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Dynamic Pricing and Price Discrimination

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Dynamic Pricing and Price DiscriminationWe’ve talked in the past about dynamic pricing models, and how they are supposed to work – adjusting prices automatically based on supply and demand. Even such things as senior and student discounts are great examples of an effective use of dynamic pricing, both online and offline. However, new evidence is emerging that some companies are taking advantage of a more sinister application of dynamic pricing technology in their online stores, and making specific customers pay more simply because they believe they can get away with it. The whole subject is in something of a legal grey area at the moment, but sooner or later, regulatory agencies will have to step in and made a decision one way or the other.

The crux of the problem lies in the fact that customers are completely unaware that personalized dynamic pricing is going on. In the offline world, most customers are made aware of specific pricing tiers, whether it’s young children riding free on public transportation or a seniors discount at the cinema. It’s perfectly clear, and applies across wide groups of individuals. In this latest online twist, however, companies are monitoring the actions you take on their websites, everything from what products you view, what product comparisons you make, and your past purchasing history. This is then compiled by an algorithm which estimates how much you’re willing to pay for the products you view.

This is doesn’t simply apply to a few companies – major retailers such as Amazon and Dell have been accused of offering widely varying prices to different individuals, and even to different public and private institutions. When you consider the scale at which large organizations purchase, this can create price differences of tens of thousands of dollars, if not more.

While it’s essential for companies to try to maximize their bottom line and to keep tabs on the competition through price tracking tools and other sorts of technological advantages, there is a serious legal question about when dynamic pricing becomes price discrimination. At the moment, in the United States, the Federal Trade Commission (FTC) has yet to make a ruling on the legality of these practices, and they are likely to set the tone for much of the ecommerce around the world. Additionally, there have been no successful legal challenges against any form of price discrimination, but there has also been no precedent yet established, leaving the door open for future action against price discrimination tactics used by these major online retailers.

Once again, this highlights the importance that customers place on pricing and bargain hunting, which means that in the quest for competitive advantage, there may be something to be said for customer trust and loyalty rather than squeezing an extra few cents out of every purchase.

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