Big Data, Price Discrimination, and Markets

on December 4, 2011
Reading Time: 2 minutes

At GigaOm, Derrick Harris has an interesting take on how data analytics are allowing New York landlords to extract maximum rents. It’s a good piece, but I think it just scratches the surface of what is going to become an increasingly important debate about the ethics of big data (where concern until now had focused primarily upon privacy issues.)

Driscrimination in admission prices
A form of price discrimination

Price discrimination is a technical (and value-neutral) term in economics. It refers to sellers charging different prices for a food or service based on factors other than the cost of providing it. In the past, price discrimination was difficult, both because it was difficult, as a practical matter to charge different prices to different customers and because sellers lacked the information they needed to determine a profit-maximizing individual price. Airlines have used discriminatory pricing since deregulation and have gotten increasingly good at it.

But there are a lot of problems inherent in price discrimination. For one thing, it is inherently a distortion of free markets. Efficient markets theory, to the extent that anyone still believes it,  assumes that all participants in a market, buyers and sellers, have equal access to the information that goes into price-setting. Price discrimination, at least as practiced in the real world, depends on the seller having information no available to the buyer. Car dealers could engage in price discrimination because only they knew what the wholesale price of the car really was and what prices were on comparable sales to other customers (a power eroded by the web.) Airlines and hotels have lots of information about available seats or rooms, marginal costs, and expected demand that lets them vary prices profitably.

The growing ability to collect and analyze vast amounts of data, plus the trend to online sales that allow customized price quotes not possible in brick-and-mortar stores, is bound to produce a lot more price discrimination. Is this necessarily bad for consumers? That’s not clear, although there definitely will be winners and losers. It is also sure to produce growing calls for regulating the practice.