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Congress Wants To Regulate Customized Pricing. Yeah, That Will Certainly Work As Intended

Written by Mark Rasch
August 15th, 2013

Attorney Mark D. Rasch is the former head of the U.S. Justice Department’s computer crime unit and today is a lawyer in Bethesda, Md., specializing in privacy and security law.

If legislation pending before the House Energy and Commerce Committee is passed and signed into law, online merchants will be severely restricted in their ability to use “big data” and behavioral advertising to help set prices, discounts or coupons for customers. Fortunately or unfortunately (depending on your position on the legislation) this being the current Congress, it is unlikely that anything will actually happen. Nevertheless, this reflects the growing unease about the concept that you and I will be charged different amounts for the same product or service based upon the data collected about us.

Recently, Rep. Susan Davis (D. Cal.) introduced H.R. 2487: the Ensuring Shoppers Honest Online Pricing Act of 2013.” In the world of cutesy acronyms, this is the E-SHOP Act. The law would require the Federal Trade Commission to promulgate rules and regulations “requiring an Internet merchant [with a total annual gross revenue of more than $1,000,000 indexed for inflation] to disclose to each consumer, prior to the final purchase of any good or service, the use of personal information in establishing or changing a price.” This would not include additional costs associated with taxes or shipping based on the consumers’ address.

Each person has a tolerance for pricing based upon our desire or need for a product or service, our perception of value or utility, our ability or willingness to pay, and of course, the supply or perceived supply or demand for the product. Some people are “early adopters” and must have the latest and greatest thing, some wait until whatever they have wears out completely. Knowing who you are, what you have bought, where you live, what you have shopped for, and even what movies you like, foods you eat and magazines you read will tell me a lot about not only what products you would likely be interested in, but also your willingness to pay for them.

We can have both behavioral targeting for advertising and promotion, but also behavioral based pricing. The two

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are related but not the same. Brand is often a proxy for price. I can offer you ads or promotions for Gucci, Fendi or Thom McAnn. I can offer you sirloin, hamburger, or hamburger helper (now just helper.) Each of these have different perceptions of quality, and of course, different prices.

But for the same item, in many (but not all) circumstances, we expect merchants to charge the same prices. Sometimes.

We know that prices for certain things are higher in Alaska and Hawaii. You know, shipping costs, etc. The Olive Garden in Times Square charges more than the Olive Garden in Westchester (higher rents). But they charge the same to all people who order the same thing.

Airplane seats cost different amounts based upon when and how you book. Companies may offer specials or discounts (or even complimentary goods and services) to their “valued” customers based upon their previous dealings with them. If you have a relationship with an affiliate (e.g., you are an Amex cardholder) you may get a different price for something than a non affiliate based upon what the merchant knows about you.

Employees may get a discount based on the fact that the company knows you are an employee. Pricing is already dynamic, and already based, at least in part, on what the merchant knows (or thinks they know) about you. If you buy on credit with a credit card, your interest rate (and therefore what you ultimately “pay” for the product) is based upon detailed information about you.

Yet our sense of fairness seems to dictate that when two people try to buy the same product, they should be able to get it at the same price. Or at least if the price is different, they should know why.

What the proposed legislation would do would require companies to tell consumers that they are being targeted for price based on personal information. It does not require the merchant to tell the consumer what personal information is being used. Thus, it appears that a simple disclaimer on a website “your personal price is based upon information we and our affiliates have collected about you in order to deliver to you the best possible service” or some weasel words like that would suffice.

Or the legislation could require the merchant to disclose exactly what personal information the company uses to set dynamic pricing – something the merchant probably won’t know, since they would simply subscribe to a service that would help them sort big data.

And what can the customer do about it? If the dynamic pricing is done at the browser level, a high propensity to pay consumer searching Google would find that toothpaste costs $4.00 a tube, and would be directed to merchants who charge that amount. A low propensity to pay consumer would be directed at merchants who charge $1.00 a tube. The merchant would pay Google for the traffic flow, but the price is static (either $4 or $1). It is the traffic that is dynamic and based on personal information.

Dynamic pricing is something worth reviewing for fairness and accuracy. Legislation may be too blunt a tool to use – for now.

If you disagree with me, I’ll see you in court, buddy. If you agree with me, however, I would love to hear from you.


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