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Price Discrimination

Price discrimination is a strategy that is frequently used by commercial organizations as a way of distinguishing between different groups of customers. By separating consumers into subcategories, companies can charge different prices for the same goods or services.

With the rapid growth of e-commerce, companies are able to experiment with and implement different price discrimination strategies. Online consumers consciously and unconsciously provide vendors with information that helps them to split the market into segments for price discrimination. This article introduces basic concepts involved in price discrimination, as well as some of the impacts on consumers’ privacy.

What is Price Discrimination?

Price discrimination is also referred to as yield management. This takes place when a company charges varying prices to different groups of customers, for the same goods or services. This variation in price is not related to the cost of the good or service provided. The different groups of customers are referred to as segmented markets.

Price discrimination is a strategy that is employed by almost every industry that has some power to determine prices. There are a number of different types of price discrimination:

  1. Optimal Pricing:  This is also referred to as perfect price discrimination. With this type of price discrimination, the vendor charges each individual the price that they are willing and/or able to pay. This heavily depends on how much information the vendor has regarding the consumer’s preferences. For the most part, this type of price discrimination is considered unattainable.
  2. Second Degree Price Discrimination:  With this form of price discrimination, vendors sell a product that is surplus capacity at a lower price than the standard or advertised price. This type of price discrimination is independent of any personal information from consumers. An example of this is the sale of standby airline seats. Second degree price discrimination has been advanced by developments in e-commerce.
  3. Third Degree Price Discrimination:  This is also referred to as multi-market price discrimination. With this type of price discrimination, the market is segmented, for instance in terms of time or geography. It is a common type of price discrimination that depends on charging different prices, depending on the segment of the market.

Price discrimination is not a new strategy; it has been applied throughout history. However, it is often not publicized, as it incites negative public responses. However, proponents argue that despite the inequitable treatment of individuals, on a larger scale, the practice may offer a more efficient use of resources. With the development of new technologies, companies are finding ways to price discriminate that may not have been possible before.

E-Commerce & Price Discrimination

With the rise of e-commerce, there has been a steady erosion of privacy. Privacy professionals and other observers have identified this as a continuing trend with the internet. The vast majority of privacy invasions stem from the private sector. Seemingly, with better information about consumers, vendors can more appropriately target their advertising dollars. In the past, companies needed to invest heavily into gathering personal information and monitoring the spending habits of consumers, current technology makes price discrimination a commercially feasible practice.

With ubiquitous computer systems, vendors can engage in more “intelligent” transactions, recording information about the environment and consumer conditions. Information about consumers may be collected through repeated interactions between vendor and seller. For instance, cookies may be used to track consumer purchasing habits. This allows vendors to refine the information about their customer base and dynamically change pricing schemes to respond to the information.

This practice may bring about both positive and negative results. For instance, customers may enjoy personalized treatment, such as discounts, suggested products and individualized content. On the other hand, many customers are wary of potential privacy invasions. Consumers are generally not pleased to learn that a vendor engages in price discrimination; no one wants to pay more than someone else for the same item.

Common examples of price discrimination include:

  • Dell Computers selling the same model laptop to different markets (i.e. individuals, small businesses, enterprises and governments) at different prices.
  • Vendors charging customers at different rates, depending on their IP address.
  • Amazon.com drawing on customer’s past purchases and spending habits to charge different prices for DVDs.

Web Coupons

Coupons retrieved from the internet are a rapidly growing segment of the coupon industry. Such coupons are accessed and printed from the internet and may carry with them a lot of consumer information, such as their IP address, personally identifiable information and the search terms used to find the coupon. While this form of tracking may be invisible to consumers, vendors may be able to collect such information simply by scanning the bar code of the coupon.

Many web coupons are handled by third party service providers, who may collect and analyze vast amounts of information about clients for the retailers. Well-known web coupon companies include RevTrax, FatWallet and Ebates.com. Vendors may also be able to narrow down their customer base by sending specific keyword searches to different web addresses. These addresses may be invisible to the consumer, who may only be able to see a simple, standard web address. Information collected online may be combined with data from offline databases that could significantly be harmful to consumers. Such information is collected, not only without individual consent, but without any form of transparency or accountability.

Legal Issues

The issues that have been raised by e-commerce and other online practices have significant implications on law and technology. Currently, the US antitrust law specifically addresses price discrimination. The Robinson-Patman Act of 1936 states that it is illegal for vendors to treat their customers differently, unless they have an acceptable legal justification for such treatment. However, the FTC has hardly applied the Act in the recent past. The Robinson-Patman Act has even been considered irrelevant in terms of dynamic pricing in an e-commerce context.

Critics have argued that the Act is not really designed to protect consumer rights. This is highly problematic for privacy advocates, who believe that private sector interests are unfairly targeting and classifying individuals without their consent. Recently, the US PIRG (United States Public Interest Research Group) has partnered with the Center for Digital Democracy and World Privacy Forum in order to urge the FTC to review online consumer tracking practices.

Summary

This article explores the issue of price discrimination. It discusses three main types of the price discrimination practice: optimal pricing; second degree price discrimination and third degree price discrimination. The article examines how price discrimination has become more prominent with the developments in e-commerce and how practices such as web coupons intensify the risk of privacy intrusions. The lack of relevant, up-to-date legislation around this issue is also discussed.

CIPP/IT Preparation

In preparation for the Certified Information Privacy Professional/Information Technology exam, a privacy professional should be comfortable with topics related to this post, including:

  • E-commerce personalization (II.A.d.)
  • Price discrimination (II.A.h.)
  • Privacy expectations and consumer behaviors (II.B.a.)
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