The White House Council of Economic Advisors recently released a report titled “Big Data and Differential Pricing.” “Differential pricing” refers to the practice of charging different prices to different groups of people for the same (or similar) products or services. The White House report explores the uses of big data for differential pricing, including the potential benefits or harms to consumers. The report follows the release of an earlier 2014 report on big data by the White House.
Reviewing the economics of differential pricing, the recent report points out that many forms of so-called ‘price discrimination’ “generate few objections”:
For example, venues like movie theaters that charge a price of admission may offer discounts to particular groups, such as children, senior citizens, or members of the military. Business travelers often pay a higher price for the same plane ticket or hotel room if they purchase closer to the date of travel. And a variety of big-ticket items – products ranging from a new car to a university education – have a list price, but offer individualized discounts that vary from one customer to the next.
These examples highlight how differential pricing allows businesses to expand their market while enabling price-sensitive consumers to access goods and services that they would not otherwise obtain.
The internet and big data – defined by the report as “the ability to gather large volumes of data, often from multiple sources, and with it produce new kinds of observations, measurements and predictions” – can affect differential pricing in a variety of ways, according to the report. From the seller’s viewpoint, “big data has lowered the costs of collecting customer-level information, making it easier for sellers to identify new customer segments and to target those populations with customized marketing and pricing plans.” From the consumer’s point of view, the availability of information online means that price-sensitive consumers can often identify the best available price. The report points out that “for example, while there is lots of differential pricing in airline ticket sales, the Internet has made it relatively easy for many travelers to compare prices and itineraries across airlines and to select the best deals for any given trip.”
Summarizing the economics, the report states that “in a competitive market with transparent pricing,” differential pricing’s “benefits are likely to outweigh the costs.” And: “Some studies even suggest that differential pricing can intensify competition relative to uniform pricing, by allowing high-margin sellers to compete more aggressively for price-sensitive customers who might otherwise buy from a lower-priced rival.”
On the other hand, the report warns that:
Ultimately, differential pricing seems most likely to be harmful when implemented through complex or opaque pricing schemes designed to screen out unsophisticated buyers.
Sounding a cautious note, the report further warns that the use of big data may cause discrimination against protected groups and could facilitate fraud on the unwary consumer. The report does not suggest that these harms are actually widespread, but nevertheless recommends “ongoing scrutiny” by regulators.
Given the balance of risks and harms, the report concludes with the suggestion that “policy should focus on encouraging competition rather than limiting differential pricing” and that, for competitive markets, “we should be cautious about proposals to regulate online pricing.”