Price Discrimination and Consumer Power in E-Commerce

Introduction

The rise of e-commerce has given retailers unprecedented ability to customize pricing and employ strategies like dynamic pricing and personalized price discrimination. Charging different consumers different prices for the same items based on their willingness to pay has become technologically feasible. However, these practices also raise concerns about fairness, transparency, and their implications for consumer welfare and power. This article provides an overview of the phenomenon of online price discrimination, examining relevant concepts, empirical evidence, consumer attitudes, and its relationship to buyer power. The ability to track, profile, and recognize customers online appears to be strengthening retailers' hands, but buyer resistance poses important constraints.

What is Price Discrimination?

Price discrimination refers to the practice of charging different prices to different consumers for the same product or service. It aims to capture more consumer surplus by tailoring prices more closely to what each consumer is willing to pay.

Economist Pigou identified three degrees of price discrimination:

First Degree Price Discrimination: This involves charging each individual consumer exactly their maximum willingness to pay. It represents "perfect" price discrimination, where the seller extracts all consumer surplus. However, sellers rarely have sufficient information to implement true first degree discrimination.

Second Degree Price Discrimination: Here, the seller offers a menu of pricing schemes (such as quantity discounts) and lets consumers self-select into them based on their preferences. This is a form of voluntary price discrimination. Examples include volume discounts, versioning of products, and loyalty programs.

Third Degree Price Discrimination: In this case, the seller separates consumers into distinct groups based on characteristics like demographics, location, purchase history etc. The seller then charges different prices to each group, but a uniform price within the group. Versioning products across groups is another form of third degree discrimination.

Online retailers possess sophisticated tracking and personalization technologies that allow them to identify and categorize consumers into very fine-grained segments. Factors like IP address, browser settings, account status and past purchases can be used to sort users. This enhances sellers' capability to implement third degree price discrimination or more advanced personalized pricing online. However, first degree "perfect" discrimination remains an ideal due to limits in consumer data.

Consumer Attitudes and Price Sensitivity

Surveys consistently show that most consumers view personalized or targeted pricing as unethical, unfair, and unacceptable. There are several key factors driving this negative attitude:

- Lack of Transparency - Consumers dislike not knowing what price category they fall into or why they are being charged a particular price. The opaque nature of personalized pricing results in information asymmetry and perceptions of unfairness.

- Privacy Concerns - Price discrimination requires collection of extensive personal data and online tracking to categorize consumers. Many find this invasion of privacy creepy and manipulative.

- Violates Norms - Singling out groups or individuals for higher prices is seen as violating norms of impartial treatment. People expect uniform pricing as the default.

- Distrust - Customized prices arouse suspicions that the seller is trying to take advantage of the consumer's limited information. This reduces trust in the seller.

However, other factors can sometimes outweigh these concerns for certain segments:

- Loyalty - Some consumers are willing to pay premium prices to trusted brands they have affinity with.

- Convenience - Services like fast shipping and recommendations create value that justifies higher prices for some.

- Lack of Alternatives - In certain markets with few options, consumers may accept personalized pricing due to no other choice.

- Benefits - Some consumers focus on personalized discounts they receive rather than implications for others.

These factors allow some tolerance for price discrimination practices, especially if implemented quietly without transparency.

Price Knowledge:

An important factor influencing price sensitivity is whether the consumer is aware of discrimination or not. Those aware of being targeted for higher prices react much more negatively. Sellers sometimes try to obfuscate discrimination to avoid backlash.

Location and Income Level:

Location-based price differences are common, with buyers in wealthier regions generally seeing higher prices. However, income level within a location has complex effects. Higher income alone does not necessarily predict lower price sensitivity.

Segmenting buyers:

Due to variations in attitudes, different buyer segments emerge - e.g. those who resist any discrimination, those open to it under certain conditions, and those who remain loyal regardless of pricing. Sellers try to identify and target these segments for effective discrimination strategy. But increased transparency could shift more consumers into discriminating-aware segments.

Conclusion

In closing, the advent of e-commerce is expanding both the technological capabilities for and the prevalence of personalized price discrimination. Though still limited to an extent, discrimination based on factors like location, account status, and browsing history appears to be growing on major retail sites. Consumer dislike of opaque and targeted pricing presents an obstacle, but segments amenable to differential pricing under certain conditions exist. The relationship between consumer and corporate power is fluid and evolving in this relatively new landscape. More transparency mandated by regulations like GDPR could reshape it further. While personalized pricing aims to increase seller surplus by capturing consumer surplus, buyers retain some countervailing power through resistance and sanctioning of discriminating retailers. The balance of power remains in flux as companies, consumers, and regulators feel their way forward in the digital retail revolution.