20 December 2018 by Robert Bell
Bespoke pricing may be resulting in a bad deal for consumers
We are all used to walking into a supermarket and picking up goods from
the shelves marked with a certain price.
That price is invariably the same for all shoppers. Many expect internet shopping
to be exactly the same. Well think again!
Online retailers, telecommunication companies, search engines and social networking sites are amassing a huge amount of our personal data which extends to our personal background, our lifestyles and our shopping habits. The technology now exists and is currently being deployed to provide us with personalised pricing for goods and services we search and buy online.
The UK Government and the CMA, the UK’s principal competition regulator, are now sufficiently worried about the increasing trend of bespoke pricing of goods or services over the Internet that they have commissioned new research, six years on from the last round. They announced on 4 November that it will explore how widespread the practice is, how businesses are applying it through various media and the extent to which personalised pricing is preventing shoppers getting the best deals.
Many justify personalised pricing by stating that the practice benefits consumers and retailers argue that personalised prices provide benefits in a number of ways.
I am sure many of you reading this will be already thinking about the broader ethical questions of this practice. Do the suppliers or retailers have specific permissions to process consumer data in this way, does their pricing meet consumer law obligations and if in a dominant position, would not such pricing amount to discriminatory pricing?
Or perhaps you are looking at these issues through the lens of a shopper. Did I just pay over the odds last week for that holiday to the Seychelles while someone with different search habits from another postcode has just got themselves a bargain? The Government’s latest research aims to understand this practice in greater detail and whether it needs to intervene through legislation, be it competition or consumer law.
For the CMA (the OFT as it then was) its first encounter with the concept of personalised pricing came some six years ago in November 2012 when they launched a call for information to improve its understanding of how the use of consumers information was affecting online markets. In approaching this subject they noted that personalised pricing was a well-established business practice but was coming more to prominence due to an increase in online sales.
The OFT defined personalised pricing as a practice where: ‘Businesses may use information that is observed, volunteered, inferred, or collected about individuals’ conduct or characteristics, to set different prices to different consumers (whether on an individual or group basis), based on what the business thinks they are willing to pay.’
“This lack of transparency harms consumers' trust in traders”
The OFT concluded that whilst it was technologically possible to set prices based on information which companies collect on consumers – for example, information about their browsing or purchasing history or the device they use – there was no evidence that businesses were using information about individuals to set higher prices.
Instead they observed that businesses were offering personalised discounts and increasingly using information collected about consumers in order to refine their pricing strategies. For example, a business may use information collected to identify consumers who have not made a purchase for a number of weeks and offer a discount on future purchases.
The study found some evidence of online search results being determined by consumers’ conduct or characteristics. But this was based on an analysis of aggregated information collected about consumers generally and not individually. Accordingly, they surmised consumers don’t always understand why prices vary and may think this is because they are being offered a price based on information collected about them personally and that they might be paying higher prices.
The research found that prices varied depending upon factors such as:
The OFT concluded that generally the ability to segment consumers into groups to present innovative discounts based on personal information has the potential to benefit consumers, where the process
However there was a lack of transparency by businesses about what information they were collecting and how it was used. This lack of transparency harms consumers’ trust in traders and business practices. They found that businesses could do a lot more to make their practices more transparent about what information they are collecting, how it is being used and give consumers real choice about this.
Overall the OFT study concluded that:
Where personalisation takes place, it is less likely to be harmful where consumers know it is happening, understand how it works and can exercise effective choice, for example where consumers receive personalised discounts as a result of membership of a loyalty scheme.
The Government/CMA Study will build on the earlier OFT study. But the rapid rise of internet shopping in the UK and the recent focus on a number of anti-competitive online practices has led to a renewed focus on personalised pricing.
The research will explore whether and how personalised pricing makes use of personal data points such as a consumer's address, marital status, birthday and travel history. In addition, the Financial Conduct Authority announced in early November it will be investigating the issue of personalised pricing for car and home insurance policies after finding hidden discrimination between customers. The regulator’s study will assess the scale of the issue, whom it affects and possible solutions.
The Government understands that with more consumers shopping online, it is important that the Government and the CMA understand how advances in technology impact consumers. The present personalised pricing research will help them stay at the forefront of emerging technology, so they can understand how best to protect people, particularly vulnerable people, from any unfair practices that may exist.
It is unclear how widespread the practice of personalised pricing is and how far it represents a challenge to the existing legal framework. However, we have seen through recent EU legislation on geo-blocking and the draft regulation of regulating online market platforms that the Internet and the associated technology which underpins it has presented regulators and Governments with unique challenges, which bring into question how fit for purpose existing legislation is in areas of competition and consumer law. Hopefully this latest research may provide some answers.