Decades without comprehensive data privacy legislation have eroded our privacy to a degree that would make dystopian fiction writers queasy. Yet some of the worst consequences of this erosion lie just over the horizon. Using our unprotected information, companies can now craft detailed data profiles for nearly all consumers. Pairing these profiles with advancing pricing algorithms, companies may now be able to set individualized prices for every consumer; what economists call “surveillance” or “personalized” pricing. The goal is simple—charge each consumer the maximum price they are willing to pay.
To illustrate, consider a typical market without personalized pricing where every consumer pays the same price: say a grocery store selling a dozen eggs for $3.00. In this example, let’s say you are a consumer willing to pay up to $3.50 for eggs and the grocer breaks even at $2.50. At the price of $3.00, everyone walks away better off: the grocer earns a $0.50 margin, and you retain a $0.50 “surplus.”
Now let’s consider personalized pricing: using security cameras nestled throughout the store, a pricing algorithm could monitor what you look like, how long you browse shelves, or even scan your face to see the record of your prior purchases, all without explicit consent, just to determine that you are willing to pay $3.50 for eggs. At that price, you are denied any surplus, and only the grocer captures the value generated by the transaction. Without this surplus, your wallet is $0.50 lighter and your ability to consume other goods and services is diminished.
While companies often dismiss personalized pricing as fearmongering, some already demonstrate a pattern of using computing advances to develop extractive pricing strategies. For instance, RealPage developed an algorithm that allows landlords to tacitly collude and charge monopolistic rent prices. If personalized pricing can similarly increase profits, companies will not hesitate to deploy it, no matter how offensive: After all, JetBlue was just caught allegedly using internet tracking to increase airfare for a customer looking for a flight to a funeral.
Facing this impending threat and a federal government gutting consumer protection, state legislatures are taking action to defend consumers’ wallets and privacy. Just this year, Maryland and Connecticut enacted first-in-the-nation restrictions on personalized pricing. New York and New Jersey have similar bills waiting for their governors’ signatures. Massachusetts could soon be next. H.99/S.2515, which bans grocers from using biometric data collected on their premises to personalize prices, is the state’s first foray into restricting personalized pricing.
Some economists, however, contend that this wave of legislation is misguided, arguing that personalized pricing can lower prices for some consumers and thus increase output. For instance, with personalized pricing, our example grocer can profitably lower prices from $3.00 down to $2.50 for consumers who value eggs less than their current market price. Yet these customers’ newfound ability to consume does not imply they are better off. Again, personalized pricing sets prices at a consumer’s maximum willingness to pay. In the jargon of economics, if a consumer is willing to pay $2.65 for a dozen eggs and is charged $2.65, they are indifferent between having the dozen eggs or having the cash to buy something else: their economic position remains unchanged.
It is only companies whose economic position improves under personalized pricing; the slim chance for consumers to benefit is if increased profits resulting from the output growth are taxed and redistributed back to consumers. We should be skeptical, however, that such redistribution is feasible. Growth often struggles to trickle down: redistribution efforts will encounter well-financed political opposition, and the redistribution itself may create distortions that erase some or all output growth. Personalized pricing likely results in a mere wealth transfer from consumers to companies.
Moreover, personalized pricing also creates new costs borne by consumers because its data requirements—and the fact that its effectiveness grows with more data—incentivize companies to invade our privacy wherever they can. In effect, personalized pricing extinguishes what economists recognize as privacy’s intrinsic value: the peace of mind of knowing that you control your information. With personalized pricing, a company co-opts that control to charge you as much as possible. Absent legislation, ubiquitous surveillance systems in grocery stores render you powerless to prevent this privacy intrusion; thus, consumers have no recourse to derive compensation for their diminished privacy—this intrinsic value is simply lost.
Personalized pricing shatters the enviable balance of capitalism. Instead of consumers and companies sharing the surpluses generated by free markets, personalized pricing allows only companies and their owners to reap the rewards. This nascent threat must be stopped before it pervades the economy; without intervention, prices will increase, privacy will erode, and faith in our economy will diminish.