Big data is coming for your purchase history - to charge you more money

Are you ready for a gas station to charge you more when you are running late or your tank is empty? Laws against price gouging typically apply in times of emergencies, for example after Hurricane Katrina. Most of the time there are no rules that limit price discrimination, and there are certainly no laws against customized products and terms of service. When you add that to the fact that federal privacy laws do a notoriously poor job of protecting our data, it’s clear that consumers are on their own.

Companies can vary their product offerings, price and contract terms from moment to moment, tailoring offers to each consumer at their specific location and point in time. Websites personalize your experience by remembering who you are and a variety of facts about you. Your browsing history, email and search terms all affect what you see. Google’s personalized search means that two people searching the same term don’t get the same results or see the same offers. Amazon recommends different products to different customers. And Netflix suggests what to watch based on what it learns about you.


Like products, price is customized all the time. From college tuition to plane tickets to groceries and medicine, consumers have already grown accustomed to paying dramatically different prices for the exact same thing. It’s accepted that the person sitting next to you on a flight or in a lecture hall might have paid half as much as you. Economists call that price discrimination, and it is proliferating throughout our economy.

A study by Benjamin Reed Shiller, an economist at Brandeis University looked at what happened to Netflix’s profits when it collected varying degrees of information about its customers and charged different prices for the same product. Just having basic demographic information alone to charge different prices increased profits 0.14%, while adding data from web browsing history increased profits by 1.4%, with some customers paying twice as much as others for the exact same product.

The goal is to get to a market of one. One-to-one selling pits each individual against a far more knowledgeable and sophisticated seller. Instead of standard prices and products offered to everyone, companies can instantly set prices specifically for you. In the right circumstances, a company that knows how much you need something and how much you can manage to pay can empty your wallet in a millisecond.

Airlines have long been at the forefront of this trend, at least as far as pricing is concerned. But little by little other types of businesses are catching up. Customer loyalty cards and personalized coupons are just some of the ways supermarkets and pharmacies are replacing the shelf or standard price with individual pricing. The CEO of Safeway, Steve Burd, told analysts in 2013: “There’s going to come a point where our shelf pricing is pretty irrelevant because we can be so personalized in what we offer people.”

Throughout history, sellers have tried to guess what buyers would be willing to pay. Without detailed knowledge and the means to implement quick changes, companies settled for the market price, the least common denominator for a group of buyers. Meanwhile lots of money stayed with consumers. Perhaps the ultimate mass market product was the Ford Model T. Selling for as little as $260, at its peak half of all cars on US roads were Fords. Within a decade, rivals were using their knowledge of consumer psychology to charge higher prices for minor variations like paint and trim.

The economics of data favor scale above all, shifting power from consumers to the masters of data. Over time, by mining immense databases with superhuman speed, data giants will get closer and closer to knowing what each of us is willing to pay. Sophisticated real time pricing will allow them to capture every penny, every time.

Before the internet, market power was equated with monopoly, the power of a single seller across a large market. Big data changes the game, tilting the balance dramatically in favor of data-rich sellers. Rather than raising prices uniformly across huge markets, a data-rich seller can opportunistically exercise power where traditional monopoly is not visible, charging extra for gas today and a bit more for a movie tomorrow. That granular capability is entirely new, and requires new responses.

That’s why antitrust enforcement has become more important than ever as big data supercharges the power of traditional monopolies. Consumers are just as vulnerable to the effects of personalized pricing as they are to price fixing - yet the government has done little to put safeguards in place. That’s why we must start with protecting the very weapon that companies use against us: our data.

(The Guardian)