When does price discrimination go too far?

[ProgressiveModerate]

Price discrimination is basically the idea of modifying the price of a product based on how much an specific individual or group of consumers is willing to pay.

A classic example of price discrimination is masculine and feminine hygiene products. Take the scenario of a company who produces shampoo; they market one bottle of shampoo to women using a lighting color pallet, softer fonts, and the phrase "for women". They market another bottle of the same shampoo to men using more aggressive fonts, a picture of a spider, and the phrase "for men". The company finds women have a higher utility for the soap and hence willing to pay more, so the company charges more for the feminine branded version of the soap. The result is women pay more for the same shampoo than men.

While gender is a common dividing line for price discrimination, it can happen in so many different ways.

Some people will argue that in the example above, it's problematic that women are being charged more for the same product then men, however, others will argue it's not a problem because women have higher utility for the shampoo, and nothing is stopping a woman from buying the soap branded to men.

In my view, I tend to agree that this type of price discrimination isn't a big issue because especially once the consumer becomes aware the discrimination exists, there is a very easy remedy of buying the shampoo advertised to men. Also because it's price discrimination against a class of people (in this case women), there are still going to be large consumer surpluses for both men and women in this shampoo market, since some women will still have higher utility than even the discriminated price would suggest.

However, with the rise of technology, I see a more concerning situation where large companies like Amazon use algorithms to achieve very close to perfect price discrimination that is very hard for the consumer to overcome.

Say for instance, I am shopping on Amazon. Through it's data collection, Amazon knows I really like capybaras, so when I search for capybara plushies, it intentionally shows me really overpriced capybara plushies, and possibly even purposely hides the less expensive ones from me when I'm logged into my account. In this case, the price discrimination is targeted at an individual level, and because it purposely hides the less expensive alternatives from me, I may not even know I'm being price discriminated against since I can't find anything cheaper - I believe the prices I'm seeing are the normal prices.

I think once large companies try to exploit algorithms to achieve as close to perfect price discrimination as possible at an individual level online, that's when it becomes a problem for me. There's sort of a hidden asymmetry of power that's just so lopsided towards the company with all this data about you that allow consumer surplus goes to 0, while producer surplus becomes as large as possible.

What are your thoughts?

[Benjamin Frank 2.0]

Are you saying this is happening or you see this could happen?

Because I wrote on this here several years ago! And, I had forgotten that I didn't think of it myself, but took the idea from Tim Harford, The Undercover Economist (that's how he billed himself writing in the UK based newspaper The Financial Times), who wrote about this in his book The Undercover Economist published in 2005.

Harford argued at that time that even more than making money selling customer data, the real purpose of Facebook was to figure out every consumer's habits well enough that the algorithms could capture everybody's consumer surplus for the producer. Harford told people to never answer the little gamey surveys Facebook posted seemingly for fun.

As bad as 'data mining' and selling of personal data is, I think that concern is a smokescreen for this. Of course, if you try and search about this online, you'll find nothing, and I don't think it's because it's a wacked out conspiracy theory, but because Google's search engines wipe it from the internet.

The way this can be easily made legal is that everybody is offered the same base price (say $10 for something, which is higher than anybody would actually pay) but everybody is given a different discount.

So, there is no technical price discrimination because the initial price is the same for everybody but there is a discount that happens to be different for everybody. Even if price discrimination is illegal, price discounts are not only perfectly legal, but are encouraged by governments.

One way around this is to only buy stuff online using computers at libraries.

[ProgressiveModerate]

Are you saying this is happening or you see this could happen?

Because I wrote on this here several years ago! And, I had forgotten that I didn't think of it myself, but took the idea from Tim Harford, The Undercover Economist (that's how he billed himself writing in the UK based newspaper The Financial Times), who wrote about this in his book The Undercover Economist published in 2005.

Harford argued at that time that even more than making money selling customer data, the real purpose of Facebook was to figure out every consumer's habits well enough that the algorithms could capture everybody's consumer surplus for the producer. Harford told people to never answer the little gamey surveys Facebook posted seemingly for fun.

As bad as 'data mining' and selling of personal data is, I think that concern is a smokescreen for this. Of course, if you try and search about this online, you'll find nothing, and I don't think it's because it's a wacked out conspiracy theory, but because Google's search engines wipe it from the internet.

The way this can be easily made legal is that everybody is offered the same base price (say $10 for something, which is higher than anybody would actually pay) but everybody is given a different discount.

So, there is no technical price discrimination because the initial price is the same for everybody but there is a discount that happens to be different for everybody. Even if price discrimination is illegal, price discounts are not only perfectly legal, but are encouraged by governments.

One way around this is to only buy stuff online using computers at libraries.

I'm saying this is something that could happen in the near future. It's def already happening to some extent already as you allude to with targeted advertising, but still don't think it's at the extreme where Consumer Surplus is eliminated.

I agree the discount way would be a smart way to go about it. I feel like many places already sort of manipulate with discounts (i.e. LIMITED TIME 50% OFF when it's just always at the market price of 50% and very few would be willing to pay the full price).

My main concern is how does the average consumer fight back and retain their surplus? I think it's through education; many people are never educated on the idea of economic or consumer surplus, and a lot of people are really bad about taking a second to think about why they may be getting a certain ad on their phone or what not before they buy.

Also perhaps someone could develop a mainstream software that just messes up data collection by firms so they don't have the data to squeeze your consumer surplus out of you.

Perhaps this is part of the reason why younger today feel so poor even though statistically they're doing just fine; the rise of technology means they have less of a consumer surplus.

[Independents for Nihilism]

Data mining is definitely a method to reach so-called perfect price discrimination - if you can match every person's preference with a fake amazon storefront charging different prices for the same product via manipulating search results, then whoever is running the algorithm can capture the entire consumer surplus if their data is accurate enough. I think this is also a tiny bit beyond facebook or google ads funneling people towards different prices - those require you to click on an ad which you might have blocked, whereas with a search, you're explicitly looking for something, and I believe people tell you to use incognito mode to search for flights for exactly that reason. Of course, some people might wind out ahead with this if they end up getting discounts but that might be wishful thinking, I say while clinging to my spotify and amazon prime student discounts. The cynic in me says the only way to fight back against this is to discourage consumerism in general, not through some kind of taxation scheme but through cultural values, which is obviously easier said than done when whatever you want is a click of a button away plus two-day shipping. I know I'm guilty of this (at least when I have disposable income), worrying about FOMO when a sale comes on or a discontinued item pops up second-hand, but that might be the nature of collecting.

The "everybody gets a discount" model kind of reminds me of Steam sales, where digital goods can get sometimes outrageous discounts compared to their MSRP, but these are games where if my understanding is correct, all costs are sunk and distribution cost is minimal, so every additional sale provides profit. We might not hit that until we're in a theoretical post-scarcity society - until then it's probably more likely that consumers would get price gouged by big data taking such an approach. Excellent question, though! I can definitely see this becoming a legislative frontier at some point in the near future.  

[Benjamin Frank 2.0]

Are you saying this is happening or you see this could happen?

Because I wrote on this here several years ago! And, I had forgotten that I didn't think of it myself, but took the idea from Tim Harford, The Undercover Economist (that's how he billed himself writing in the UK based newspaper The Financial Times), who wrote about this in his book The Undercover Economist published in 2005.

Harford argued at that time that even more than making money selling customer data, the real purpose of Facebook was to figure out every consumer's habits well enough that the algorithms could capture everybody's consumer surplus for the producer. Harford told people to never answer the little gamey surveys Facebook posted seemingly for fun.

As bad as 'data mining' and selling of personal data is, I think that concern is a smokescreen for this. Of course, if you try and search about this online, you'll find nothing, and I don't think it's because it's a wacked out conspiracy theory, but because Google's search engines wipe it from the internet.

The way this can be easily made legal is that everybody is offered the same base price (say $10 for something, which is higher than anybody would actually pay) but everybody is given a different discount.

So, there is no technical price discrimination because the initial price is the same for everybody but there is a discount that happens to be different for everybody. Even if price discrimination is illegal, price discounts are not only perfectly legal, but are encouraged by governments.

One way around this is to only buy stuff online using computers at libraries.

I'm saying this is something that could happen in the near future. It's def already happening to some extent already as you allude to with targeted advertising, but still don't think it's at the extreme where Consumer Surplus is eliminated.

I agree the discount way would be a smart way to go about it. I feel like many places already sort of manipulate with discounts (i.e. LIMITED TIME 50% OFF when it's just always at the market price of 50% and very few would be willing to pay the full price).

My main concern is how does the average consumer fight back and retain their surplus? I think it's through education; many people are never educated on the idea of economic or consumer surplus, and a lot of people are really bad about taking a second to think about why they may be getting a certain ad on their phone or what not before they buy.

Also perhaps someone could develop a mainstream software that just messes up data collection by firms so they don't have the data to squeeze your consumer surplus out of you.

Perhaps this is part of the reason why younger today feel so poor even though statistically they're doing just fine; the rise of technology means they have less of a consumer surplus.

As I said, the best way to fight this is to use public library computers when buying online as you are completely anonymous.  I believe this can be done and that people don't need cookies when shopping on Amazon or where ever else. I don't really buy stuff online so I don't know.

[Electric Circus]

A lot of dissatisfaction with health care and higher education is a reflection of how effective they are at pushing price discrimination at the expense of patients and students.

Leaders in these sectors tend to market these strategies to the public in terms of access and equity. The reality is that the system is fine-tuned to vacuum every possible dollar out of government coffers and middle class pockets.

[ProgressiveModerate]

Are you saying this is happening or you see this could happen?

Because I wrote on this here several years ago! And, I had forgotten that I didn't think of it myself, but took the idea from Tim Harford, The Undercover Economist (that's how he billed himself writing in the UK based newspaper The Financial Times), who wrote about this in his book The Undercover Economist published in 2005.

Harford argued at that time that even more than making money selling customer data, the real purpose of Facebook was to figure out every consumer's habits well enough that the algorithms could capture everybody's consumer surplus for the producer. Harford told people to never answer the little gamey surveys Facebook posted seemingly for fun.

As bad as 'data mining' and selling of personal data is, I think that concern is a smokescreen for this. Of course, if you try and search about this online, you'll find nothing, and I don't think it's because it's a wacked out conspiracy theory, but because Google's search engines wipe it from the internet.

The way this can be easily made legal is that everybody is offered the same base price (say $10 for something, which is higher than anybody would actually pay) but everybody is given a different discount.

So, there is no technical price discrimination because the initial price is the same for everybody but there is a discount that happens to be different for everybody. Even if price discrimination is illegal, price discounts are not only perfectly legal, but are encouraged by governments.

One way around this is to only buy stuff online using computers at libraries.

I'm saying this is something that could happen in the near future. It's def already happening to some extent already as you allude to with targeted advertising, but still don't think it's at the extreme where Consumer Surplus is eliminated.

I agree the discount way would be a smart way to go about it. I feel like many places already sort of manipulate with discounts (i.e. LIMITED TIME 50% OFF when it's just always at the market price of 50% and very few would be willing to pay the full price).

My main concern is how does the average consumer fight back and retain their surplus? I think it's through education; many people are never educated on the idea of economic or consumer surplus, and a lot of people are really bad about taking a second to think about why they may be getting a certain ad on their phone or what not before they buy.

Also perhaps someone could develop a mainstream software that just messes up data collection by firms so they don't have the data to squeeze your consumer surplus out of you.

Perhaps this is part of the reason why younger today feel so poor even though statistically they're doing just fine; the rise of technology means they have less of a consumer surplus.

As I said, the best way to fight this is to use public library computers when buying online as you are completely anonymous.  I believe this can be done and that people don't need cookies when shopping on Amazon or where ever else. I don't really buy stuff online so I don't know.

Wouldn't an easy way around this be for companies to force you to create an account in order to buy anything? Even if you're on a library computer, if you're on a personal Amazon account that personal account still knows your info.

[Benjamin Frank 2.0]

Are you saying this is happening or you see this could happen?

Because I wrote on this here several years ago! And, I had forgotten that I didn't think of it myself, but took the idea from Tim Harford, The Undercover Economist (that's how he billed himself writing in the UK based newspaper The Financial Times), who wrote about this in his book The Undercover Economist published in 2005.

Harford argued at that time that even more than making money selling customer data, the real purpose of Facebook was to figure out every consumer's habits well enough that the algorithms could capture everybody's consumer surplus for the producer. Harford told people to never answer the little gamey surveys Facebook posted seemingly for fun.

As bad as 'data mining' and selling of personal data is, I think that concern is a smokescreen for this. Of course, if you try and search about this online, you'll find nothing, and I don't think it's because it's a wacked out conspiracy theory, but because Google's search engines wipe it from the internet.

The way this can be easily made legal is that everybody is offered the same base price (say $10 for something, which is higher than anybody would actually pay) but everybody is given a different discount.

So, there is no technical price discrimination because the initial price is the same for everybody but there is a discount that happens to be different for everybody. Even if price discrimination is illegal, price discounts are not only perfectly legal, but are encouraged by governments.

One way around this is to only buy stuff online using computers at libraries.

I'm saying this is something that could happen in the near future. It's def already happening to some extent already as you allude to with targeted advertising, but still don't think it's at the extreme where Consumer Surplus is eliminated.

I agree the discount way would be a smart way to go about it. I feel like many places already sort of manipulate with discounts (i.e. LIMITED TIME 50% OFF when it's just always at the market price of 50% and very few would be willing to pay the full price).

My main concern is how does the average consumer fight back and retain their surplus? I think it's through education; many people are never educated on the idea of economic or consumer surplus, and a lot of people are really bad about taking a second to think about why they may be getting a certain ad on their phone or what not before they buy.

Also perhaps someone could develop a mainstream software that just messes up data collection by firms so they don't have the data to squeeze your consumer surplus out of you.

Perhaps this is part of the reason why younger today feel so poor even though statistically they're doing just fine; the rise of technology means they have less of a consumer surplus.

As I said, the best way to fight this is to use public library computers when buying online as you are completely anonymous.  I believe this can be done and that people don't need cookies when shopping on Amazon or where ever else. I don't really buy stuff online so I don't know.

Wouldn't an easy way around this be for companies to force you to create an account in order to buy anything? Even if you're on a library computer, if you're on a personal Amazon account that personal account still knows your info.

Oh right. Oh well.

[Make Canada Boring Again]

I guess in strictly economic terms, price discrimination would go 'too far' when there is no consumer surplus. At the same time, this simply would mean that the consumer would lose the most money by buying the product - this does not mean price discrimination would be inherently unacceptable. The consumer could simply choose not to buy the product or actively attempt to find a cheaper alternative.

I may be misunderstanding something with your Amazon example but wouldn't that not necessarily be price discrimination if the more expensive items are shown to all demographics? Or would Amazon be selective with the demographics to whom shows more expensive and cheaper items, and if so how would it make that decision?

[ProgressiveModerate]

I guess in strictly economic terms, price discrimination would go 'too far' when there is no consumer surplus. At the same time, this simply would mean that the consumer would lose the most money by buying the product - this does not mean price discrimination would be inherently unacceptable. The consumer could simply choose not to buy the product or actively attempt to find a cheaper alternative.

I may be misunderstanding something with your Amazon example but wouldn't that not necessarily be price discrimination if the more expensive items are shown to all demographics? Or would Amazon be selective with the demographics to whom shows more expensive and cheaper items, and if so how would it make that decision?

In the Amazon example, my assumption is that what they show you depends on the data Amazon has about you. If Amazon's data says you specifically are likely to have particularly high utility for a certain item, they'll intentionally show you overpriced listings. If  data suggests your utility is more normal, they'll show you market rate listings.

For instance, Amazon could use their data to determine if something is a discretionary or necessary purchase for an individual. If amazon thinks a potential purchase is more necessary/urgent for an individual, the more likely Amazon would show them overpriced listings.

If Amazon's data thinks I am having a baby very very soon, it may intentionally show me overpriced baby toys, milk bottles, and diapers. I would be willing to spend more because these are things I need for my new baby ASAP. I may also be overwhelmed by other things and not really be thinking as much about cost.

However, if Amazon thinks I've had the baby for a few months and am just surfing for anything that looks fun or useful, it'll show me market rate baby toys and baby supplies. The lower prices may make me more likely to make an impulse purchase, especially since things seem relatively cheaper than when I bought stuff a few months ago.

[Make Canada Boring Again]

I guess in strictly economic terms, price discrimination would go 'too far' when there is no consumer surplus. At the same time, this simply would mean that the consumer would lose the most money by buying the product - this does not mean price discrimination would be inherently unacceptable. The consumer could simply choose not to buy the product or actively attempt to find a cheaper alternative.

I may be misunderstanding something with your Amazon example but wouldn't that not necessarily be price discrimination if the more expensive items are shown to all demographics? Or would Amazon be selective with the demographics to whom shows more expensive and cheaper items, and if so how would it make that decision?

In the Amazon example, my assumption is that what they show you depends on the data Amazon has about you. If Amazon's data says you specifically are likely to have particularly high utility for a certain item, they'll intentionally show you overpriced listings. If  data suggests your utility is more normal, they'll show you market rate listings.

For instance, Amazon could use their data to determine if something is a discretionary or necessary purchase for an individual. If amazon thinks a potential purchase is more necessary/urgent for an individual, the more likely Amazon would show them overpriced listings.

If Amazon's data thinks I am having a baby very very soon, it may intentionally show me overpriced baby toys, milk bottles, and diapers. I would be willing to spend more because these are things I need for my new baby ASAP. I may also be overwhelmed by other things and not really be thinking as much about cost.

However, if Amazon thinks I've had the baby for a few months and am just surfing for anything that looks fun or useful, it'll show me market rate baby toys and baby supplies. The lower prices may make me more likely to make an impulse purchase, especially since things seem relatively cheaper than when I bought stuff a few months ago.

I see, thank you for explaining. Either way, the question of 'when does price discrimination go too far' is one I probably need to think about more.

[Del Tachi]

Nate Silver has the McDonalds theory of why everyone thinks the economy sucks.

It's basically that, yes, between inflation, changes in marketing/spending habits, algorithmically-surcharged price discrimination, Americans are really draining their batteries to zero.  Prices may be up 16% since December 2020, but Americans' personal spending is up even more (25%!)   

[ProgressiveModerate]

Nate Silver has the McDonalds theory of why everyone thinks the economy sucks.

It's basically that, yes, between inflation, changes in marketing/spending habits, algorithmically-surcharged price discrimination, Americans are really draining their batteries to zero.  Prices may be up 16% since December 2020, but Americans' personal spending is up even more (25%!)   

lol this remind me of something I saw a while back about how there was actually a pretty significant subset of Americans spending 20-30k/year (or more!) just on food delivery services.

The most economically efficient thing to do for most is either make your own food, or just subscribe for one of these pre-made meal services, and occasionally picking up food at relatively inexpensive local places, but many feel as if they deserve “better” and will spend excessive amounts ordering out.

I also think it’s one of those things where when doing delivery becomes normal, it’s really hard to switch back to manually going out and get food.

The one exception to delivery is when someone’s time saved is actually more valuable than the additional cost of picking up the food, but that’s pretty seldom imo. An example might be working overtime at home for an extra $100 so you’re willing to pay $10 for delivery of your meal.

[Electric Circus]

Reflecting on two ways in which price discrimination has become more intrusive:

(1) Phone apps are taking the place of paper coupons and store membership cards. Vendor apps offer exceptional deals on everything from McDonald's fries, to cat food, to gas. But they also require that customers agree to extremely intrusive data collection on their phones (which in turn enables more sophisticated price discrimination).

(2) Means-tested programs administered by utilities and vendors. I don't remember these being as common ten or twenty years ago. (Maybe it's just that Vermont likes to lean on these more than other states with which I'm familiar.) For example, moderate-income households can pay a lower monthly rate for internet service. Some state subsidies for energy efficiency upgrades work like this too. I don't know how much uptake many of these programs get, but they're common enough that someone could save a substantial amount of money if they were diligent about claiming eligibility. (This is in addition to the big-ticket items like housing, health care, child care, elder care, and education that have massive and complex price discrimination.)