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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.
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!"
"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.
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
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...)
I Can't Believe It's A Law Firm, LLP does not necessarily endorse the contents of this message.
"Price Discrimination" sounds evil, but really it's used every day, you've seen it a thousand times, and it's never bothered you before. Been to a movie lately? How come a ticket costs less if you're a senior citizen? Are the costs of showing a movie to an old woman significantly lower than that of showing it to a young man, such that a $3 difference in ticket price is warranted? Same thing for airline seats, amusement park tickets, etc. It's really no big deal.
We don't have a state-run media we have a media-run state.
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).
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.
--
BitTorrent in C -- LibBT
http://www.sf.net/projects/libbt
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.
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