It may be more profitable for retailers to avoid personalising prices, but that may hurt consumers, writes Shota Ichihash

Ichihashi, Shota

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LSE Research Online

When online sellers use different prices for different consumersLSE Research Online URL for this paper: http://eprints.lse.ac.uk/104518/Version: Published VersionOnline resource:Ichihashi, Shota (2020) When online sellers use different prices for different consumers. LSE Business Review (20 Jan 2020). Blog Entry. lseresearchonline@lse.ac.ukhttps://eprints.lse.ac.uk/ ReuseItems deposited in LSE Research Online are protected by copyright, with all rights reserved unless indicated otherwise. They may be downloaded and/or printed for private study, or other acts as permitted by national copyright laws. The publisher or other rights holders may allow further reproduction and re-use of the full text version. This is indicated by the licence information on the LSE Research Online record for the item.When	online	sellers	use	different	prices	for	differentconsumersDo	you	shop	online?	If	so,	sellers	are	likely	to	know	a	lot	about	you:	purchase	histories,	browsing	histories,	whereyou	live,	which	operating	system	you	use,	and	so	on.	Consumers	and	policymakers	are	concerned	that	onlinesellers	may	use	data	of	consumers	to	learn	about	how	much	they	are	willing	to	pay,	and	then	charge	differentprices	to	different	consumers—so-called	personalised	pricing.Should	we	worry	about	personalised	pricing?	My	recent	work	provides	a	simple	theory	that	argues	the	opposite:Sellers	have	an	incentive	to	avoid	personalised	pricing,	and	consumers	might	worry	about	the	absence	ofpersonalised	pricing.	To	see	the	first	part,	imagine	that	an	online	seller	uses	consumer	data	to	personalise	prices.Then,	consumers	would	try	to	game	the	system.	For	example,	they	may	create	new	user	accounts	to	see	whetherthey	receive	lower	prices,	or	go	to	privacy	settings	and	erase	cookies.	Such	behaviour	will	lower	the	quality	of	dataand	prevent	the	seller	from	not	only	pricing	effectively	but	also	improving	its	recommendation	system	and	searchengine.	To	avoid	this,	the	seller	can	commit	to	not	personalise	prices.	The	commitment	encourages	consumers	toprovide	more	data,	which	enables	the	seller	to	display	products	that	are	directly	relevant	to	each	consumer.	Largeonline	retailers	may	especially	benefit	from	this	strategy,	because	the	crucial	part	of	their	business	is	to	matchconsumers	with	relevant	products.	When	sellers	can	use	data	to	personalise	non-price	aspects	of	their	services	andcreate	value,	they	might	be	better	off	by	committing	to	not	personalise	prices.Surprisingly,	this	seemingly	consumer-friendly	policy	may	hurt	consumers.	To	see	this,	imagine	that	a	sellercommits	to	not	personalise	prices,	and	all	consumers	except	you	provide	their	data.	The	seller	can	use	data	tolearn	consumers’	tastes,	and	show	each	consumer	the	products	he	or	she	likes.	Because	the	seller	can	presenteach	product	to	consumers	who	value	it	highly,	the	seller	can	set	a	relatively	high	price	for	each	product.	Sinceprices	are	not	personalised,	you	will	also	have	to	pay	these	high	prices,	regardless	of	whether	you	provide	data.The	key	is	that,	when	the	seller	does	not	personalise	prices,	data	provision	by	some	consumers	can	hurt	otherconsumers	through	high	prices	(this	resembles	what	economists	call	negative	externality).	Because	consumers	donot	take	this	into	account,	each	consumer	chooses	to	protect	privacy	too	little,	compared	to	the	level	that	maximisesconsumers’	joint	welfare.	This	problem	does	not	occur	under	personalised	pricing,	because	each	consumer	takesinto	account	how	data	provision	affects	prices	charged	to	the	consumer.LSE Business Review: When online sellers use different prices for different consumers Page 1 of 2		Date originally posted: 2020-01-20Permalink: https://blogs.lse.ac.uk/businessreview/2020/01/20/when-online-sellers-use-different-prices-for-different-consumers/Blog homepage: https://blogs.lse.ac.uk/businessreview/The	story	also	applies	to	offline	shopping.	Imagine	that	you	go	to	buy	a	car.	You	talk	to	salespeople	about	what	kindof	cars	you	like,	and	they	recommend	a	few	cars.	You	test-drive	some	of	them	and	decide	which	one	to	buy.Suppose	that	salespeople	might	give	you	a	discount,	depending	on	how	much	they	think	you	are	willing	to	pay.	Ifyou	talk	a	lot,	then	salespeople	can	figure	out	the	exact	car	you	like,	but	they	are	unlikely	to	offer	a	discount	for	it.This	concern	will	make	you	reluctant	to	provide	information	such	as	your	tastes	and	budget.	As	you	talk	less,salespeople	can	only	give	you	inaccurate	recommendations.	As	a	result,	you	have	to	spend	more	time	and	effort	tofind	suitable	cars.	In	contrast,	suppose	that	the	car	dealer	adopts	a	“no-haggle	pricing.”	Then,	you	would	be	morewilling	to	talk,	because	providing	information	never	affects	prices.	My	theory	tells	that	the	no-haggle	pricing	maybenefit	car	dealers	but	hurt	buyers.	The	pricing	strategy	eliminates	your	option	to	hide	information	to	obtainbargaining	power	in	subsequent	price	negotiation.Does	the	above	theory	explain	the	reality?	At	least,	the	theory	seems	to	reconcile	two	pieces	of	puzzling	anecdotalevidence.	First,	personalised	pricing	does	not	seem	to	be	widespread	as	much	as	we	might	expect,	according	tothe	recent	“Furman	report.”	This	could	be	due	to	technological	constraints	or	firms’	fear	of	consumer	backlash.	Mytheory	adds	another	reason	for	sellers	to	avoid	personalised	pricing.	The	second	puzzle	is	that,	despite	the	growingconcerns,	consumers	seem	to	casually	share	their	data	with	online	retailers.	The	theory	tells	that	it	could	be	optimalfor	an	individual	consumer	to	do	so,	as	long	as	sellers	do	not	personalise	prices.	However,	this	does	not	mean	thatwe	do	not	need	to	worry	about	privacy.	Collectively,	consumers	might	be	giving	up	too	much	personal	data.To	think	about	the	future	of	personalised	pricing,	let	me	explain	two	crucial	assumptions	of	the	above	theory.	Oneassumption	is	that	sellers	can	use	data	to	improve	something	other	than	pricing,	such	as	efficiently	matchingconsumers	with	products.	With	the	advancement	of	information	technology	and	increasing	product	variety,	such	asituation	will	continue	to	be	relevant	in	the	future.The	other	crucial	assumption	is	that	consumers	can	control	their	data.	This	is	important	because	the	idea	thatsellers	want	to	avoid	personalised	pricing	holds	only	if	consumers	can	choose	to	hide	their	data.	If	sellers	couldfreely	gather	data	without	consumer	consent,	then	sellers	would	collect	as	much	data	as	possible	and	use	it	to	tailorprices.	Do	we	have	control	over	our	data?	There	is	no	simple	answer	to	this,	and	we	may	think	the	answer	is	no	insome	contexts.	However,	the	recent	General	Data	Protection	Regulation	is	at	least	trying	to	give	consumers	morecontrol	over	data.	But	recall	the	punch	line:	If	consumers	have	full	control	over	their	data,	sellers	may	simply	committo	not	personalise	prices,	and	non-personalised	pricing	may	make	consumers	worse	off.	♣♣♣This	blog	post	is	based	on	the	author’s	research	article,	“Online	Privacy	and	Information	Disclosure	byConsumers”	in	the	American	Economic	Review	(forthcoming).The	post	expresses	the	views	of	its	author,	not	the	position	of	the	Bank	of	Canada,	LSE	Business	Review	orthe	London	School	of	Economics	and	Political	Science.Featured	image	by	HutchRock,	under	a	Pixabay	licenceWhen	you	leave	a	comment,	you’re	agreeing	to	our	Comment	PolicyShota	Ichihashi	is	a	senior	economist	at	the	Bank	of	Canada.	He	has	a	PhD	in	economics	fromStanford	University.	His	research	interests	are	in	microeconomic	theory	and	the	economics	of	theInternet.	His	academic	website	is	here.			LSE Business Review: When online sellers use different prices for different consumers Page 2 of 2		Date originally posted: 2020-01-20Permalink: https://blogs.lse.ac.uk/businessreview/2020/01/20/when-online-sellers-use-different-prices-for-different-consumers/Blog homepage: https://blogs.lse.ac.uk/businessreview/

When online sellers use different prices for different consumers

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When online sellers use different prices for different consumers

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