Earlier this week, the Executive Office of the President released a report on big data and differential pricing that is a sensible guide to a tricky topic. The main conclusions were that the use of big data for differential pricing doesn’t really raise any new policy issues. It is not widespread, the practice has many consumer benefits, there is no evidence of real harm associated with the practice and hypothetical harms are covered under existing laws or are likely to be mitigated by consumer behavior such as seeking the best price.
The underlying economics of differential pricing does not change when data analysis is used to implement it. Charging customers different prices for the same product usually benefits people who cannot afford a uniform high price. Big data analysis just makes it easier to identify lower-income price-sensitive consumers and allows sellers to offer them a lower price that they are likely to be able to afford. Big data’s shift toward personalized pricing is therefore likely to increase economic equality by making more products available at lower prices to people at the lower end of the economic ladder.
Often differential pricing is seen as unfair. Indeed, it does increase prices for people who are better off and who can afford to pay an individualized price that is higher than a uniform price. But it is hard to see any injustice in charging those who are better off a price they can afford and are willing to pay. Discriminatory practices that perpetuate historic prejudices against protected classes of people would be a serious problem, but, as the report notes, there is no evidence that big data is being used in this way and such use would be illegal under a variety of civil rights and anti-discrimination statutes. Fraudulent or deceptive practices involving differential pricing also would be a serious problem, but, as the report also notes, there is no indication that big data analysis is being used to do this, and it would be illegal to do this under a variety of consumer protection laws.
The report cautions against taking regulatory action directly against differential pricing, by banning it, for instance, or through price regulation. The reason, the report notes, is that differential pricing often has substantial benefits for the public. Policy makers should also refrain from measures that indirectly ban or regulate differential pricing by restriction or putting extra burdens on the use of data to implement personalized pricing or other differential pricing practices. Unfair discrimination involving big data analytics should be a matter of vigorous enforcement of existing statutes.