Big Data means retailers can figure out exactly what you’re willing to pay—and they’re starting to charge itby James Plunkett / December 8, 2017 / Leave a comment
Published in January 2018 issue of Prospect Magazine
Imagine strolling with a neighbour to the corner shop, only to be charged 50p more than her for buying the same box of cornflakes. You’d better get used to that feeling of unfairness because “price discrimination” could be a big part of the future of retail. In fact, it’s already here. On some websites, online prices now bounce up and down in ways that are specific to you—depending on what you’ve bought before, what you paid for it, and even what you’ve previously browsed and not bought. Big data, the cascade of digital traces we all leave in the networked age, allows firms to gather information on customers, and they can use that information to figure out, with unprecedented accuracy, how much we’re each willing to pay—and, therefore, the maximum they can charge.
Put like this, price discrimination sounds unappealing, and there’s no doubt it offends the expectations we’ve developed in the mass consumer markets of the last 70 years. We’ve grown used to prices not varying for the simple reason that companies haven’t known the maximum their customers were willing to pay—their so-called “reserve price.”
On top of this, even if companies had hazarded a guess at which customers they could charge more, they would have found it impractical to do so. Imagine changing your price tags, or reprinting your menus, for each new customer that walked in the door. Even if you could, the complexity involved wouldn’t justify the cost. Businesses have therefore, in general, had to play it straight, charging all their customers the same competitive price.
This isn’t to say prices have been static or simple. We’ve always known that prices can be pushed up—by surging demand or scarce supply. But, at least when they rose, they rose for all. There was an intuitive fairness to the system. With personalised pricing, by contrast, the individual takes his or her chances—depending on the unknowable things a supplier knows about them. Put like that, this emerging future doesn’t feel so right.
And yet price discrimination is neither entirely new, nor all bad news. Think of the young person’s railcard: it gives one group lower fares on the assumption that they can typically afford to pay less than the middle aged. Some chip shops offer “pensioner specials” on the same basis; and coffee shops in Belgravia charge more than cafés in Bootle—not just because the rent is higher, but also because they have a hunch that the locals will be willing to pay more. Prices also vary on an individual basis in sectors like second-hand cars, where haggling survives. And, in the right circumstances, economic theory suggests that price discrimination of this kind can make markets more efficient. By better matching demand to supply, so that more value-adding trades take place, it can boost output and—in aggregate—consumer outcomes.