Bespoke Pricing – What Is the Invisible Hand Up To?
CDT has previously written about the increased risks of collusion enabled by the growing power and capabilities of data supercharged by artificial intelligence.[1]
A corollary exposure to consumers courtesy of untrammeled data collection and powerful algorithms is enabling a seller to tailor the price it offers to what the seller knows about the particular consumer’s identity, preferences, and situation. This practice has been variously referred to as “individualized pricing” – or “dynamic pricing,” of which the practice is a subspecies – by those who wish to emphasize its potential benefits, or as “surveillance pricing” by those who want to highlight its invasiveness and its potential to be weaponized against vulnerable consumers without their awareness, let alone their consent.[2]
A more apt name might be “bespoke pricing,” as the price is being custom-tailored by the seller to fit the particular customer – made-to-measure.
Bespoke pricing is not entirely new. Some products and services innately require the seller to charge different prices to fit the particular consumer’s situation. Insurance and credit are two prominent examples, where underwriting is used to determine the price to charge the particular buyer based on the risk posed – because the actual cost to the seller – for the claims made on the policy, or for the default on the credit – cannot be determined until after the sale.[3] And it is also customary for larger consumer purchases like homes and cars, where prices are typically the result of negotiations between buyers and sellers.
Dynamic pricing in the broader sense includes charging different prices based on a seller’s sensitivity to fluctuations in supply and demand, which can have the effect of discerning different categories of buyers expected to be willing to pay different prices. One example is airline tickets that for the same flight are priced lower when purchased in advance – more likely by individuals and families planning travel for personal reasons, on a budget – and priced higher when purchased closer to the time of the flight – more likely by persons traveling for business, on a corporate expense account, or persons with an urgent, last-minute need to travel, and no flexibility.
Bespoke Pricing’s Ancient Origins
Bespoke pricing has ancient antecedents, hearkening back to the beginning of commerce and trade.[4] Even in prehistoric times, we can imagine that every exchange that did not occur by force was between two individuals who knew each other, or came to know each other, based on a recognition of each other’s needs and wants. Importantly, it was presumably a mutual recognition.
Similarly, in a medieval marketplace, merchants exercised their own form of bespoke pricing, sizing up each prospective customer for how much they’d be willing to pay, and testing them with a higher, even exorbitant price initially. But customers could similarly size up the merchant, and could exercise their own recourse, not just to refuse to pay until the price seemed reasonable, but to walk through the marketplace to see what price other merchants were asking and what price they would accept. There was still mutuality, with a rough equivalence of transparency, and of bargaining power – especially when there were competing merchants.
Arrival of the Anonymous Buyer
Bespoke pricing continued into the Industrial Age, as selling increasingly moved into brick-and-mortar stores. Then in the 1870’s, a marketing revolution occurred – the price tag was introduced at a department store, the Grand Depot in Philadelphia, and quickly caught on.[5] Sellers realized they were not as apt to know their customers, and it became more efficient to post – to advertise – a price that all customers could see. This did not always prevent a customer from trying to bargain for a discount. But most customers came to accept the posted price, for most products. And store owners competed by setting the advertised price at a level calculated to appeal to as many consumers as possible, at a high enough price, to maximize profits. The price tag ushered in anonymity for buyers, and sellers coped by standardizing their prices.
Online Shopping Shifts the Balance
The internet promised to be a boon to consumers, making it far easier and more convenient for them to comparison shop across a vast, potentially unlimited number of sellers. And it largely delivered on that promise, and brought new, competitive pressure on sellers to make sure they were offering comparatively attractive deals. But online commerce also engendered a new market, for consumer data, which has been collected, organized, distributed, sold, and cross-referenced on a massive scale – sometimes referred to as “big data.”
Big data has created the potential for sellers to regain the upper hand, fundamentally reversing the anonymity equation. Now the seller’s pricing decisions can be obscured, while the buyer becomes an open book.
Pro-competition? Pro-consumer? Or Neither?
Proponents of bespoke pricing have touted it as a vehicle for promoting competition. And in theory, by enabling a seller to tailor its offer to a particular consumer’s situation, bespoke pricing could incentivize the seller to lower its price for that consumer to a point that wins the sale from some rival seller. Multiple rival sellers engaging in this practice simultaneously could, theoretically, create new possibilities for competition, bringing the efficient allocation of resources to new heights.
In practice, however, it is questionable whether more competition, and lower prices for some consumers, would actually be the result. It would depend on where the rival sellers’ profit-maximizing incentives lead them. Marshaling this increased amount of data into their pricing calculations might well lead them to monitor and coordinate with each other’s pricing, promoting collusion rather than competition.[6]
Moreover, the consumer would be left entirely in the dark about a seller’s price-setting context, while the consumer would be utterly visible to the seller. The seller would have access to vast amounts of data about the consumer, such as the consumer’s previous purchases of or searches for the product or service, and for similar and related products; the consumer’s income, assets, debts, and financial condition and history; other purchases that reveal the consumer’s propensity to spend; activities the consumer and the consumer’s family engage in that manifest a need for or benefit from the product or service; any urgency for that need or benefit; and broadly, any characteristics revealed by the consumer’s web-browsing history, or by other behaviors tracked and fed into the big data maw, that may indicate the consumer is more susceptible to sales-pitch puffery or pressure.
Granted, those insights might enable a seller to spot a consumer who has thus far not been willing, and is not likely, to purchase at the original offered price, but who has a sufficient need or desire or use for the product or service to be more likely to purchase it at a somewhat reduced price. The seller could even sequentially reduce the offered price until that consumer is willing to buy its product or service rather than a competitor’s product or service. Isn’t that the essence of healthy competition?
If the engagement actually occurred in that fashion, that would indeed constitute competition, and that particular consumer would come out ahead in that instance, as would the seller.
The question is how likely bespoke pricing is to occur in that fashion. The same digital resources that would enable a seller to target price reductions can just as easily enable targeted price increases for consumers who the seller determines are willing to pay more.[7] Those digital resources can also enable the seller to coordinate with other sellers to avoid price reductions when they perceive anticompetitive price-fixing to be in their collective net interest.[8] Sellers engaged in such a price-fixing conspiracy have the incentive and, with those digital resources, the potential ability to retaliate against a seller who selectively cuts prices, because that undermines the stability of the conspiracy. But they do not have an incentive to retaliate against a seller who takes advantage of an opportunity to selectively raise prices.[9]
So all told, the incentives for using bespoke pricing are all too likely to skew in the direction of higher prices. Informed consumer choice is the engine that drives competition; because consumers won’t be as informed, and thus will have little or no agency in the supposed competitive benefits, they are more apt to be taken advantage of than to benefit.
Regardless, this justification is likely to be too abstract to appeal to the typical consumer. When consumers learn that companies are using bespoke pricing, they will assume that they are being subjected to it, without their knowledge or consent, and being taken advantage of. They are apt to react viscerally, to regard it as invasive of their privacy, and offensive to their sense of fairness. When they are told that it’s the “invisible hand”[10] at work, they are likely to conclude that the invisible hand is picking their pocket.
Consumers will see data-charged bespoke pricing as a fundamental reversal of the way the marketplace has worked, to their benefit, for 150 years, since the arrival of the price tag.
Possible enforcement action or legislation
Bespoke pricing has caught the attention of the Federal Trade Commission. The FTC has launched a study of the practice and its effects under its section 6(b) authority, requesting information from eight data intermediary companies that offer pricing products and services that incorporate data about consumers’ characteristics and behavior.[11] The results of the study will inform the FTC, Congress, and other policymakers, and the public, about the practice and its effects. And it will help the FTC determine whether the practice is a violation of the FTC Act and, if so, in what circumstances, or if new rulemaking or legislation is warranted to prohibit or rein it in.
The practice has also been the subject of hearings in the Senate Committee on Banking, Housing, and Urban Affairs, with follow-up letters to Walmart and Amazon inquiring about their use of pricing algorithms.[12]
Stronger privacy laws
Enacting stronger data privacy laws, which has been a top priority for CDT since our founding three decades ago,[13] would have many benefits for consumers, among them dramatically curtailing the potential for bespoke pricing.[14] Restricting sellers’ access to consumers’ personal data as a basis for setting prices would limit sellers’ intimate knowledge of their customers, and would confine targeting only to broad categories of consumers, based on factors like geography, timing of purchase, and quantity. With sufficiently strong data privacy protections, we could restore some anonymity to buyer identities, like price tags in a brick-and-mortar store offered.
Restoring anonymity through purchasing agents
An interesting approach to consider, in addition to or as an alternative to legal action or new lawmaking, is using technology to restore anonymity and put power back in the consumer’s hands, by means of one or more intermediaries who could act as a purchasing agent for the consumer. The seller would have no information about the prospective buyer beyond the fact that the buyer is choosing to use the intermediary.
To be most effective, an organization acting as purchasing agent would be able to guarantee – and willing to be held accountable for – preserving the consumer’s anonymity. This should include, for example, that the purchasing agent not ask for, collect, or retain any data beyond what is necessary and proportionate for acting as the consumer’s agent, including for ensuring that the product is delivered at the agreed price and terms.[15] The data should also be carefully protected against access by any third party, as well as by anyone working at the organization not involved in arranging the specific purchase.
Ideally, this would mean eliminating the use of any third parties to process the data. And for further protection, the consumer’s request, and all subsequent communications, would be encrypted.
One good option for a purchasing agent could be an independent, non-profit consumer organization with the capability and integrity to maximize reliability and trustworthiness. Using a non-profit could keep the fee the agent would charge to a nominal amount, close to the amount needed to cover the amortized costs of setting up the service and the expenses of running it.
Consumer Reports is one example of the kind of organization that could be a suitable candidate for establishing such an intermediary purchasing agent. CR has the credibility of a strong brand with consumers, as well as significant resources. And it has experience with two principal components of this approach, anonymous purchasing and agency. Its experience with anonymous purchasing goes back over many decades of purchasing the products it tests in the marketplace, without disclosing that CR is the one purchasing them. More recently, CR has established the Permission Slip,[16] under which a consumer can appoint CR as their authorized agent to contact any number of companies to request that they stop sharing that consumer’s personal data, or that they delete it altogether. The infrastructure for an authorized purchasing agent service would be similar in scale to Permission Slip, matching a consumer with multiple companies.
To the extent that bespoke pricing can actually benefit consumers, and can further the pro-competitive objective of expanding the market, by offering a lower price to consumers who need it to afford to purchase, those consumers can still obtain that benefit by checking prices both ways and comparing them.
Sellers might say they need to charge higher prices to some consumers in order to lower the price to other consumers and still obtain the same overall revenue. But in a marketplace where competition is functioning effectively, a seller will still have incentives to identify prospective buyers who would pay a lower price that would still be profitable to the seller.
Conclusion
Bespoke pricing is likely coming soon, to sellers near you – if it has not already arrived. The technological capability is here, and the incentive to use it will be irresistible.[17] We need to come to terms with how to confront it on the consumer side, so that the online marketplace works for consumers as promised when its arrival was heralded. The FTC investigation and the Senate Banking inquiry are good places to start.
[1] G. Slover & H. Babinski, Is Artificial Intelligence a New Gateway to Anticompetitive Collusion, Center for Democracy & Technology, Oct. 2, 2023, https://cdt.org/insights/is-artificial-intelligence-a-new-gateway-to-anticompetitive-collusion/.
[2] D. Dayen, One Person One Price, The American Prospect, June 4, 2024, https://prospect.org/economy/2024-06-04-one-person-one-price/. An analogous concern has arisen regarding companies’ use of workers’ personal data to discriminate in what they are paid. See, e.g., Veena Dubal, On Algorithmic Wage Discrimination, 123 Columbia Law Rev. 1929 (2023), https://www.jstor.org/stable/27264954.
[3] See FTC Issues Orders to Eight Companies Seeking Information on Surveillance Pricing, July 23, 2024 (concurring statement of Commissioner Ferguson), https://www.ftc.gov/system/files/ftc_gov/pdf/surveillance-pricing-6b-ferguson-concurrence.pdf.
[4] See Federal Trade Commission, Behind the FTC’s Inquiry into Surveillance Pricing Practices, July 23, 2024, https://www.ftc.gov/policy/advocacy-research/tech-at-ftc/2024/07/behind-ftcs-inquiry-surveillance-pricing-practices.
[5] J. Glorfeld, John Wanamaker Makes a Sale, Cosmos, May 2, 2021, https://cosmosmagazine.com/people/john-wanamaker-makes-a-sale/; B. Wallheimer, Are You Ready for Personalized Pricing?, Chicago Booth, Feb. 26, 2018, https://www.chicagobooth.edu/review/are-you-ready-personalized-pricing#.
[6] See Slover & Babinski, n. 1; The New Invisible Hand? The Impact of Algorithms on Competition and Consumer Rights, Senate Comm. on the Judiciary, Subcomm. on Competition Policy, Antitrust, and Consumer Rights, Dec. 13, 2023, https://www.judiciary.senate.gov/committee-activity/hearings/the-new-invisible-hand-the-impact-of-algorithms-on-competition-and-consumer-rights.
[7] See C. Dilmegani, Ultimate Guide to Dynamic Pricing in 2024: Roadmap & Vendors, AIMultiple, Jan. 3, 2024, https://research.aimultiple.com/dynamic-pricing/.
[8] Slover & Babinski, n. 1.
[9] Id.
[10] Adam Smith, The Wealth of Nations, 1776.
[11] FTC Issues Orders to Eight Companies Seeking Information on Surveillance Pricing, July 23, 2024, https://www.ftc.gov/news-events/news/press-releases/2024/07/ftc-issues-orders-eight-companies-seeking-information-surveillance-pricing.
[12] Press release, Brown Demands Answers on Amazon and Walmart’s Use of So-Called “Dynamic Pricing”, May 9, 2024, https://www.banking.senate.gov/newsroom/majority/brown-demands-answers-on-amazon-and-walmarts-use-of-so-called-dynamic-pricing.
[13] See, e.g., Testimony of Deirdre Mulligan before the Senate Committee on Commerce, Science and Transportation Subcommittee on Communications, Sept. 23, 1998, https://cdt.org/insights/testimony-of-deirdre-mulligan-before-the-senate-committee-on-commerce-science-and-transportation-subcommittee-on-communications/. CDT has also long been emphasizing that data minimization is a key privacy protection. See, e.g., https://cdt.org/insights/report-why-collection-matters-surveillance-as-a-de-facto-privacy-harm/ and https://cdt.org/insights/states-are-letting-us-down-on-privacy/.
[14] See T. Noble, To Fight Surveillance Pricing, We Need Privacy First, Electronic Frontier Federation, Aug. 5, 2024, https://www.eff.org/deeplinks/2024/08/fight-surveillance-pricing-we-need-privacy-first.
[15] At some point after the purchase price and terms are agreed to, the seller will need a mailing or email address for the buyer to deliver the product or service.
[16] K. Waddell, How to Take Back Control of Online Data With Apps Like Consumer Reports’ Permission Slip, Consumer Reports, Oct. 3, 2023, https://www.consumerreports.org/electronics/privacy/take-control-of-online-data-with-apps-a5151057853/.
[17] See, e.g., D. Dayen, The Emerging Danger of Surveillance Pricing, Jacobin, July 9, 2024, https://jacobin.com/2024/07/surveillance-personalized-pricing-data-collection.
