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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.
Is this legal in the United States? It sounds similar to price fixing to me.
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Slap privacy on something and you can generate controversy pretty easily, but soda machines charging more when the weather's hot is nothing new.
Couldn't this be turned around by making false online identies? Tailoring it to garner the best prices?
You stop by CNN.com, and a pop-up flashes on screen: "Hello, Mr Thompson, you look like you could use a bigger penis!"
That Bill Gates will get charged $1000 for a pack of gum?
If so, I'm all for it.
I suspect that this field will become increasingly important in the years ahead. One problem (from the supplier side) in the current economy is the lack of pricing power available to boost earnings. Partly due to influences like the availability of product information on the web, consumers are more willing and able to find the best deal on a given item, rather than just march down to the store and pay MSRP.
People also have to realize that price descrimination is and has been all around us for a very long time. Coupons, "daily specials", business-class travel, etc. are all examples of this. There should be plenty of opportunities to increase price descrimination without impacting customer privacy (i.e. the temperature-sensitive drink machine in the article).
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Legality is dependant on how much you are able to spend.
For instance, a tow truck or taxi driver may charge a well-to-do suburban driver who breaks down in the inner city several times the going rate, just to get their rich butt to safety.
And imagine the poor diabetic about to go into insulin shock at the pharmacy, why, they'd pay treble to stave off a medical emergency.
Now, a nice sense of business ethics, based on such hokey premises such as "Thou Shalt Not Steal" might mitigate this, but I have trouble imagining it in our liberalist society.
A. Rightmann
"So, I'd like to buy a lamp. I'll pay a dirham for it."
"Bah, this lamp is made of the finest brass, five dirhams is the least I can accept!"
"Eh... out of pity, I might be persuaded to go as high as two dirhams."
"Sir, I can see you are a man of discriminating taste. As a special favor, I will let it go for three dirhams."
"Done, provided the lamp is filled with oil."
"You drive a hard bargain sir. Done."
All the creatures will die, And all the things will be broken. That's the law of samurai. (Jubai, 1605)
Now don't you go getting any ideas...
Actually, my last job was as a pricing analyst, and it was all about this topic. How to price differentiate while staying within the bounds of the law. Arguably this increases overall economic efficiency.
Felt kind of weird, however, trying to figure out how to wring every possible penny out of the small buyers but coming back, while at the same time keeping the national accounts in check with huge price reductions (50% or more). The 3rd factor is making sure that the little guys never knew about the big boy pricing, or at least never knew more than the fact that buying more could be a positive thing for their own price structure.
Keeping small guy prices high is easy.
Keeping big guy prices low is easy.
Keeping the both happy customers is not.
I see some major potential for abuse with this. What if a compant decides it does not want to sell to people of certain ethnic backgrounds (French and Arabs, for instance), and raises its prices for those people to a million dollars?
"Do I dare disturb the universe?"
So does this mean that all those people claiming that the software they steal isn't a loss because they wouldn't buy it anyway will get to buy it for $0.01? I mean, that's accurately priced for them...
Sig & Below
Yuck Fou
This is very similar to the targeted prices of DVDs (region-coding). It's definitly a good thing for corporations (making people with more money pay more while still having access to lower-income markets), but there are obvious implications...
Of course, barring poor legislation, there are always ways around this sort of thing. If $product is available somewhere for less, I will be able to find it somehow (thank you Internet!) regardless of a corporation's efforts to trick me into paying more.
Right now, I have a region-free DVD player (flashed APEX), a region-free PS1 (stealth chipped), etc...
Geeks always win.
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Ever been asked to provide some "promotional code" from an ad before getting a price? Different ads have different pricing. Giving loyal customers better prices is common. Airline pricing seems fair to me. A business that makes me travel on short notice pays through the nose. Joe blow who plans his vacation well in advance gets a better price. Buyers beware same as always. Well informed consumers get better deals. That won't change. The people who don't like this want everyone to pay the same shitty prices. They want to remove all responsibly for getting the best price from the actual consumer.
It seems that companies claiming prices as 'confidential' want it all their own way. That doesn't seems like a very pure form of capitalism.
You are exactly right. The consumer still has control of the decision to purchase- but the transaction is now more personal.
I can remember shopping in the Philippines- each clerk had a calculator in hand to show you the price of an item- so that other customers would not over hear. Each transaction stood on its own and you might do better or worse than the person standing next to you.
It's hard to believe that's how Micronians are made. Why don't we see it right now by having you both kiss one another?
Until an unplanned meeting with some black ice and a nearby tree, I used to own a Jaguar XJR. Now, big luxury cars depreciate fast and this Jaguar was seven years' old at the time of its demise. In other words, most people's year-old hatchbacks cost more than this car's second-hand value.
Despite that, the majority of people I dealt with who saw the car decided that I was obviously stinking rich, available to be fleeced and took the opportunity to try and rip me off. This would include car mechanics to a small extent (it was main-dealer serviced most of the time, you get ripped off there anyway) but also to workman calling at the house. Prices quoted for the same job varied enormously depending on whether I left the Jaguar parked outside the front or whether we left the MX-5 (Eunos Roadster/Miata by another name) parked outside.
Price discrimination? Yep, know all about that.
Cheers,
Ian
It pisses me off every time I'm in a store, but I only get really angry when the checker says something like 'Sir, you would have saved $15 on this purchase if you had used your discount card. Would you like me to give you one now that I'll use for this purchase.' If I have to pay outrageous fines to maintain my privacy, I'd rather not know how outrageous they are.
Recently (probably as complaints have risen from my demographic), most of upscale markets in our area have started granting the discount anyway if you tell them that you value your privacy, and they swipe a register card instead. Presumably they now are collecting data on privacy freaks, but at least it is as a group rather than as individuals.
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Think about it this way: two buyers, based on their collected information, are offered DVDs at wildly differing prices. Say buyer one gets said DVD for $1, but buyer two gets it for $10. Both are satisfied, buyer one because it feels really cheap and buyer two because he loves the movie.
Assuming the buyers never converse about the price they paid, both will be satisfied with the exchange value of the DVD, despite buyer two's costs being 10 times his compatriot's.
Ironically, if the two buyers did share price information, buyer two would immediately become irate, knowing that he could have had a better deal. Then again, it's possible that he might just shrug and say, "it was still worth it." I think it just puts the onus on the shopper to be as informed as possible about the value of their purchase and on the seller to make sure their discriminatory pricing doesn't leak out.
I couldn't find a link to it (old story), but the class ring company Josten's had different pricing scales for inner city and suburban school in the Minneapolis-St. Paul metropolitan area a few years back. The shit hit the fan when the media caught wind. Ironically, I don't know that they ever changed their pricing scheme.
Under capitalism man exploits man. Under communism it's the other way around.
It may sound awful mean, but remember that the possibility of changing very high prices on occasion may be the only thing that makes the good available in the first place. The diabetic will surely be sorry he's not getting his insulin cheap, but if the possibility of his getting taken advantage of and providing big money to the pharmacist is the only reason the pharmacy is there in the first place, and otherwise the diabetic would die, then he can't be very sorry.
In the case of the taxi driver, remember that prices can't get too high, because (in the absence of collusion) otherwise other taxis would step in, at a price approximating their actual cost, not the benefit to the consumer, under perfect competition.
There are some laws limiting price discrimination. The most widely discussed is the rule of maritime law that a salvage ship can only charge a reasonable price, even if it's the only one around and gets the sinking ship's owner to promise something higher. There is extensive economic analysis of such rules; the general conclusion is that they are not useful, subject to the usual long list of exceptions.
There's a broader question, though. Suppose price gauging is "immoral" according to our common sense but its existence in a particular case is Pareto efficient: that is, it makes everyone in the world better off. Utilitarians would say that, in such a case, we are obligated to discard our moral intuition to make everyone better off. Do you disagree?
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I recall buying my last car, where the salesman had to try several tactics in succession before realizing I wasn't the typical dumbass.
The tactics he tried were set up to catch people of decreasing stupidity, but, because he didn't know who I was, he had no choice but to make guesses about my intelligence and willingness to spend money. This means I was slightly empowered as a consumer, and the deck wasn't entirely stacked in the dealer's favor.
Now, imagine if the salesman had access to my entire purchasing history. If you think salespeople are agressive now, I don't want to imagine what it will be like if they use our own experience against us! The credit score is already bad enough as it is.
Healthcare article at Kuro5hin
Utilitarians would also argue along those lines for a massive reduction in trade barriers, and in large part they'd be right (IMHO). The decision on such matters, however, does extend beyond dollars and cents. There are other factors (social stability, national security, cultural tradition, etc.) that don't fit into the economic model yet play a role in setting policy.
/. has the sig along the lines of, "all models are wrong, some are useful." A very good thing to keep in mind...
I can't recall the user, but someone here at
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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.
Your sucker rating will haunt you like your credit rating. Now is the time to start being shrewd, before you build up a reputation a big fat sucker.
While being a bachelor here in Toronto I learned an important lesson in buying meat and how it is priced. Go to a rich neighborhood to buy your hamburger and go to a poor neighborhood to buy your expensive meats (steak, filet). What was interesting was that the quality of the lower cost meats was generally better.
When I got married, my wife didn't believe this until I did some comparison shopping with her. I suspect this is true in other cities as well.
myke
Mimetics Inc. Twitter
These systems are busy trying to figure out who's eager to blow big bucks (to charge him through the nose) and who's barely interested & very price sensitive (to charge their lowest price). Guess what - if you're willing to act poor when Big Bro's watching (and quietly pay cash after dickering price whenever you can for your luxuries), you can make this system work for you.
Much of the social status of being rich (vs. poor) comes from the blow-through-the-dough-and-don't-have-to-care (vs. sweating every penny) lifestyle & attitude. This system ain't much different from a bazaar 3000 years ago - the merchants knew perfectly well who was rich and who was poor.
It's easy to make up & spread cool- and credible-sounding stuff. Finding & checking hard facts is hard work.
For individual price fixing to work, it has to appeal to the consumer on a number of possible levels:
- Product appeal
- Convenience
- Value (or apparent value). Why do you think all those do-dads on TV include "free" items? To build value into otherwise worthless junk.
- Impulse purchase
- Level of trust
- Time limited offers
Any experienced on-line purchaser or consumer usually has a rough idea how much certain items are worth, i.e. CDs, movies, etc. This is why I don't think price discrimination will feature large differences is price. It's easy enough just to call down to my favorite music store and ask how much a particular movie or CD is before I purchase on-line, or check other web sites. The point is, comparison shop. If you shop around, the most a price discriminator could get away with is a few dollars, not the amounts that some people have indicated here, but YOU HAVE TO SHOP AROUND. Whenever I am considering a large on-line purchase, I compare the price to what is offered at a local store.
The problem, of course, with shopping around is it entails effort and many want the web to be effortless, so they impulse buy or worse yet trust the deal that's offered to them without shopping. It's the same in the real world, you have to comparison shop.
What I think you will find instead of huge price fluctuations is package deals and specials tailored to the individual consumer. I see nothing wrong with that, actually it quite appeals to me. I regularly receive specials from an on-line electronics dealer that I frequent and have taken advantage of quite a few of these specials, after comparing prices first.
My 2 cents.
Can ultra efficient price discrimination limit and eventually prevent entries into a market?
Imagine that Amazon.com succeeds in charging you exactly what you'll pay for. This means that you'll see their price, you'll consider it, and, WHAM, you'll click on the patented, novel, Buy(TM) button.
Now imagine that a new, energetic startup, Nile.com, decides that it wants to enter the internet book-selling market. It, not having the resources that Amazon has, is forced to use a "one-price-fits-all" strategy. Nile, by the laws of economics, will not be as efficient. And less efficient companies will lose out to more efficient ones, again, according to the laws of economics.
So all Amazon.com has to do to prevent Nile.com from gaining market share is operate at a high efficiency whenever there's a competitor. Once the competitors are toast it can go back to acting like a monopoly. The difference here is that NO ONE WILL EVER KNOW. If you don't know what price your neighbor paid, how can you claim that they've raised prices? Especially in a world where raising prices can actually mean not lowering consumer prices when distributor prices fall.
You're always happy with Amazon's price (remember this is a perfect price discrimination structure), so there's no incentive to look elsewhere. Amazon.com just keeps the excess profit from falling prices and only lowers them when new companies enter the field.
Bingo, a perpetual monopoly, one that can't be broken by anti-trust laws and investigations. Or am I seriously wrong in my theorizing?
www.eissq.com/BandP.html Ball and Plate System. Amuse your friends. Crush your enemies.
about three years ago. It was reported in the NY Times. They were charging for DVD's based on past spending habits. If you were known to be willing to pay a lot for a DVD you saw the higher prices.
There was a customer uproar and a threat of a class action suit. They publicly recanted and said "never again."
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.