Regulatory Solutions for Personalized Pricing

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Scholars consider methods to regulate the practice of setting individualized prices based on personal data.

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Two friends separately try to buy online the exact same item from the exact same retailer—but they pay different prices. This ability of online retailers to set “personalized” prices for individual users may soon become the norm, fear two economists in a recent paper.

Businesses have so far refrained from engaging in personalized pricing, perhaps due to the “fear of consumer backlash.” The incentives for this practice, however, are great. One study showed that an online recruiting company could increase profits by up to 75% by employing personalized pricing.

The effect of personalized pricing on consumers varies based on the consumer’s “willingness to pay.” Those who are more willing to pay for an item will pay higher prices, while those who are less willing to pay may be able to benefit from lower prices. Lower prices, however, may entice the latter group to purchase some items that they would not otherwise have bought.

The authors of the paper, Marc Bourreau of France’s Telecom ParisTech and Alexandre de Streel of Belgium’s University of Namur, also propose regulations for personalized pricing.

Bourreau and de Streel worry about the wider effects of personalized pricing. To protect consumer privacy, regulations should prohibit the practice when the pricing relies on sensitive types of personal data. Regulations should also require companies to provide notice that prices are personalized. Since consumers are wary of personalized prices and fearful that companies will use personal data to their advantage, these steps are important for maintaining consumer trust.

Bourreau and de Streel divide their proposal into four categories of regulatory solutions: consumer protection, data protection, competition protection, and anti-discrimination.

For consumer protection, Bourreau and de Streel suggest that regulations could increase transparency. Regulators could require businesses to provide notice to consumers that prices are personalized. They could also require businesses to state their “main parameters” in determining prices. And they could mandate that businesses provide a range of prices offered to other consumers “so that a specific consumer can have an anchor price” to inform their decision.

Data protection rules, by contrast, would attempt to protect the privacy of consumers while also promoting transparency. Bourreau and de Streel suggest that businesses only use personal data with the consumer’s consent and note that these rules should prohibit the gathering of sensitive information such as race and religion.

Competition and protection rules would protect the welfare of consumers and of the market as a whole. Bourreau and de Streel recommend modeling these rules on current antitrust regulations. For example, European antitrust regulations already prohibit personalized pricing when the practice decreases total or consumer welfare or when a company conducts “exploitative abuses” of customers.

Finally, anti-discrimination rules would prevent businesses from using certain data to differentiate individual consumers. Bourreau and de Streel observe that international treaties and domestic legislation already impose anti-discrimination rules. They suggest applying regulations similar to Article 21 of the Charter of Fundamental Rights of the European Union, which forbids discrimination by public entities based on factors such as nationality, sex, and age. They caution, however, that anti-discrimination regulations for private businesses typically cover narrower grounds.

Although governments have this menu of regulatory options to combat personalized prices, they may not need to worry quite yet about adopting new rules. Bourreau and de Streel emphasized that, at the time of publishing, evidence did not exist to suggest that businesses have engaged in the practice.

Businesses do, however, employ alternative techniques that have similar effects, according to Bourreau and de Streel.

One such practice is that of personalized discounts. Businesses can offer an item at a uniform price to all consumers, but can offer discounts tailored to individuals. Bourreau and de Streel expect that personalized discounts would be harder to track and less likely to provoke a strong reaction from consumers, even though the end result would be “equivalent to personalized pricing.”

Some companies also feature certain products to certain individuals based on their data—a practice known as search discrimination. Companies have engaged in this practice since at least 2012, when the Wall Street Journal reported that a travel website featured more expensive hotels based on the type of computer that the consumer was using.

Any regulatory system will require an effective enforcement mechanism, Bourreau and de Streel argue. Considering the global reach of many online retailers, international cooperation will be necessary to promote consistency and empower consumers.

Bourreau and de Streel were writing for the Competition Committee of the Organization for Economic Co-operation and Development’s Directorate for Financial and Enterprise Affairs.