Feds target web price discrimination

National-chamber-foundationBy Michael Hendrix,
U.S. Chamber of Commerce Foundation

The Internet is perhaps the greatest modern ally of everyday people. Shoppers in particular have more options available to them than ever before. Yet are shoppers’ data being used against them when they’re not looking? That is a question the President’s Council of Economic Advisers tackled with its new report, Big Data and Differential Pricing. In a word, the answer is “no.”

Differential pricing simply means charging different customers different prices for the same product. Economists call this “price discrimination,” a rather unfortunate term for an ancient and common practice. Movie theaters, for instance, charge children a lower price for the same movie. The upshot is that seeing Frozen becomes more affordable for families. The moviegoer market is expanded and more siblings are forced to “Let It Go.”

Differential pricing then is generally good for both consumers and businesses. What is the White House’s worry then? The advent of Big Data makes customer information easier to obtain. Surfing the Internet leaves a trail of data that is cheaper than ever to pick up and analyze. Companies then may get too good at targeting their pricing. What’s to prevent price discrimination from slipping into individual discrimination?

But these fears appear overblown. As the report concludes, “We have not yet entered an era of widespread personalized pricing.” Investigations along these lines by the Federal Trade Commission in 2014 and the Government Accountability Office in 2013 confirm as much. Companies are mainly doing three things: (1) randomizing their prices in order to learn more about the shape of market demand, (2) adjusting how products appear on customer’s screens, and (3) targeting their marketing.

Customers certainly do not seem worried. Digital shopping baskets are as full as ever. Online spending now represents 6% of all retail sales, up from 2% in 2004. E-commerce revenue is also growing at 16% per year. Meanwhile, 96-97% of Internet users allow cookies—a snippet of tracking code—on their devices. The benefits of sharing data, it seems, often outweighs the perceived costs.

Even the best efforts by companies at price discrimination may not go very far. New tools are emerging to help consumers find the best available price on the Internet. Kayak, for instance, serves as a search engine for airline ticket prices. And Craigslist allows individual sellers to engage in a sort of arbitrage with other more established vendors. These tools bring about more transparency in pricing.

Differentiated prices perform an important market function. But what about real harms that may occur at some point in the future? Areas where the stakes are high for consumers, such as in determining credit eligibility, were of particular concern to the report’s authors. The White House is careful to say that current “antidiscrimination, privacy, and consumer protection laws” are well-equipped to handle them.

The federal government should apply current laws then as harms arise and not in anticipation of them. Regulation must match the pace of reality. Otherwise government risks stifling innovation and, in this case, a burgeoning global marketplace.

The real focus by the federal government should be on fostering competition. Differential pricing is harder when competitors are around to offer lower prices and undermine another firm’s market power. Thankfully, the Internet has long been one of the most competitive spaces in the world. Let’s keep it that way.

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