The end of the bargain? And should we worry?

Price elasticity. And vice versa.
Price elasticity. And vice versa.

In the run-up to an OECD Competition Committee roundtable discussion on 30 November 2016, Chris Pike of the OECD Directorate for Financial and Enterprise Affairs looks at the concerns and the opportunities created by the increased scope for personalised pricing in the digital economy.

We’ve all felt it – the rush you get when you find a great bargain at a price way less than you would happily have paid. But will these moments continue in the digital world as shopping moves online and the scope for firms to charge different prices to different customers increases?

In the era of big data and automated pricing algorithms, firms, using increasingly sophisticated analytical tools, can – with increasing accuracy – use huge volumes of information to model and predict our willingness to pay for a product. This helps them identify how much extra profit they might have extracted from any given transaction, and if they wish, to adjust and personalise their prices accordingly to extract that profit.

Reports suggest that more than 500 sellers on Amazon Marketplace have been identified as using algorithmic pricing and that at some retailers prices can differ by 10-30% for identical products based on the customer’s location, the device they’re using, proximity to a rival’s brick-and-mortar store (paywall) and characteristics including browser configuration.

An early example is Safeway, a grocery store with a mobile app that sends personalised promotional offers on specific products to shopper’s mobile devices as they walk around the store. These could be based on the current or forecast weather, products previously purchased, regularity and history of purchasing that product, complementary products purchased that day, and whether the location of their mobile device suggests they have already passed the aisle. Whether the customer uses the offer or not, the firm can use that information in its pricing algorithm to predict the discount required for like-minded consumers.

Moreover, this information might be added to in future, particularly as data is generated by the ‘internet of things’ (online devices in cars, kitchen devices, and health devices). For example, what were they doing prior to shopping? When did they last eat? Is there an appointment they are late for? Which rival stores do they use? Which rival stores are located on their route home? What’s in their calendar for the next week? What’s on their digital shopping list (or that of other family members)? Have they ordered takeaway that week? Do they have family visiting?

So this could be really bad news for consumers that would in any case buy the product; what if Amazon now realises that I’m willing to pay a frankly irrational amount of money for the new Hot Chip album? Are they seriously going to charge me 300 euro for it? Well, if they had an exclusive on it, then they might do. Would that be exploitative? Price gouging? Should competition agencies investigate? Maybe.

But, it could also mean they set a price of 3 euro to my dad who would never dream of paying 15 euro for it, since in the digital world reproduction is effectively costless so this is all profit. It would also increase the incentive for the band to make another album, which would be great, though at some point we might wonder whether this incentivises the right things.

Moreover, if I can get it elsewhere then the information that I value the product at 300 euro has little value. So big data should be less valuable in more competitive markets? Might its value even help us identify uncompetitive markets? Again, perhaps. But, if I can’t get it elsewhere, that is if they have market power, then what?

Well firstly we should recognise that consumers might not be defenceless, they might react by withholding information and services have been developed to provide anonymity (paywall). By making it more difficult for firms to estimate a consumer’s valuation these can disrupt discriminatory pricing schemes. Alternatively, consumers might start to demand compensation for providing the information.

And even if consumers are individually vulnerable, there might be small things we can do to help empower them. For example while personalised pricing is not yet widespread, a more common approach is to send personalised coupons. These change the effective price without changing the list price and this framing can make it more acceptable to consumers who would otherwise resent being charged personalised prices. The risk of offending a sense of fairness is perhaps key, and may lead to firms facing boycotts. This may explain the proposal that firms using personalised pricing schemes should have to declare transparently to consumers that they are doing so. They might for example be required to specify whether the personalised price is higher than average or the range of prices that they are charging for the product in question.

So, the effects of personalised pricing could go either way, and they could often benefit consumers, particularly those on small budgets, so we can’t go blundering in and prohibit all price discrimination. What to do then? Traditionally competition agencies would look at price discrimination where it was used to exclude a rival, and perhaps if it threatened to distort competition in a downstream market. They have been understandably reluctant to challenge price discrimination in final consumer markets. As a default position, a presumption that price discrimination is often competitive and good for consumers is entirely sensible. However, as this discrimination becomes near perfect in its execution, and the scale of potential harm to consumers increases, the risk calculus changes and so agencies and lawmakers may need to become more open to complaints and more active in requiring transparency on pricing policy.

Links

This post is based on an OECD Secretariat paper on price discrimination

OECD Roundtable on Price Discrimination (30 November 2016)

Big Data: Bringing competition policy to the digital era

Data-driven innovation: Big data for growth and well-being

OECD Competition Committee Best Practice Roundtables

Today is Cyber Monday. And so is tomorrow and the next day and the next…

measuring digital economyToday’s post is from Andrew Wyckoff, head of the Directorate for Science, Technology and Innovation (STI) at the OECD. 

Today is Cyber Monday – although the term is less than ten years old, so you may not have even known it. Like its better known cousin ‘Black Friday’, ‘Cyber Monday’ is a marketing term to mark the kick-off of the holiday shopping season, right after Thanksgiving, in the US. Unlike Black Friday though, Cyber Monday is all about e-commerce: the New York Times sanctified the term in 2005, with the observation that “millions of otherwise productive working Americans, fresh off a Thanksgiving weekend of window shopping, were returning to high-speed Internet connections at work Monday and buying what they liked.”

When IBM took a look at Cyber Monday 2013, it found it to be the biggest online shopping day in history. This year’s looks set to be even bigger as more Americans than ever before plan do some of their holiday shopping online.

The OECD has just released a comprehensive mapping of the digital economy around the world. It shows how American consumers aren’t the only ones who are buying more online. Our data shows 90% of internet users in the U.K. and Germany now shop online, with the U.S. closer to the 70% mark – although when data is broken down by age, American seniors rank among the biggest e-shoppers of their peers.

Shopping online has gotten easier. The New York Times pointed to access to broadband internet as a precipitating factor. The explosion in smart phone use is another, which outsold standard phones for the first time in 2013, as we can now also make payments on the go: apps in the Android market are growing by almost 60% a year. Paying online is easier too, with services increasingly provided by firms like Facebook, eBay or PayPal, rather than banks. As a result, we’re witnessing a revolution in how consumers behave – it’s Cyber Monday every day now. Close to 50% of all adults in OECD countries now shop online, up from less than a third in 2007.

But has it all become too easy? As e-commerce grows and consumption patterns change, have measures to protect consumers been able to keep up?

New patterns of consumption are making new consumer grievances emerge. They focus on accessing and understanding payment, product and transaction-related information, which all too often is buried in footnotes or so complex and lengthy that we don’t bother to read it. Concerns around privacy are even more sensitive. Consumers report not understanding what is being done with their data by the many different entities that are involved in an online transaction – why such information is being collected, whether it can be shared with third parties, and for what purposes.

The U.S. provides an illustration of another type of possible tension. The U.S. Federal Trade Commission recently reached million-dollar settlements with both Google and Apple (and a third case against Amazon is ongoing), to compensate parents of children who had run up charges while playing “free” online games. As a result of the FTC’s action, both Google and Apple have agreed to change their advertising practices and introduce authentication tools that would help stop kids from unwittingly spending money online.

What should be done when things go wrong? When, for example, you download or stream a poor-quality song, or your cell phone bill includes unexpected charges, you can end up having either to navigate a maze of legislation that may govern your transaction or enjoy no level of protection at all. When you buy online from a different country – like the two-thirds of Canadians who report buying a U.S. product over the web – it can mean double trouble. So it is hardly surprising that the OECD finds that in some countries, less than half of Internet users feel confident about buying products online from another country.

So what needs to be done? New OECD guidance developed with governments, civil society and leading industry players recommend that businesses and governments implement measures to prevent children from being able to purchase products without parental consent, to ensure advertising is clearly identifiable as such, and that apps be clear about any charges that might be incurred. E-sellers and regulators should also implement measures to enable consumers to know how personal data may be collected, used and shared, and sensitive data such as geo-location, health or financial information should be the object of express consent. The OECD also calls for the development of some level of consumer protection for all types of e-commerce transactions.

Google, like Apple, is starting to bring in changes along these lines. Protecting and empowering consumers, and building their confidence in buying online, is the best way to ensure we benefit from the dynamism of e-commerce, on Cyber Monday or any other day.

Useful links

OECD work on the Internet economy

OECD work on Internet consumer policy

Does more information for consumers lead to better choices?

Today’s post is contributed by Ewelina MAREK from the OECD Directorate for Science, Technology and Industry.

I was recently thinking of changing my mobile phone plan as my current contract was almost up. I started searching on the Internet and was amazed how many web sites there are to compare offers! Many offers looked much better than what I had been getting from my current provider. But by the time I was looking at a fifth website, I was getting a headache. Some contracts were for only one year and some lasted longer. Others offered more minutes or free Internet or for just a little more per month, I could even get a new phone with Wi-Fi and 60 TV channels. As I was getting lost looking at all these offers and conditions, I decided to pick the first offer on the web site I was looking at right then. Within just a few clicks I was locked into a two-year contract with a provider that ultimately may not have been the best option for me.

Have you ever asked yourself when buying something if you were making the right choice or getting the best offer? The OECD’s Consumer Policy Toolkit can help answer this question.  The OECD not only looks at global trends from a macroeconomic perspective, but also follows developments in our everyday consumer choices. In that regard, the OECD Committee on Consumer Policy has been addressing a number of emerging issues for the past few decades. It also highlights the public debate on how consumers make decisions and how insights from behavioural economics could improve the way they do so.

One rule of thumb in behavioural economics is that consumers do not always make rational decisions, particularly when they are confronted with complex markets or products where it is difficult to make comparisons.  And when I think about how I chose my mobile phone plan, I must say I could have done better. But I was too overwhelmed and impatient to deal with all the information I was seeing. According to the Consumer Policy Toolkit, the way I made my decision was no exception as that is how consumers often make their decisions (which they often regret) when faced with too many offers and too much information.

What does the Toolkit shows us?  Among other things, that we often have difficulty evaluating very sophisticated products and services. And that we should take the time to filter information rather than hurry. Bet that doesn’t surprise many of us.  Yet the world we live in is saturated with tons of information and rarely “enough” time to analyse it to anyone’s satisfaction.  So how can consumers get a better deal? What policy instruments have been useful in helping consumers make good decisions?  Check out the Consumer Policy Toolkit and let us know what you think!

OECD work on other consumer policy issues available at:

www.oecd.org/ict/econsumerconference

www.oecd.org/sti/consumer-policy/productsafety

www.oecd.org/sti/consumer-policy/greenclaims

www.oecd.org/sti/consumer-policy/toolkit