The Rise of Behavioural Discrimination

… PAPER-UNIVERSITY OF BRISTOL DEPARTMENT OF …, 2000

E-commerce brings firms new personalisation technologies enabling them to exploit information about individual consumers in order to tailor both products and prices to individual requirements. Thus firms can engage in two new competitive strategies – first degree ...

Economic Research, 2010

Journal of Product & Brand Management, 2010

Purpose -The purpose of this paper is to identify some of the current social norms of pricing that constrain sellers' discriminatory pricing on the internet. Violations of such social norms can lead to perceptions of price unfairness and swift and potentially damaging negative reactions from consumers. This paper seeks to demonstrate a state-of-the-art technique for assessing social norms, to identify current norms using a large representative sample of US consumers and to distinguish between social norms and personal beliefs. Design/methodology/approach -The study involves an online survey of 387 respondents. The survey was designed to measure both the consensus and the strength of consumer reaction to seller behaviors. To establish that a behavior is the norm, the consensus has to be greater than a 65 percent agreement and the strength of the response has to be significantly different from neutral. Both personal beliefs and perceptions of society's beliefs were collected. Findings -The paper finds that some of the social norms constraining discriminatory pricing on the internet are as follows: a seller should charge the same price for a given item to all customers; a seller should not charge a higher price to either more loyal or more frequent customers; a seller should not charge more to new or infrequent customers; and a seller should not charge less to infrequent purchasers. In addition, although it is not established as a norm, a surprising 50 percent of the respondents think that Americans in general believe that all retailers should charge the same price for the same item. The paper also finds that personal beliefs are consistent with social norms but more extreme. Practical implications -The implications are that e-tailers need to be careful about price discrimination on the internet -many of the most profitable practices violate current internet pricing norms. For example, consumers do not think that it is fair to give a cheaper price to a new buyer than to a repeat buyer. However, different e-tailers can offer the same product at a different price. That is not considered price discrimination. Originality/value -By identifying the social norms of pricing, sellers are provided with the information they need to avoid unwitting violations of those norms. Sellers can thus avoid angering their customers, as Amazon did when they allegedly charged new customers less than established customers.

The enhanced abilities of online retailers to learn about their customers' shopping behaviors have increased fears of dynamic pricing, a practice in which a seller sets prices based on the estimated buyer's willingness-to-pay. However, among online retailers, a deviation from a one-price-for-all policy is the exception. When price discrimination is observed, it is often in the context of customer outrage about unfair pricing. One setting where pricing varies is the name-your-own-price (NYOP) mechanism. In contrast to a typical retail setting, in NYOP markets, it is the buyer who places an initial offer. This offer is accepted if it is above some threshold price set by the seller. If the initial offer is rejected, the buyer can update her offer in subsequent rounds. By design, the final purchase price is opaque to the public; the price paid depends on the individual buyer's willingness-to-pay and offer strategy. Further, most forms of NYOP employ a fixed threshold price policy. In this paper, we compare a fixed threshold price setting with an adaptive threshold price setting. A seller who considers an adaptive threshold price has to weigh potentially greater profits against customer objections about the perceived fairness of such a policy. We first derive the optimal strategy for the seller. We analyze the effectiveness of an adaptive threshold price vis-à-vis a fixed threshold price on seller profit and customer satisfaction. Further, we evaluate the moderating effect of revealing the threshold price policy (adaptive versus fixed) to buyers. We test our model in a series of laboratory experiments and in a large field experiment at a prominent NYOP seller involving real purchases. Our results show that revealing the usage of an adaptive mechanism yields higher profits and more transactions than not revealing this information. In the field experiment, we find that applying a revealed adaptive threshold price can increase profits by over 20 percent without lowering customer satisfaction.

Journal of …, 2007

This paper focuses on a novel mechanism for market segmentation and price discrimination based on consumers' use of online infomediaries. Using the auto-retailing context as the setting for our study we address the following question: Can online infomediaries serve as a viable mechanism for market segmentation and price discrimination? We draw upon a unique and extensive dataset of consumers who report on the information they found when using online buying services (OBS) as part of their new vehicle purchase process. The analysis of the dataset shows that consumers who obtain price information pay lower prices (for the same product) while consumers who obtain product information pay higher prices. While this points to the existence of distinct consumer segments, this knowledge is of limited value without a viable mechanism that enables firms to specifically identify and target these customer-segments. Based on consumer usage patterns of OBSs, we then uncover distinct OBS clusters and empirically demonstrate that the usage of these different clusters is associated with predicted differences in consumer outcomes. We also show that the differential use of OBS clusters is systematically related to underlying consumer characteristics. We discuss the relevance of our findings for auto-dealers and manufacturers as well as for other industries where online infomediaries have established a significant presence.

Social Justice Research

Online businesses collect a wealth of data on customers, often without properly informing them. Increasingly, these data can be used for behavioral price discrimination. In this two-study article, we explore how consumers would respond if businesses were compelled to disclose their use of discriminatory behavioral pricing techniques. Using different disclosure frames, we examine the effects of disclosure on purchase intention and purchase probability. The findings indicate that specific disclosure frames affect purchase intentions. Furthermore, we find that a disclosure frame that is more in line with a consumer’s self-interest increases purchase intention. Specifically, the frame indirectly influences intention to purchase through its effect on the perception that the use of behavioral pricing information serves self-interest. In this way, our study draws attention to a potentially unanticipated effect of regulatory intervention. Implications for future research and legal policy ar...

2005

When firms are able to recognize their previous customers, they may be able to use their information about the consumers ’ past purchases to offer different prices and/or products to consumers with different purchase histories. This article surveys the literature on this “behavior-based price discrimination.”

Page 1. Price Discrimination, Privacy Technologies, and User Acceptance Alessandro Acquisti H. John Heinz III School of Public Policy and Management Carnegie Mellon University [email protected] Second Au Affil Add e-mail Optional ph ABSTRACT We discuss the relations between welfare enhancing price discrimination and privacy enhancing technologies, and the possible drivers of consumers' and merchants' acceptance of those technologies.

Economic Inquiry, 2006

The electronic technologies of the Internet make it possible for sellers to track potential customers and discriminate between the informed and uninformed. In this article, we report an experiment that investigates the market impact of firms tracking customers and offering discriminatory prices based on search history. We find that consumers, on average, face the same prices when sellers have the

Journal of Business Ethics

Price discrimination is widely considered unethical/unfair by consumers, as has been borne out by decades of psychological research and mainstream press reporting. However, little academic work has been done to investigate the ethics of price discrimination. The work that has been done to date concludes that while price discrimination is not unethical, despite widespread lay perceptions, it is at best morally neutral. We argue price discrimination is more ethical than unitary pricing, when done ‘progressively,’ meaning firms charge customers as a function of their willingness-to-pay. We introduce this specific kind of price discrimination as ‘Progressive Pricing’ and demonstrate it ethically outperforms a ‘Unitary Pricing’ scheme (where everyone pays the same price, regardless of their willingness-to-pay), at least within a broadly consequentialist framework. We do this by comparing a Unitary Pricing scheme to a Progressive one, analyzing them through the lenses of four different co...