Personalized Pricing Isn’t All Bad for Consumers

By Christopher Gardner and Juan Londoño of Cato. Excerpts:

"The novelty of IDP (individualized dynamic pricing) lies in the ability to autonomously set prices by using an individual’s data to infer how much they are willing to pay for a product. Many industries, from car sales to higher education, practice some sort of individualized pricing. The primary distinction for IDP is that it can adjust prices cheaply, autonomously, and without bias. This arrangement allows companies to increase profits while offering lower prices to consumers."

"Dynamic pricing can best be understood as the adjustment of prices in response to changing market conditions."

"Algorithmic pricing’s recent turn in the spotlight is not a function of its increased use. Rather, technological advancement, which has enabled greater speed and individualization, has made the reality of those price changes more apparent to the average consumer."

"individualized pricing. This practice has been around since the dawn of commerce, when merchants and customers haggled over the price of a given product."

"A common example of individualized pricing is buying a car."

"IDP can be less subjective than a human salesperson."

"the practice has been in use for years across an array of industries, from insurance to retail. Each instance represents an effort to increase company profits, but it also helps allocate goods and services more effectively to those who need them."

"Most of the time, businesses use these tools as an extra nudge to lure in potential customers who are on the fence over a product. 

An example of how businesses commonly use IDP, particularly in online retail, is to combat “cart abandonment,” a term for when a user adds a product to their virtual shopping cart but ultimately decides not to buy it. When the website realizes that the customer is wavering in their resolve to buy a product or is browsing a competitor’s website to compare prices, it might “sweeten” the deal by offering a personalized discount hoping that the deal might convince the customer to complete the purchase."

"the best protection for consumers is a competitive market. In competitive markets with no supply constraints, IDP has proven to largely benefit consumers. Any time a firm uses IDP to raise prices for a given consumer, that automatically allows a competing firm to undercut those prices and take that consumer away. The nature of these structural protections is borne out as new technologies are implemented, such as electronic shelf labels. In spite of regulatory concern, there is virtually no evidence that electronic shelf labels are intended or used for surprise price increases."

"certain definitions of dynamic or personalized pricing would lump in popular pro-consumer discounts such as happy hours."

"Existing regulations often provide consumers with ample protection, given that the conduct underlying IDP is not novel despite technological advances. Aside from antitrust law covering concentrated markets, existing regulations on deceptive pricing directly address concerns about fictitious high baseline prices."