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Privacy Incursions to Support Price Discrimination
An anonymous reader writes "BusinessWeek has an interesting interview with academic Andrew Odlyzko about how increased corporate spying will inevitably lead to targeted pricing and how this system can be abused." The paper (pdf) makes interesting reading. Very good insights into the reasons why businesses want to get to know you.
Price fixing is when multiple suppliers get together and artificially raise the price of an item to the market as a whole. Price descrimination is a different animal entirely.
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The easy solution to this though is to simply not let the companies gather any information about you. For example, if you are a businessman, they will try to charge you more for airfare. Whereas, if they no nothing about you, they will assume that you are just a vacationer, and you can get a cheaper fare. It's all about working the system.
Price discrimination by itself is totally legal; in fact, it is almost always economically efficient, so that some otherwise possibly illegal acts (subject to "rule of reason" antitrust analysis) can be legal if they enhance price discrimination.
On the other hand, in conventional economic models at least, the existence of price discrimination is evidence that someone has market power and so should be subject to antitrust scrutiny. But, of course, there are lots of legal ways to have a monopoly (own IP, just happen to make the product better than anyone else...)
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It's not illegal, and it's not price fixing (setting prices above a competitive level). Levels of (2nd degree) price discrimination (although supported by limited quality differentiation) are widely practiced by airlines (last minute business traveler fares anyone?).
In fact it has been attempted on a consumer-by-consumer (3rd degree) basis by Amazon not too long ago. What happened is people found out through discussion in forums, consumer outcry followed and Amazon stopped it (search for the articles/blogs if you want).
It is not at all similar to price fixing. Price fixing occurs if competitors get together and agree on a price for their product. Therefore, competition is eliminated. This is a cartel and illegal under all antitrust laws know to me. Price fixing also occurs in other circumstances, when, for example a producer sets a minimum (or maximum) price at which a retailer is allowed to sell its product.
On the other hand, a company is price discriminating if it sells the same product at different prices. In many circumstances, this is entirely legal.
Why price discriminate?
Imagine a company selling product X. There are three different consumers, A, B and C. A values X at EUR50, B at EUR100 and C at EUR200.
In a market where the company is unable to distinguish these customers, it can only sell the item to each customer at the same price. If it sells at EUR50, all three customers will buy, if it sells at EUR150, only customer C will buy.
Therefore, the company has every incentive to price differentially, optimally EUR50 to A, EUR100 to B and EUR200 to C.
Two problems: (1) The company will have to find out about the valuations. (2) The possibility of trading amongst the customers limits price discrimnation (A buys at EUR50 and sells on to C at a higher price).
(1) is usually not solved perfectly. Price discrimination is usually applied across different groups that can be identified (ie customers in country A vs customers in country B or students vs non-students). However, the article describes how technology can be used to achieve perfect price discrimination.
(2) Either the characteristics of the product are such that trading is impossible (ie personalised products) or difficult (high transaction costs). Alternatively, the company could prevent trading by using contracts or other competitive threats. This could be illegal under some circumstances.
Discrimination against the "protected classes" (age, race, gender, etc.) is illegal, but any other form of price-setting is perfectly legal. The McDonald's in NYC has always charged more than the McDonald's in small-town USA, and Walmart is known to have different prices in its stores based on the existance (or lack of) local competition in the area.
Amazon.com tried this scheme before, offering the same item at different prices to different people to test reactions, but ended up embarassed when caught and refunded all those unknowingly involved in the test the difference between the price they paid and the lowest price that item was sold at during the test.
It's not price fixing... that's when the supposed competitors get together and agree on the price.
Rip the system.
I filled out my super-duper-saver card with false info. I get my Mountain Dew on the cheap, they get broken demographic data.
I giggle every time they swipe that thing. It's just such a sham.
Mr. Odlyzco states that: "Economically, price discrimination is regarded as desirable."
Hoo boy, Where did that come from? Not only is that statement wrong, it is so fundamentally wrong I can't believe that anyone would interview this guy (obviously they haven't published his paper).
All beneficial aspects of market economics is based upon a "market clearing price." The "efficient market" is based upon a market like the New York stock exchange. The market clearing price is what drives down prices, and gives us what is called the "consumer surplus."
Price discrimination only results in higher output for a monopolist--because the monopolist makes his profit from restricting supply. The highest output is always achieved from a perfect market in which the price is driven down to the marginal cost per unit.
Only a monopolist can engage in true price discrimination, but all vendors wish to create "limited" monopolies and get price discrimination to certain degrees. Limited monopolies can be created through brand IDs, location, government franchise, patent and copywrite, being first to market, and so forth.
Price discrimination in airline fares is a complex intertwining of federal governement regulation, local airport regulation, kickbacks (where the flyer is not paying the fare), obfuscation and fraud.
If price discrimination were the rule, we would pay more for water than we do for wine. Every life-saving or limb saving medical operation would require the patient to file bankruptcy and pay every penny to the hospital because bankruptcy would always be preferable to losing an arm.
No prices would ever be posted anywhere. We would negotiate the price of every single purchase--including every hamburger and every Coke (his example).
It is this bleak vision that lead to over half of the world choosing communism in the first half of the century. It is the open market, that gives us our prosperity.
The issues of price discimination, monopolies and limited monopolies are so well documented that it is puzzling that Business Week would even think it worth while to interview this guy. In any case, it is pretty clear that after taking Econ 101, Mt. Odlyzco dropped out halfway through econ 102
The tourist McDonalds has no Value Menu; the regular one does. This is common practice, and it is up to the consumer to avoid rip-offs.
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Together, we will drive the rats from the tundra.
My point is simply that discrimination against certain groups is taboo, and will not soon be tolerated regardless of whether it is statistically justified. This is obvious from the anti-discrimination laws themselves, which make no allowance for discriminating on the basis of statistics.
> Heck, I have a different email address for everything I sign up for online, why not have a different credit card for each merchant? :)
:)
I know you ask in jest, but for those who don't know the right asnwer, here's why:
BAD CREDIT RATING!
I have just requested my credit report this year, and in the list of parameters affecting your credit rating with major credit bureaus is "excessive lines of credit". It is HIGHLY recommended not to keep too many open credit cards if you want to have a good credit rating (for when you move out of Mom's basement and buy a house from all those dot-bomb money you didn't make so you need a mortgage
-DVK
"The right to figure things out for yourself is the only true freedom everyone shares. Go use it"-R.A.Heinlein
I think that this is fundamentally different to discrimination based on attributes that are directly related to the activity such as ability to pay and desire to acquire.
The ultimate aim of price discrimination is to have people pay the exact amount that represents the tradeoff between desire to have and ability to pay irrespective of race, gender, sexual orientation or physical or mental disabilities. In the examples given by you effective price discrimination would actually allow poorer people to pay less than richer people. This is achieved in real life by way of scholarships (for education) , soft loans, and other welfare type benefits (even as far as food stamps) that 'usually' only go to the poorer members of society.
Price discrimination works both ways. It is in fact particularly beneficial for poor people. Selling drugs to poor countries at lower than US prices is price discrimination. Selling cars for $500,000 to rich people is price discrimination.