\n\n Bespoke pricing continued into the Industrial Age, as selling increasingly moved into brick-and-mortar stores.\u00a0Then in the 1870\u2019s, a marketing revolution occurred \u2013 the price tag was introduced at a department store, the Grand Depot in Philadelphia, and quickly caught on.[5] Sellers realized they were not as apt to know their customers, and it became more efficient to post \u2013 to advertise \u2013 a price that all customers could see.\u00a0This did not always prevent a customer from trying to bargain for a discount.\u00a0But most customers came to accept the posted price, for most products.\u00a0And store owners competed by setting the advertised price at a level calculated to appeal to as many consumers as possible, at a high enough price, to maximize profits.\u00a0The price tag ushered in anonymity for buyers, and sellers coped by standardizing their prices.<\/p>\n\n\n\n Online Shopping Shifts the Balance<\/strong><\/p>\n\n\n\n The internet promised to be a boon to consumers, making it far easier and more convenient for them to comparison shop across a vast, potentially unlimited number of sellers.\u00a0And it largely delivered on that promise, and brought new, competitive pressure on sellers to make sure they were offering comparatively attractive deals.\u00a0But online commerce also engendered a new market, for consumer data, which has been collected, organized, distributed, sold, and cross-referenced on a massive scale \u2013 sometimes referred to as \u201cbig data.\u201d<\/p>\n\n\n\n Big data has created the potential for sellers to regain the upper hand, fundamentally reversing the anonymity equation. Now the seller\u2019s pricing decisions can be obscured, while the buyer becomes an open book.<\/p>\n\n\n\n Pro-competition? Pro-consumer? Or Neither?<\/strong><\/p>\n\n\n\n Proponents of bespoke pricing have touted it as a vehicle for promoting competition. And in theory, by enabling a seller to tailor its offer to a particular consumer\u2019s situation, bespoke pricing could incentivize the seller to lower<\/em> its price for that consumer to a point that wins the sale from some rival seller. Multiple rival sellers engaging in this practice simultaneously could, theoretically, create new possibilities for competition, bringing the efficient allocation of resources to new heights.<\/p>\n\n\n\n In practice, however, it is questionable whether more competition, and lower prices for some consumers, would actually be the result.\u00a0It would depend on where the rival sellers\u2019 profit-maximizing incentives lead them.\u00a0Marshaling this increased amount of data into their pricing calculations might well lead them to monitor and coordinate with each other\u2019s pricing, promoting collusion rather than competition.[6]<\/p>\n\n\n\n Moreover, the consumer would be left entirely in the dark about a seller\u2019s price-setting context, while the consumer would be utterly visible to the seller. The seller would have access to vast amounts of data about the consumer, such as the consumer\u2019s previous purchases of or searches for the product or service, and for similar and related products; the consumer\u2019s income, assets, debts, and financial condition and history; other purchases that reveal the consumer\u2019s propensity to spend; activities the consumer and the consumer\u2019s family engage in that manifest a need for or benefit from the product or service; any urgency for that need or benefit; and broadly, any characteristics revealed by the consumer\u2019s web-browsing history, or by other behaviors tracked and fed into the big data maw, that may indicate the consumer is more susceptible to sales-pitch puffery or pressure. <\/p>\n\n\n\n Granted, those insights might enable a seller to spot a consumer who has thus far not been willing, and is not likely, to purchase at the original offered price, but who has a sufficient need or desire or use for the product or service to be more likely to purchase it at a somewhat reduced price. The seller could even sequentially reduce the offered price until that consumer is willing to buy its product or service rather than a competitor\u2019s product or service. Isn\u2019t that the essence of healthy competition?<\/p>\n\n\n\n If the engagement actually occurred in that fashion, that would indeed constitute competition, and that particular consumer would come out ahead in that instance, as would the seller.<\/p>\n\n\n\n The question is how likely bespoke pricing is to occur in that fashion.\u00a0The same digital resources that would enable a seller to target price reductions<\/em> can just as easily enable targeted price increases<\/em> for consumers who the seller determines are willing to pay more.[7]\u00a0Those digital resources can also enable the seller to coordinate with other sellers to avoid<\/em> price reductions when they perceive anticompetitive price-fixing to be in their collective net interest.[8]\u00a0Sellers engaged in such a price-fixing conspiracy have the incentive and, with those digital resources, the potential ability to retaliate against a seller who selectively cuts prices, because that undermines the stability of the conspiracy.\u00a0But they do not have an incentive to retaliate against a seller who takes advantage of an opportunity to selectively raise<\/em> prices.[9]<\/p>\n\n\n\n So all told, the incentives for using bespoke pricing are all too likely to skew in the direction of higher prices. Informed consumer choice is the engine that drives competition; because consumers won\u2019t be as informed, and thus will have little or no agency in the supposed competitive benefits, they are more apt to be taken advantage of than to benefit.<\/p>\n\n\n\n Regardless, this justification is likely to be too abstract to appeal to the typical consumer.\u00a0When consumers learn that companies are using bespoke pricing, they will assume that they are being subjected to it, without their knowledge or consent, and being taken advantage of.\u00a0They are apt to react viscerally, to regard it as invasive of their privacy, and offensive to their sense of fairness. When they are told that it\u2019s the \u201cinvisible hand\u201d[10] at work, they are likely to conclude that the invisible hand is picking their pocket.<\/p>\n\n\n\n Consumers will see data-charged bespoke pricing as a fundamental reversal of the way the marketplace has worked, to their benefit, for 150 years, since the arrival of the price tag.<\/p>\n\n\n\n Possible enforcement action or legislation<\/strong><\/p>\n\n\n\n Bespoke pricing has caught the attention of the Federal Trade Commission.\u00a0The FTC has launched a study of the practice and its effects under its section 6(b) authority, requesting information from eight data intermediary companies that offer pricing products and services that incorporate data about consumers\u2019 characteristics and behavior.[11]\u00a0The results of the study will inform the FTC, Congress, and other policymakers, and the public, about the practice and its effects.\u00a0And it will help the FTC determine whether the practice is a violation of the FTC Act and, if so, in what circumstances, or if new rulemaking or legislation is warranted to prohibit or rein it in. Stronger privacy laws<\/strong> <\/p>\n\n\n\n Enacting stronger data privacy laws, which has been a top priority for CDT since our founding three decades ago,[13] would have many benefits for consumers, among them dramatically curtailing the potential for bespoke pricing.[14]\u00a0Restricting sellers\u2019 access to consumers\u2019 personal data as a basis for setting prices would limit sellers\u2019 intimate knowledge of their customers, and would confine targeting only to broad categories of consumers, based on factors like geography, timing of purchase, and quantity.\u00a0With sufficiently strong data privacy protections, we could restore some anonymity to buyer identities, like price tags in a brick-and-mortar store offered.<\/p>\n\n\n\n Restoring anonymity through purchasing agents<\/strong><\/p>\n\n\n\n An interesting approach to consider, in addition to or as an alternative to legal action or new lawmaking, is using technology to restore anonymity and put power back in the consumer\u2019s hands, by means of one or more intermediaries who could act as a purchasing agent for the consumer.\u00a0The seller would have no information about the prospective buyer beyond the fact that the buyer is choosing to use the intermediary. Ideally, this would mean eliminating the use of any third parties to process the data. And for further protection, the consumer\u2019s request, and all subsequent communications, would be encrypted.<\/p>\n\n\n\n One good option for a purchasing agent could be an independent, non-profit consumer organization with the capability and integrity to maximize reliability and trustworthiness. Using a non-profit could keep the fee the agent would charge to a nominal amount, close to the amount needed to cover the amortized costs of setting up the service and the expenses of running it.<\/p>\n\n\n\n Consumer Reports is one example of the kind of organization that could be a suitable candidate for establishing such an intermediary purchasing agent.\u00a0CR has the credibility of a strong brand with consumers, as well as significant resources.\u00a0And it has experience with two principal components of this approach, anonymous purchasing and agency. Its experience with anonymous purchasing goes back over many decades of purchasing the products it tests in the marketplace, without disclosing that CR is the one purchasing them. More recently, CR has established the Permission Slip,[16] under which a consumer can appoint CR as their authorized agent to contact any number of companies to request that they stop sharing that consumer\u2019s personal data, or that they delete it altogether.\u00a0The infrastructure for an authorized purchasing agent service would be similar in scale to Permission Slip, matching a consumer with multiple companies.<\/p>\n\n\n\n To the extent that bespoke pricing can actually benefit<\/em> consumers, and can further the pro-competitive objective of expanding the market, by offering a lower price to consumers who need it to afford to purchase, those consumers can still obtain that benefit by checking prices both ways and comparing them.<\/p>\n\n\n\n Sellers might say they need<\/em> to charge higher prices to some consumers in order to lower the price to other consumers and still obtain the same overall revenue. But in a marketplace where competition is functioning effectively, a seller will still have incentives to identify prospective buyers who would pay a lower price that would still be profitable to the seller.<\/p>\n\n\n\n Conclusion<\/strong><\/p>\n\n\n\n Bespoke pricing is likely coming soon, to sellers near you \u2013 if it has not already arrived.\u00a0The technological capability is here, and the incentive to use it will be irresistible.[17]\u00a0We need to come to terms with how to confront it on the consumer side, so that the online marketplace works for consumers as promised when its arrival was heralded. The FTC investigation and the Senate Banking inquiry are good places to start.<\/p>\n\n\n\n [1] G. Slover & H. Babinski, Is Artificial Intelligence a New Gateway to Anticompetitive Collusion, Center for Democracy & Technology, Oct. 2, 2023, https:\/\/cdt.org\/insights\/is-artificial-intelligence-a-new-gateway-to-anticompetitive-collusion\/. <\/p>\n","protected":false},"featured_media":86101,"template":"","content_type":[7251],"area-of-focus":[5660,78],"class_list":["post-105723","insight","type-insight","status-publish","has-post-thumbnail","hentry","content_type-blog","area-of-focus-competition","area-of-focus-privacy-data"],"acf":[],"_links":{"self":[{"href":"https:\/\/cdt.org\/wp-json\/wp\/v2\/insight\/105723","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/cdt.org\/wp-json\/wp\/v2\/insight"}],"about":[{"href":"https:\/\/cdt.org\/wp-json\/wp\/v2\/types\/insight"}],"version-history":[{"count":5,"href":"https:\/\/cdt.org\/wp-json\/wp\/v2\/insight\/105723\/revisions"}],"predecessor-version":[{"id":105729,"href":"https:\/\/cdt.org\/wp-json\/wp\/v2\/insight\/105723\/revisions\/105729"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/cdt.org\/wp-json\/wp\/v2\/media\/86101"}],"wp:attachment":[{"href":"https:\/\/cdt.org\/wp-json\/wp\/v2\/media?parent=105723"}],"wp:term":[{"taxonomy":"content_type","embeddable":true,"href":"https:\/\/cdt.org\/wp-json\/wp\/v2\/content_type?post=105723"},{"taxonomy":"area-of-focus","embeddable":true,"href":"https:\/\/cdt.org\/wp-json\/wp\/v2\/area-of-focus?post=105723"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}
The practice has also been the subject of hearings in the Senate Committee on Banking, Housing, and Urban Affairs, with follow-up letters to Walmart and Amazon inquiring about their use of pricing algorithms.[12]\u00a0<\/p>\n\n\n\n
To be most effective, an organization acting as purchasing agent would be able to guarantee \u2013 and willing to be held accountable for \u2013 preserving the consumer\u2019s anonymity.\u00a0This should include, for example, that the purchasing agent not ask for, collect, or retain any data beyond what is necessary and proportionate for acting as the consumer\u2019s agent, including for ensuring that the product is delivered at the agreed price and terms.[15]\u00a0The data should also be carefully protected against access by any third party, as well as by anyone working at the organization not involved in arranging the specific purchase.<\/p>\n\n\n\n
[2]\u00a0D. Dayen, One Person One Price, The American Prospect, June 4, 2024, https:\/\/prospect.org\/economy\/2024-06-04-one-person-one-price\/. An analogous concern has arisen regarding companies\u2019 use of workers\u2019 personal data to discriminate in what they are paid. See, e.g.,<\/em> Veena Dubal, On Algorithmic Wage Discrimination, 123 Columbia Law Rev. 1929 (2023), https:\/\/www.jstor.org\/stable\/27264954.
[3] See<\/em> FTC Issues Orders to Eight Companies Seeking Information on Surveillance Pricing, July 23, 2024 (concurring statement of Commissioner Ferguson), https:\/\/www.ftc.gov\/system\/files\/ftc_gov\/pdf\/surveillance-pricing-6b-ferguson-concurrence.pdf.
[4]\u00a0See<\/em> Federal Trade Commission, Behind the FTC\u2019s Inquiry into Surveillance Pricing Practices, July 23, 2024, https:\/\/www.ftc.gov\/policy\/advocacy-research\/tech-at-ftc\/2024\/07\/behind-ftcs-inquiry-surveillance-pricing-practices.
[5]\u00a0 J. Glorfeld, John Wanamaker Makes a Sale, Cosmos, May 2, 2021, https:\/\/cosmosmagazine.com\/people\/john-wanamaker-makes-a-sale\/; B. Wallheimer, Are You Ready for Personalized Pricing?, Chicago Booth, Feb. 26, 2018, https:\/\/www.chicagobooth.edu\/review\/are-you-ready-personalized-pricing#.
[6] \u00a0See<\/em> Slover & Babinski, n. 1; The New Invisible Hand? The Impact of Algorithms on Competition and Consumer Rights, Senate Comm. on the Judiciary, Subcomm. on Competition Policy, Antitrust, and Consumer Rights, Dec. 13, 2023, https:\/\/www.judiciary.senate.gov\/committee-activity\/hearings\/the-new-invisible-hand-the-impact-of-algorithms-on-competition-and-consumer-rights.
[7] See<\/em> C. Dilmegani, Ultimate Guide to Dynamic Pricing in 2024: Roadmap & Vendors, AIMultiple, Jan. 3, 2024, https:\/\/research.aimultiple.com\/dynamic-pricing\/.
[8] \u00a0Slover & Babinski, n. 1.
[9] \u00a0Id.<\/em>
[10] \u00a0Adam Smith, The Wealth of Nations, 1776.
[11] FTC Issues Orders to Eight Companies Seeking Information on Surveillance Pricing, July 23, 2024, https:\/\/www.ftc.gov\/news-events\/news\/press-releases\/2024\/07\/ftc-issues-orders-eight-companies-seeking-information-surveillance-pricing.
[12] \u00a0Press release, Brown Demands Answers on Amazon and Walmart\u2019s Use of So-Called \u201cDynamic Pricing\u201d, May 9, 2024, https:\/\/www.banking.senate.gov\/newsroom\/majority\/brown-demands-answers-on-amazon-and-walmarts-use-of-so-called-dynamic-pricing.
[13] \u00a0See, e.g.,<\/em> Testimony of Deirdre Mulligan before the Senate Committee on Commerce, Science and Transportation Subcommittee on Communications, Sept. 23, 1998, https:\/\/cdt.org\/insights\/testimony-of-deirdre-mulligan-before-the-senate-committee-on-commerce-science-and-transportation-subcommittee-on-communications\/.\u00a0CDT has also long been emphasizing that data minimization is a key privacy protection. See, e.g.,<\/em> https:\/\/cdt.org\/insights\/report-why-collection-matters-surveillance-as-a-de-facto-privacy-harm\/ and https:\/\/cdt.org\/insights\/states-are-letting-us-down-on-privacy\/.
[14] \u00a0See<\/em> T. Noble, To Fight Surveillance Pricing, We Need Privacy First, Electronic Frontier Federation, Aug. 5, 2024, https:\/\/www.eff.org\/deeplinks\/2024\/08\/fight-surveillance-pricing-we-need-privacy-first.
[15] At some point after the purchase price and terms are agreed to, the seller will need a mailing or email address for the buyer to deliver the product or service.
[16] \u00a0K. Waddell, How to Take Back Control of Online Data With Apps Like Consumer Reports\u2019 Permission Slip, Consumer Reports, Oct. 3, 2023, https:\/\/www.consumerreports.org\/electronics\/privacy\/take-control-of-online-data-with-apps-a5151057853\/.
[17] \u00a0See, e.g.,<\/em> D. Dayen, The Emerging Danger of Surveillance Pricing, Jacobin, July 9, 2024, https:\/\/jacobin.com\/2024\/07\/surveillance-personalized-pricing-data-collection.<\/p>\n\n\n\n