tag:theconversation.com,2011:/africa/topics/price-discrimination-4244/articlesPrice discrimination – The Conversation2024-02-15T19:03:47Ztag:theconversation.com,2011:article/2233102024-02-15T19:03:47Z2024-02-15T19:03:47ZWhy prices are so high – 8 ways retail pricing algorithms gouge consumers<figure><img src="https://images.theconversation.com/files/575804/original/file-20240215-28-d833it.jpeg?ixlib=rb-1.1.0&rect=114%2C175%2C1776%2C1011&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>The just-released report of the inquiry into <a href="https://pricegouginginquiry.actu.org.au/">price gouging and unfair pricing</a> conducted by Allan Fels for the Australian Council of Trades Unions does more than identify the likely offenders.</p>
<p>It finds the biggest are supermarkets, banks, airlines and electricity companies.</p>
<p>It’s not enough to know their tricks. Fels wants to give the Australian Competition and Consumer Commission more power to investigate and more power to prohibit mergers.</p>
<p>But it helps to know how they try to trick us, and how technology has enabled them to get better at it. After reading the report, I’ve identified eight key maneuvers.</p>
<h2>1. Asymmetric price movements</h2>
<p>Otherwise known as <a href="https://www.jstor.org/stable/25593733">Rocket and Feather</a>, this is where businesses push up prices quickly when costs rise, but cut them slowly or late after costs fall.</p>
<p>It seems to happen for <a href="https://www.sciencedirect.com/science/article/abs/pii/S0140988323002074">petrol</a> and <a href="https://www.sciencedirect.com/science/article/abs/pii/S105905601730240X">mortgage rates</a>, and the Fels inquiry was presented with evidence suggesting it happens in supermarkets. </p>
<p>Brendan O’Keeffe from NSW Farmers told the inquiry wholesale lamb prices had been falling for six months before six Woolworths announced a cut in the prices of lamb it was selling as a “<a href="https://pricegouginginquiry.actu.org.au/wp-content/uploads/2024/02/InquiryIntoPriceGouging_Report_web.pdf">Christmas gift</a>”. </p>
<h2>2. Punishment for loyal customers</h2>
<p>A <a href="https://theconversation.com/simple-fixes-could-help-save-australian-consumers-from-up-to-3-6-billion-in-loyalty-taxes-119978">loyalty tax</a> is what happens when a business imposes higher charges on customers who have been with it for a long time, on the assumption that they won’t move.</p>
<p>The Australian Securities and Investments Commission has alleged a big <a href="https://theconversation.com/how-qantas-might-have-done-all-australians-a-favour-by-making-refunds-so-hard-to-get-213346">insurer</a> does it, setting premiums not only on the basis of risk, but also on the basis of what a computer model tells them about the likelihood of each customer tolerating a price hike. The insurer disputes the claim.</p>
<p>It’s often done by offering discounts or new products to new customers and leaving existing customers on old or discontinued products.</p>
<p>It happens a lot in the <a href="https://www.finder.com.au/utilities-loyalty-costing-australians-billions-2024">electricity industry</a>. The plans look good at first, and then less good as providers bank on customers not making the effort to shop around. </p>
<p>Loyalty taxes appear to be less common among mobile phone providers. Australian laws make it easy to switch <a href="https://www.reviews.org/au/mobile/how-to-switch-mobile-carriers-and-keep-your-number/">and keep your number</a>.</p>
<h2>3. Loyalty schemes that provide little value</h2>
<p>Fels says loyalty schemes can be a “low-cost means of retaining and exploiting consumers by providing them with low-value rewards of dubious benefit”. </p>
<p>Their purpose is to lock in (or at least bias) customers to choices already made. </p>
<p>Examples include airline frequent flyer points, cafe cards that give you your tenth coffee free, and supermarket points programs. The purpose is to lock in (or at least bias) consumers to products already chosen. </p>
<p>The <a href="https://www.accc.gov.au/consumers/advertising-and-promotions/customer-loyalty-schemes">Australian Competition and Consumer Commission</a> has found many require users to spend a lot of money or time to earn enough points for a reward. </p>
<p>Others allow points to expire or rules to change without notice or offer rewards that are not worth the effort to redeem.</p>
<p>They also enable businesses to collect data on spending habits, preferences, locations, and personal information that can be used to construct customer profiles that allow them to target advertising and offers and high prices to some customers and not others.</p>
<h2>4. Drip pricing that hides true costs</h2>
<p>The Competition and Consumer Commission describes <a href="https://pricegouginginquiry.actu.org.au/wp-content/uploads/2024/02/InquiryIntoPriceGouging_Report_web.pdf">drip pricing</a> as “when a price is advertised at the beginning of an online purchase, but then extra fees and charges (such as booking and service fees) are gradually added during the purchase process”. </p>
<p>The extras can add up quickly and make final bills much higher than expected. </p>
<p>Airlines are among the best-known users of the strategy. They often offer initially attractive base fares, but then add charges for baggage, seat selection, in-flight meals and other extras.</p>
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Read more:
<a href="https://theconversation.com/junk-fees-and-drip-pricing-underhanded-tactics-we-hate-yet-still-fall-for-211117">Junk fees and drip pricing: underhanded tactics we hate yet still fall for</a>
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<h2>5. Confusion pricing</h2>
<p>Related to drip pricing is <a href="https://www.x-mol.net/paper/article/1402386414932836352">confusion pricing</a> where a provider offers a range of plans, discounts and fees so complex they are overwhelming.</p>
<p>Financial products like insurance have convoluted fee structures, as do electricity providers. Supermarkets do it by bombarding shoppers with “specials” and “sales”. </p>
<p>When prices change frequently and without notice, it adds to the confusion. </p>
<h2>6. Algorithmic pricing</h2>
<p><a href="https://pricegouginginquiry.actu.org.au/wp-content/uploads/2024/02/InquiryIntoPriceGouging_Report_web.pdf">Algorithmic pricing</a> is the practice of using algorithms to set prices automatically taking into account competitor responses, which is something akin to computers talking to each other.</p>
<p>When computers get together in this way they can <a href="https://www.x-mol.net/paper/article/1402386414932836352">act as it they are colluding</a> even if the humans involved in running the businesses never talk to each other.</p>
<p>It can act even more this way when multiple competitors use the same third-party pricing algorithm, effectively allowing a single company to influence prices.</p>
<h2>7. Price discrimination</h2>
<p>Price discrimination involves charging different customers different prices
for the same product, setting each price in accordance with how much each customer is prepared to pay.</p>
<p>Banks do it when they offer better rates to customers likely to leave them, electricity companies do it when they offer better prices for business customers than households, and medical specialists do it when they offer vastly different prices for the same service to consumers with different incomes.</p>
<p>It is made easier by digital technology and data collection. While it can make prices lower for some customers, it can make prices much more expensive to customers in a hurry or in urgent need of something.</p>
<h2>8. Excuse-flation</h2>
<p><a href="https://www.bloomberg.com/news/articles/2023-03-09/how-excuseflation-is-keeping-prices-and-corporate-profits-high">Excuse-flation</a> is where general inflation provides “cover” for businesses to raise prices without
justification, blaming nothing other than general inflation.</p>
<p>It means that in times of general high inflation businesses can increase their prices even if their costs haven’t increased by as much.</p>
<p>On Thursday Reserve Bank Governor <a href="https://www.afr.com/policy/economy/inflation-is-cover-for-pricing-gouging-rba-boss-says-20240215-p5f58d">Michele Bullock</a> seemed to confirm that she though some firms were doing this saying that when inflation had been brought back to the Bank’s target, it would be </p>
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<p>much more difficult, I think, for firms to use high inflation as cover for this sort of putting up their prices</p>
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<h2>A political solution is needed</h2>
<p>Ultimately, our own vigilance won’t be enough. We will need political help. The government’s recently announced <a href="https://treasury.gov.au/review/competition-review-2023">competition review</a> might be a step in this direction.</p>
<p>The legislative changes should police business practices and prioritise fairness. Only then can we create a marketplace where ethics and competition align, ensuring both business prosperity and consumer wellbeing. </p>
<p>This isn’t just about economics, it’s about building a fairer, more sustainable Australia.</p><img src="https://counter.theconversation.com/content/223310/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>David Tuffley is affiliated with the Australian Computer Society (Member).</span></em></p>Each of these tricks is old, but each has been supercharged by the use of information technology.David Tuffley, Senior Lecturer in Applied Ethics & CyberSecurity, Griffith UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2166202024-01-04T20:01:24Z2024-01-04T20:01:24ZUntil now, sellers have used AI to get the best deal for themselves – those tables are about to turn<figure><img src="https://images.theconversation.com/files/563223/original/file-20231204-17-kex550.png?ixlib=rb-1.1.0&rect=639%2C55%2C3322%2C1329&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/artificial-intelligence-aimachine-learning-data-mining-1218220324">Shutterstock</a></span></figcaption></figure><p>It’s no accident we are seeing record profits from some of our biggest consumer-facing companies, among them <a href="https://www.abc.net.au/news/2023-08-24/qantas-profit-2023-annual-results-alan-joyce/102763766">Qantas</a> andthe <a href="https://www.theguardian.com/news/2023/aug/09/commonwealth-bank-posts-record-1016bn-profit-amid-rising-stress-for-borrowers">big four banks</a>.</p>
<p>They are among the firms - alongside our grocery duopoly - investing the most in artificial intelligence in the form of <a href="https://www.theaustralian.com.au/business/technology/sam-altmans-openai-battle-is-fight-for-ais-future/news-story/4bcf77cc9f95309b713de863a3f16cbe">data analytics</a> and machine learning. </p>
<p>Their investments include staff – often hundreds of data scientists – plus information technology systems and external consultants. </p>
<p>It isn’t cheap, and ultimately much of it will be paid for by customers.</p>
<p>While some of the initiatives target costs by improving planning and reducing waste and fraud and theft, most target revenue via marketing and personalisation with the aim of getting the best deals to the customers who insist on them and the worst deals to the customers who will buy anyway.</p>
<p>To the extent that these firms are successful in charging different prices to different customers, it’s a fair bet they are keeping up the cost of living.</p>
<p>In simpler times, only a few customers needed to do the hard yakka of comparing the prices displayed in shops or on websites and voting with their feet in order to force sellers to keep published prices in check for everyone. </p>
<p>Now, there’s often no such thing as a single published price.</p>
<p>Booking a holiday now comes with a bewildering set of frequent flyer rules, hotel loyalty programs, credit card points, cashback offers, possibly buy-now pay-later options, and vouchers and coupons sprinkled across social media.</p>
<h2>Comparing prices has become next to impossible</h2>
<p>Retailers, airlines, phone companies and insurers use sophisticated machine learning algorithms and real-time experiments to continuously tweak the prices and deals they offer <a href="https://theconversation.com/how-qantas-might-have-done-all-australians-a-favour-by-making-refunds-so-hard-to-get-213346">individual customers</a>, meaning there is often no such thing as a standard price.</p>
<p>(The fact they refer to what they are doing as offering discounts doesn’t change the reality that what they are doing is charging higher prices to the customers least likely to notice or complain.) </p>
<p>To succeed at this game requires vast amounts of customer data, which they have via loyalty schemes and information about past online purchases but their customers do not. That’s about to change.</p>
<h2>AI is starting to turn the tables</h2>
<p>For some time now online communities of “<a href="https://www.pointhacks.com.au/">points hackers</a>” have been running massive spreadsheets squeezing out the best deals for shoppers and swapping tips. </p>
<p>But for most of us, it hasn’t seemed worth the effort – so much so that for four years the Victorian government offered a <a href="https://compare.energy.vic.gov.au/psb-faq">$250 Power Saving Bonus</a> to residents who simply put their name and email address into a price-comparison website.</p>
<p>But there’s something that does tedious mind-numbing chores extremely well. It’s artificial intelligence of the kind that only became widely available a year ago with the launch of <a href="https://openai.com/chatgpt">ChatGPT</a>.</p>
<p>Already, websites are offering AI assistants or “copilots” to pore over our financial records and scour the web, tirelessly haggling with providers’ automated copilots on our behalf. </p>
<p>These new <a href="https://www.platformer.news/p/how-openai-is-building-a-path-toward">agents</a>, with names like <a href="https://plugin.surf/plugin/comparison">Comparison</a> and <a href="https://web.meetcleo.com/haggle-it">Haggle It</a> use information about our long-term spending patterns, preferences and broad financial goals to benefit us rather than the firms who are trying to sell things to us.</p>
<p>ChatGPT already has <a href="https://mashable.com/article/expedia-kayak-openai-chatgpt-plugins">travel plug-ins</a> from providers that can take vague instructions about your timing, preferred locations and budget and build an itinerary with links for buying.</p>
<p>The next step – not far away – will see it negotiating purchases on our behalf that strike the right balance of points, cashback, miles and vouchers across multiple providers and transactions in a way that will make even the most obsessive points hacker swoon.</p>
<p>There are already <a href="https://openai.com/blog/chatgpt-plugins">ChatGPT plug-ins</a> for e-commerce, restaurants and groceries. </p>
<h2>Prepare for haggle-bots, that work for us</h2>
<p>Around the world, new and established firms are building Generative AI applications for optimising our household budgets and personal finances across ever-expanding categories. </p>
<p>A recent survey from Credit Karma found <a href="https://www.foxbusiness.com/technology/consumers-want-ai-help-manage-their-personal-finances-study">43%</a> of United States residents would be happy for an artificial intelligence bot to manage their personal finances to reduce their money problems.</p>
<p>Comparison shopping is the cornerstone of a well-functioning market economy, helping moderate profits and keeping costs down. </p>
<p>While the last wave of AI was used by big companies to make that task harder, the next wave is about to put that technology in the hands of consumers. </p>
<p>It is set to force our oligopolies to compete in ways they’ve not been used to, putting downward pressure on prices rather than helping keep them high.</p>
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Read more:
<a href="https://theconversation.com/hotel-booking-sites-actually-make-it-hard-to-get-cheap-deals-but-theres-a-way-around-it-196460">Hotel booking sites actually make it hard to get cheap deals, but there's a way around it</a>
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<img src="https://counter.theconversation.com/content/216620/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Gregory Hill does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>AI is tireless, knows more about the big companies than we do, and will relentlessly pursue our interests.Gregory Hill, Adjunct Lecturer, Centre for Business Analytics, Melbourne Business SchoolLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2133462023-09-12T06:23:01Z2023-09-12T06:23:01ZHow Qantas might have done all Australians a favour by making refunds so hard to get<p>I’m not sure whether I’ve got any unclaimed Qantas flight credits. </p>
<p>I haven’t looked, either because I’m too busy or can’t be bothered. Which is exactly what Qantas wants. And not only Qantas. Separating out those people who are desperate or determined to get their money from those who give up is a standard business practice.</p>
<p>It’s called <a href="https://www.investopedia.com/terms/p/price_discrimination.asp">price discrimination</a>, although Qantas appears to have added a twist.</p>
<p><a href="https://www.haier.com.au/promotions/2023/upto-150-cashback-laundry">Washing machine</a>, <a href="https://www.lg.com/au/promotions/fridge-cashback-23">fridge</a> and <a href="https://www.umart.com.au/promotions/609">computer</a> manufacturers all do it. They sell their products for a standard price, and then offer a $200 or $400 “cash back” to buyers who fill in and send off a form when they get home.</p>
<p>The manufacturers know time-poor, lazy or well-off customers won’t bother, so they won’t need to send them cash. But the customers who do bother will really need the cash, and probably wouldn’t buy the products without it.</p>
<p>That way they can sell to people who otherwise wouldn’t have bought, while at the same time charging a high price to people prepared to pay it. They’ve arranged things so the two groups sort themselves out.</p>
<h2>A tax on the time-poor</h2>
<p>Qantas (and Virgin) could have easily refunded money to people who bought flights during the first years of COVID and had to cancel because of lockdowns. In most cases, Qantas had their credit card numbers. It still has them. It could refund the best part of <a href="https://www.afr.com/rear-window/qantas-grand-theft-klepto-20230829-p5e0g8">A$500 million</a> right now.</p>
<p>Instead, it makes it really difficult to get money back. It requires phone calls, waiting on the line and fishing out old emails and customer codes. </p>
<p>For a while, until it <a href="https://www.dailymail.co.uk/news/article-12463715/Qantas-flight-credit-Airline-makes-staggering-backdown-victory-customer-owed-refunds-credit.html">backed down</a> days ahead of its chief executive bringing <a href="https://theconversation.com/qantas-chief-alan-joyce-quits-early-amid-customer-fury-at-the-airline-212845">forward his retirement</a>, Qantas said those credits would expire unless they were reclaimed, knowing full well many would not be.</p>
<p>But it’s not only Qantas imposing a tax on the time-poor.</p>
<h2>A tax on those who won’t pick up the phone</h2>
<p>News Corporation will allow you to subscribe to its papers with a click and a card. But when you hit “<a href="https://www.newsagencyblog.com.au/2022/11/11/news-corp-makes-it-so-difficult-to-cancel-a-subscription-to-the-australian-that-some-are-bound-to-give-up/">unsubscribe</a>”, you get given a phone number. </p>
<p>When (and if) you get around to ringing it, you are subjected to an ordeal in which the operator gives you reason after reason not to unsubscribe, instead of acting on your request. You can insist, of course, but it takes time and effort.</p>
<p>The (NewsCorp-owned) Wall Street Journal also makes it impossible to unsubscribe without a phone call… unless you live in <a href="https://clocr.com/blogs/social-media-will/cancel-wall-street-journal-subscription/">California</a>. There, and only there – not in Australia, not in the rest of the United States – you are allowed to unsubscribe online because of a law <a href="https://www.cnet.com/tech/services-and-software/companies-must-let-customers-cancel-subscriptions-online-california-law-says/">forcing</a> providers to offer the option.</p>
<p>Australia’s banks are experts at separating lazy customers from diligent shoppers, as are electricity companies.</p>
<p>They routinely offer customers who switch (or say they are about to switch) <a href="https://theconversation.com/see-when-australias-biggest-banks-stopped-paying-proper-interest-on-your-savings-and-what-you-can-do-about-it-200265">better</a> rates than customers who stay, turning a time-poor tax into a <a href="https://www.etax.com.au/loyalty-tax-what-is-it-and-how-to-avoid-paying-it/">loyalty tax</a>.</p>
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Read more:
<a href="https://theconversation.com/when-the-price-is-not-right-technology-price-gouging-in-australia-10582">When the price is not right: technology price gouging in Australia</a>
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<h2>A tax on loyal customers</h2>
<p>You might think a tax on those who don’t chase the best deals is effectively a tax on the better-off, as they are the least likely to need savings. </p>
<p>Yet an array of evidence across a wide range of industries assembled by David Byrne and Leslie Martin finds loyalty taxes hit <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3773860">the poorest</a> the hardest.</p>
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<a href="https://images.theconversation.com/files/547702/original/file-20230912-9241-dkcdd3.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/547702/original/file-20230912-9241-dkcdd3.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/547702/original/file-20230912-9241-dkcdd3.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=967&fit=crop&dpr=1 600w, https://images.theconversation.com/files/547702/original/file-20230912-9241-dkcdd3.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=967&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/547702/original/file-20230912-9241-dkcdd3.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=967&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/547702/original/file-20230912-9241-dkcdd3.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1215&fit=crop&dpr=1 754w, https://images.theconversation.com/files/547702/original/file-20230912-9241-dkcdd3.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1215&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/547702/original/file-20230912-9241-dkcdd3.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1215&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Byrne and Martin set up a call centre inside Melbourne University.</span>
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<p>In an intriguing and expensive experiment in 2017, Byrne and Martin attempted to find out why this was.</p>
<p>They staffed a <a href="https://academic.oup.com/qje/article/137/4/2499/6570715">call centre</a> at The University of Melbourne, in which actors phoned electricity companies, provided or let slip a few details, and said they were thinking of switching.</p>
<p>Among those details was eligibility for Victoria’s low-income energy subsidy. </p>
<p>Byrne and Martin found no discrimination against low-income callers <em>because</em> they said they had low incomes. But they did find that where the callers sounded as if they lacked information, they were presented with worse offers.</p>
<h2>A premium price dispute</h2>
<p>Disturbing evidence tendered in the Federal Court suggests some Australian insurance companies may be systematising discrimination against Australians who lack access to information.</p>
<p>The Australian Securities and Investments Commission has alleged some insurers set premiums not only on the basis of risk, but also on the basis of what a computer model tells them about the likelihood of each customer tolerating a price hike.</p>
<p>ASIC says the alleged practice is known internally as “<a href="https://www.afr.com/companies/financial-services/the-allegedly-sly-algorithm-targeting-loyal-insurance-clients-20230831-p5e11v">renewal optimisation</a>”.</p>
<p>Those claims are <a href="https://www.afr.com/companies/financial-services/the-allegedly-sly-algorithm-targeting-loyal-insurance-clients-20230831-p5e11v">disputed</a>, with insurer IAG telling The Australian Financial Review: “We don’t agree with how ASIC has characterised the process by which we calculate renewal premiums, and the impact on our customers.”</p>
<h2>Enough for a government inquiry</h2>
<p>Where immorality starts and standard business practice stops will be a question for a newly-established taskforce on competition. It will be headed by the Grattan Institute’s <a href="https://ministers.treasury.gov.au/ministers/jim-chalmers-2022/media-releases/appointment-productivity-commission-chair">Danielle Wood</a> (who will also head the Productivity Commission) and the former head of the Competition and Consumer Commission, <a href="https://ministers.treasury.gov.au/ministers/jim-chalmers-2022/media-releases/more-dynamic-and-competitive-economy">Rod Sims</a>.</p>
<p>One thing they might be able to agree on immediately is that something else Qantas has been accused of doing with flight credits is beyond the pale. </p>
<p><a href="https://www.abc.net.au/news/2022-02-14/qantas-flight-credit-policy-customer-complaints-covid/100824816">Evidence supplied to the ABC</a> in 2022 suggests that not only has Qantas been hanging on to customers’ money by directing them to use credits for flights rather than refunds, it has been jacking up the price of flights when they do – by 50% to 300%, imposing what amounts to an extra (enforced) loyalty tax.</p>
<p>If Qantas and others have taken standard business practices just that little bit further in recent years, there’s a small chance they’ve done us a favour. They’ve given the taskforce something to sink its teeth into.</p>
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Read more:
<a href="https://theconversation.com/booking-customers-on-cancelled-flights-how-could-qantas-do-that-212793">Booking customers on cancelled flights – how could Qantas do that?</a>
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<p class="fine-print"><em><span>Peter Martin does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Price discrimination is charging customers who don’t mind paying more than those who do – and businesses do it all the time. But Qantas seems to have taken it to a new level.Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1009592018-10-08T19:12:51Z2018-10-08T19:12:51ZWhy you might be paying more for your airfare than the person seated next to you<figure><img src="https://images.theconversation.com/files/239278/original/file-20181004-52695-10af8rs.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Price discrimination is when a seller charges you what you’re willing to pay.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/download/success?u=http%3A%2F%2Fdownload.shutterstock.com%2Fgatekeeper%2FW3siZSI6MTUzODY1ODI5MywiYyI6Il9waG90b19zZXNzaW9uX2lkIiwiZGMiOiJpZGxfMTE5MTE1MDI1NiIsImsiOiJwaG90by8xMTkxMTUwMjU2L2h1Z2UuanBnIiwibSI6MSwiZCI6InNodXR0ZXJzdG9jay1tZWRpYSJ9LCJ2MmM2bW5jclZFQXNBUzVKRkw1RjQzNENkWlUiXQ%2Fshutterstock_1191150256.jpg&pi=41133566&m=1191150256&src=jV6t-_PqQEdNI4-YvuN7QA-2-1">Shutterstock</a></span></figcaption></figure><p><em>Price discrimination is legal in Australia where sellers will typically pick an opening price based on the likelihood that someone will pay it. We take a look at how you can get the best deal on airfares in the second part of a <a href="https://theconversation.com/au/topics/tourism-and-technology-60904">series</a> exploring how technology is changing tourism.</em></p>
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<p>Few things are more annoying than spending a large sum of money on a purchase, only to discover that someone else got the same thing for a lower price. This often happens with airfares. You go the same website, search the same airline, choose the same seat row and fare conditions, but you’re offered a different price depending on when and where you do it. Why?</p>
<p>Often it’s a result of price discrimination. This happens when a seller charges you what you’re willing to pay. Of course, it also needs to be at a level that the seller is willing to accept. </p>
<p>When it comes to airfares, there are two levels of price discrimination, both driven by algorithms. First, there is price discrimination by the airline. Airline pricing is typically dynamic. That is, the prices are <a href="https://theconversation.com/a-travellers-guide-to-airline-price-discrimination-98329">higher for more popular flights</a>. Then there are intermediary platforms, such as travel agents or price comparison websites, which can introduce a further level of price discrimination.</p>
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Read more:
<a href="https://theconversation.com/longing-for-the-golden-age-of-air-travel-be-careful-what-you-wish-for-34177">Longing for the 'golden age' of air travel? Be careful what you wish for</a>
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<h2>How it works</h2>
<p>Websites create <a href="https://support.google.com/chrome/answer/95647?co=GENIE.Platform%3DDesktop&hl=en-GB">cookies</a> that record interactions between a user and a website. Often there are other tags and beacons created. From these, the website provider can obtain information, such as the browser type and the kind of device being used. Flight sales providers use this information to determine the price offered to a customer. </p>
<p>For example, if the same user checks a website multiple times for a flight at a specific time and on a particular date, the provider might assume this is the only time and date the user is interested in. It might respond by increasing the price offered, since it knows the travel decision is made. Alternatively, it might reduce the price to lock in the customer. </p>
<p>Clearing cookies or using a search engine that does not share search history (such as <a href="https://duckduckgo.com">Duck Duck Go</a>) can reduce this effect.</p>
<h2>Price discrimination is legal</h2>
<p>In Australia, like in many countries, price discrimination is legal. Sellers will typically pick an opening price based on the likelihood that someone will pay it. You see this happen at garage sales. Indeed, perfect price discrimination may mean that no two people pay the same price for the same product or service. </p>
<p>There are a few different ways of thinking about this. </p>
<p>In one sense, this is just <a href="https://quadrant.org.au/magazine/2013/06/adam-smith-and-the-propensity-to-truck-barter-and-exchange/">how markets operate</a>. If both buyers and sellers operate in a self-interested manner, efficient outcomes arise that are better for everyone – it’s the “<a href="https://www.investopedia.com/terms/i/invisiblehand.asp">invisible hand</a>”. Of course, this doesn’t prevent people from feeling ripped off.</p>
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<strong>
Read more:
<a href="https://theconversation.com/explainer-fuel-hedging-and-its-impact-on-airlines-and-airfares-36773">Explainer: fuel hedging and its impact on airlines and airfares</a>
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<p>The market can also provide intermediaries. Instead of paying the airline’s asking price, you could get an intermediary to buy the fare for you at a lower price. After all, you might not mind paying more than the minimum price available, provided that it’s less than you thought was reasonable to start off with. In airline searches, this is the type of service offered by businesses such as <a href="https://www.skyscanner.com.au">SkyScanner</a>.</p>
<h2>Limitations</h2>
<p>There is a legal issue which limits the use of price discrimination – such as if a seller engages in <a href="https://www.technologyreview.com/s/520131/data-discrimination-means-the-poor-may-experience-a-different-internet/">actual discrimination</a>. If a website discriminates against an identifiable group, for example by charging more to women with an Italian surname, it would risk being in breach of the <a href="https://www.legislation.gov.au/Details/C2014C00014">Racial Discrimination Act</a>.</p>
<p>Another limitation is the potential for social media backlash against the practice, which could lead to reputational harm. In the retail space, Amazon issued a statement denying that it engages in price discrimination, after angry customers found they had been <a href="https://abcnews.go.com/Technology/story?id=119399&page=1">charged different prices for the same product</a>. Platforms engaged specifically in airline sales haven’t disclosed whether or not they engage in price discrimination, but they are likely at risk of similar customer backlash.</p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/so-when-should-you-book-that-flight-the-truth-on-airline-prices-34033">So when should you book that flight? The truth on airline prices</a>
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<p>In the end, if you want to get a better deal on your airfare, the answer is still to shop around. And using comparison services, clearing cookies from you browser cache, and leaving as few breadcrumbs as possible is likely to yield the best deals.</p><img src="https://counter.theconversation.com/content/100959/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Rob Nicholls does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>If you check a website multiple times for a flight on a specific date, the seller might assume this is the only date you’re interested in and increase the price on offer.Rob Nicholls, Senior lecturer in Business Law, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/925942018-03-11T19:03:32Z2018-03-11T19:03:32ZHow companies can make more money by allowing you to ‘pay as you want’<figure><img src="https://images.theconversation.com/files/209667/original/file-20180309-30972-5afhta.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">In some cases, pay what you want did not provide an increase in revenue. A recent example is the closure of the Footscray Lentils as Anything restaurant.</span> <span class="attribution"><span class="source">Alpha/Flickr</span>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span></figcaption></figure><p>The last couple of years has seen the rise of <a href="http://lentilasanything.com/about/">restaurants</a>, <a href="https://rsecure.metmuseum.org/admissions">museums</a> and other businesses allowing customers to pay as they want. There may be altruistic reasons for companies to adopt this pricing, but research shows that “pay what you want” pricing can <a href="https://doi.org/10.1509/jmkg.73.1.44">sometimes lead to an increase in revenue</a>.</p>
<p>Adopting pay what you want does increase the risk for businesses, as customers can easily pay nothing, or less than the seller’s costs. However, the fact that <a href="https://doi.org/10.1509/jmkg.73.1.44">most customers still pay significantly more than zero</a>, and that revenue can actually increase, shows people make purchase decisions for many reasons, including a perception of fairness.</p>
<p>Businesses can use several strategies to increase revenue, such as posting signs with suggested prices, or donating money to charity. </p>
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Read more:
<a href="https://theconversation.com/the-economics-behind-ubers-new-pricing-model-78180">The economics behind Uber’s new pricing model</a>
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<p>Research on pay what you want <a href="https://doi.org/10.1509/jmkg.73.1.44">is mixed</a>. <a href="https://doi.org/10.1016/j.socec.2011.07.003">One study</a> tracking a pay-what-you-want restaurant over two years found that the average meal payment decreased but the number of daily guests increased, which meant total revenue increased.</p>
<p>However, in other cases, pay what you want did not provide an increase in revenue. A recent example is the <a href="https://www.broadsheet.com.au/melbourne/food-and-drink/pay-what-you-can-afford-restaurant-forced-close">closure last year of the Footscray Lentils as Anything restaurant</a>. </p>
<p>In general, pay what you want is <a href="https://doi.org/10.1287/mnsc.2014.1946">most effective in low-competition marketplaces</a>.</p>
<p>The rock band Radiohead famously <a href="http://content.time.com/time/arts/article/0,8599,1666973,00.html">used pay what you want</a> to sell one of its albums online. New York’s Metropolitan Museum of Art used a <a href="https://rsecure.metmuseum.org/admissions">pay-as-you-wish admission policy</a> for 50 years. <a href="https://en.wikipedia.org/wiki/Main_Page">Wikipedia</a> also uses a pay-what-you-want model to fund itself. </p>
<h2>Why pay as you want can be profitable</h2>
<p>There are a few reasons why pay as you want <a href="https://doi.org/10.1287/mnsc.2014.1946">could be profitable</a>.</p>
<p>Pay as you want allows for <a href="https://www.investopedia.com/terms/p/price_discrimination.asp">price discrimination</a>. Normally this means companies try to extract the most a customer would be willing to pay by offering different services, such as extra legroom on planes, for example. </p>
<p>Think about how much you would pay for a smashed avocado breakfast. For some people, the answer is A$10. For others it is A$20. A restaurant that prices its smashed avo at A$15 may be losing some customers (those willing to pay only A$10) and also fail to capture the full value from other customers (those who would have been willing to pay A$20). </p>
<p>By allowing people to pay as they want the restaurant can successfully cater to both types of customers. </p>
<p>Pay as you want can also be used to undercut the competition. While a competitor has posted its prices in a menu or on a website, customers can always pay less at the pay-as-you-want business. This can not only increase the number of customers to the pay as you want business, but could drive competitors out of the market. </p>
<p>In that sense, pay as you want lends itself to businesses that want to sell as many products as possible – they are appealing to all price points and are technically the cheapest option.</p>
<h2>Why do people pay more than zero?</h2>
<p>If a customer was perfectly rational then they would always pay zero to a pay-as-you-want business. </p>
<p>But research shows that <a href="https://doi.org/10.1287/mnsc.2014.1946">most people are inherently pro-social</a>, meaning they engage in altruistic actions that have no direct benefits to themselves. </p>
<p>Paying more than zero is also a “<a href="https://doi.org/10.1509/jmkg.73.1.44">signal</a>” to others that we are fair. Paying zero for a product that obviously cost the seller something to produce would make the customer appear unreasonable to those around them, which would <a href="https://doi.org/10.1073/pnas.1120893109">violate their self-image as a good person</a>. </p>
<p><a href="https://doi.org/10.1016/j.obhdp.2014.11.004">A customer may value the product enough</a> that they want to help the seller stay in business. After all, if no one pays then a seller will close down and the customer will lose access to the product. </p>
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<figcaption><span class="caption">Lentil as Anything – Social Return on Investment Report.</span></figcaption>
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<h2>Strategies to increase pay-as-you-want revenue</h2>
<p>For a pay-as-you-want strategy to be effective, customers <a href="https://link.springer.com/article/10.1057/s41272-017-0078-0">must perceive</a> the product to be of good quality and have high satisfaction with the transaction. Beyond this basic necessity sellers can employ numerous strategies to increase revenue. </p>
<p><a href="https://doi.org/10.1016/j.jbusres.2012.09.015">Customers pay more</a> when provided with a reasonable suggested price. A seller may put up a sign saying “a meal like ours would cost you $20 next door”, for example. A suggested price serves to anchor customer’s expectations and helps make clear what might otherwise be a confusing situation at the till. </p>
<p><a href="https://doi.org/10.1177/0276146712448193">Customers will also pay more</a> when provided with information about “socially correct” behaviour. For example, a seller may put up a sign indicating that “90% of people pay more than the cost price of our meals”. This kind of information helps customers understand what behaviour is considered normal and expected. </p>
<p><a href="https://doi.org/10.1126/science.1186744">Customers also pay more</a> when a portion of their payment is directed to charity. Charity donation provides customers with a “warm glow” feeling and presents the seller as socially responsible. </p>
<p>The next time you are buying a product, reflect on what you would pay if free to choose. It might be higher than you think.</p><img src="https://counter.theconversation.com/content/92594/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Adrian R. Camilleri does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>There may be altruistic reasons for companies to adopt ‘pay as you want’ pricing, but research shows it can lead to an increase in revenue.Adrian R. Camilleri, Senior Lecturer in Marketing, University of Technology SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/838582017-09-14T01:09:41Z2017-09-14T01:09:41ZIrma price gouging highlights sad truth: Consumer fleecing is the new normal<figure><img src="https://images.theconversation.com/files/185755/original/file-20170912-3782-qmkyc9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Many accused Delta, shown here over Tampa in 2014, and other carriers of price gouging ahead of Irma, but it's just business as normal.</span> <span class="attribution"><span class="source">Drew Horne/Shutterstock.com</span></span></figcaption></figure><p>Since Hurricane Irma put Florida in its sights, there have been <a href="http://www.orlandosentinel.com/weather/hurricane/os-hurricane-irma-price-gouging-20170906-story.html%20.">thousands of reports of price gouging</a> on everything from water to gasoline. </p>
<p>The most notable complaint was not, however, the one alleging a <a href="http://www.foxnews.com/us/2017/09/08/price-gouging-reported-in-florida-ahead-irma.html">US$72 charge for a six-pack of water</a>. Rather, it was the <a href="https://www.washingtonpost.com/news/dr-gridlock/wp/2017/09/06/3200-for-a-one-way-ticket-out-of-miami-the-story-behind-the-hurricane-irma-tweet-that-went-viral/?utm_term=.6c460aad609c">$3,200 reportedly asked by Delta</a> for a ticket out of Florida.</p>
<p>That’s because it wasn’t actually hurricane-related price gouging. Airlines were <a href="https://www.nytimes.com/2017/09/09/travel/airlines-face-criticism-amid-irma-price-gouging-charges.html?mcubz=3">charging similar fares</a> to last-minute buyers two weeks ago – and have been for years – long before Irma became a threat.</p>
<p>The fact is that airlines have made it <a href="https://www.washingtonpost.com/lifestyle/travel/did-your-great-fare-suddenly-disappear-blame-dynamic-pricing/2017/07/06/9c83f4fe-56c5-11e7-a204-ad706461fa4f_story.html?utm_term=.1c9ad009cec0">a routine practice</a> to jack up prices at moments of peak demand, such as right before a flight, when Americans dealing with family or business emergencies are willing to pay almost anything to get on the next plane out of town.</p>
<p>By bringing desperation to so many, Hurricane Irma is revealing a sad fact about many American companies, and not just airlines: that they have <a href="http://www.latimes.com/business/la-fi-agenda-dynamic-pricing-20160314-story.html">come in recent years to embrace</a> taking advantage of desperate consumers as a central part of their business models.</p>
<p>The practice, called dynamic pricing, is intended to ration scarce goods and services, yet, <a href="https://papers.ssrn.com/abstract=2817523">as I show in a recent paper</a>, it primarily harms consumers by making it easier for companies to fleece them. </p>
<h2>First come, first served</h2>
<p>Until recently, American businesses rationed access to goods or services that are in limited supply on a first-come, first-served basis. A company would make a product and then choose a price that covers its costs, including a reasonable return for investors. The price wouldn’t change, even if that meant the product might sell out from time to time. </p>
<p>Apple, for one, follows this traditional approach. If demand for its new $999 iPhone X exceeds supply <a href="https://www.cnet.com/news/apple-unveils-iphone-x-iphone-8-phone-8-plus/">after the phone goes on sale in November</a>, Apple likely won’t raise the price in response. </p>
<p>Instead, it’ll just tell consumers it’s <a href="https://www.cnbc.com/2016/09/15/apple-says-initial-quantities-of-iphone-7-plus-sold-out.html">temporarily sold out</a> and increase production as quickly as it can. </p>
<h2>How dynamic pricing rations differently</h2>
<p>Dynamic pricing works differently, and more and more companies are doing it. Examples include <a href="https://www.nytimes.com/2014/01/12/magazine/is-ubers-surge-pricing-an-example-of-high-tech-gouging.html?smid=pl-share&_r=0">Uber’s surge pricing</a>, Disney World’s decision to increase prices <a href="http://www.marketwatch.com/story/how-disneys-dynamic-pricing-could-benefit-some-consumers-2015-10-05?mg=prod/accounts-mw">when more kids show up to see Mickey</a> and plans in the works at brick-and-mortar supermarkets to <a href="https://www.theguardian.com/technology/2017/jun/04/surge-pricing-comes-to-the-supermarket-dynamic-personal-data">vary prices thousands of times per day</a>, just like <a href="https://www.forbes.com/sites/barbarathau/2017/06/20/amazon-is-poised-to-revamp-price-selection-and-convenience-in-the-grocery-aisle/">Amazon does online</a>.</p>
<p><a href="https://nyti.ms/2rZCclx">Some economists and company executives</a> seem to believe that this approach to pricing, also known as “price discrimination,” is the best way to ration, because higher prices reduce the number of consumers who are willing to pay for a product or service, ensuring that the number of willing buyers is equal to available supply. </p>
<p>If Apple were to embrace dynamic pricing, instead of simply letting the iPhone X sell out, the company would keep raising the price as the supply dwindled: first to $1,050, then $1,100 and, who knows, perhaps $1,499 or more – to whatever price would be necessary to ensure that the number of consumers who can actually afford the phone equals the stock available.</p>
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<img alt="" src="https://images.theconversation.com/files/185756/original/file-20170912-3737-ekn218.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/185756/original/file-20170912-3737-ekn218.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=469&fit=crop&dpr=1 600w, https://images.theconversation.com/files/185756/original/file-20170912-3737-ekn218.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=469&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/185756/original/file-20170912-3737-ekn218.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=469&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/185756/original/file-20170912-3737-ekn218.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=590&fit=crop&dpr=1 754w, https://images.theconversation.com/files/185756/original/file-20170912-3737-ekn218.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=590&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/185756/original/file-20170912-3737-ekn218.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=590&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Eclipse glasses: first come, first served.</span>
<span class="attribution"><span class="source">AP Photo/Brady McCombs</span></span>
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<h2>Is it better?</h2>
<p>Is dynamic pricing a better way to ration access than first come, first served? </p>
<p>Before the internet, <a href="http://www.journals.uchicago.edu/doi/abs/10.1086/466785?journalCode=jle">the answer might have been yes</a>. Back then, “first come, first served” meant wasting a lot of time standing on line. Die-hard Apple fans still do this (some were <a href="https://www.cultofmac.com/501744/crazy-apple-fans-already-lining-buy-iphone-x/">already lining up</a> ahead of the iPhone X announcement). </p>
<p>But the internet is swiftly eliminating this problem. Every time you make a purchase online, or try but fail because the item is sold out, you have waited in an instantaneous virtual line. Indeed, Apple will allow enthusiasts to <a href="https://www.cnet.com/how-to/how-to-preorder-the-iphone-x/">preorder the iPhone on Apple’s website</a> without wasting time on a street corner. Buyers who take this route will use virtual lines.</p>
<p>So then why have companies been embracing dynamic pricing instead? The answer is just what you think: Raising prices <a href="http://sloanreview.mit.edu/article/how-to-reap-higher-profits-with-dynamic-pricing/">is more profitable</a>, and by making it easier for companies to change prices in real time, the internet has made dynamic pricing easier to execute as well. </p>
<h2>Consumers suffer</h2>
<p>The flip side of more profits for companies is less money in the pockets of consumers. But so what? Isn’t the economy <a href="https://www.nytimes.com/2016/10/23/upshot/i-paid-2500-for-a-hamilton-ticket-im-happy-about-it.html">healthy as long as supply meets demand</a>, no matter how that is achieved?</p>
<p>In <a href="https://papers.ssrn.com/abstract=2817523">my paper</a>, I argue that how we ration matters. An economy in which only consumers who are able to pay very high prices get access to products in scarce supply is not an economy worth living in, for two reasons.</p>
<p>First, dynamic pricing will tend to ration access to goods based on wealth. Of course, a company must charge enough to cover costs and make money, and, in market economies, that means that wealthier people, who can pay higher prices, get access to more stuff. </p>
<p>But dynamic pricing goes beyond this, giving priority to the wealthy even when their extra dollars aren’t needed to call forth production. Companies make enough to cover the costs of production – bringing forth the greatest possible supply – under both dynamic pricing and first come, first served – <a href="https://www.washingtonpost.com/business/economy/apples-cash-pile-is-as-big-as-the-gdp-of-finland-and-jamaica-combined/2017/05/01/192d082c-2e7d-11e7-9dec-764dc781686f_story.html?utm_term=.500ba1ca7786">just look at Apple</a>. When companies opt for dynamic pricing, they are choosing to raise prices above the price that is already high enough to cover those costs but at which the product would sell out. </p>
<p>Incidentally, that’s why the argument made by some companies, that dynamic pricing benefits consumers <a href="https://newsroom.uber.com/guest-post-a-deeper-look-at-ubers-dynamic-pricing-model/">by creating incentives to increase supply</a>, does not hold water. </p>
<p>Second, companies are not going to stop here. <a href="https://www.theatlantic.com/magazine/archive/2017/05/how-online-shopping-makes-suckers-of-us-all/521448/">Their end goal</a> is to be able to charge each individual consumer the highest price that consumer is willing to pay. Indeed, Uber <a href="https://www.bloomberg.com/news/articles/2017-05-19/uber-s-future-may-rely-on-predicting-how-much-you-re-willing-to-pay">is trying to do just that</a>. </p>
<p>In such a world, the economy has little value to consumers. You might be willing to give up your life savings to flee Irma, but what a price to pay to simply get out of harm’s way. </p>
<p>That margin between what you get – safety, for a flight out of Irma – and what you pay is the entire value of the economy to you. The goal of dynamic pricing is to squeeze that value right down to zero.</p>
<p>The airlines responded to public pressure during Irma <a href="https://www.usatoday.com/story/travel/flights/todayinthesky/2017/09/06/airlines-cap-fares-florida-amid-price-gouging-complaints/640332001/">by temporarily reverting to first come, first served</a>. But the problems with dynamic pricing won’t clear with the weather.</p><img src="https://counter.theconversation.com/content/83858/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ramsi Woodcock does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Some consumers were alarmed that airlines were charging thousands of dollars to get out of the hurricane’s path. That’s actually business as usual for more and more companies.Ramsi Woodcock, Professor of Legal Studies, Georgia State UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/555132016-03-04T14:41:48Z2016-03-04T14:41:48ZWhat is so wrong with flexible pricing in football?<figure><img src="https://images.theconversation.com/files/113364/original/image-20160301-8060-16qlp01.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Getting bums on seats.</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/werkman/22499590043/in/photolist-Ahdhfg-eaets3-3ZW7ro-82BAub-dqTyCK-nXF9RA-KVKi-5MkmcL-GneE9-KqG8b-6wQGpA-dZncX4-L3eeF-6JcmeA-ditLRf-6J8uvm-8PTxW-5s6fhP-92RXHx-92RXTX-5cMPaZ-6H8GSw-8LD7c-L6nT-6fWrt6-jmGHgP-5cS5uN-6fcE9Q-6fcEum-jmM7dJ-6oiVsm-5gMAvQ-5ebmo7-5ebmzy-6oiUgf-642YRE-FqGaN-6oiW5j-63XJUz-6qNqVf-6fcFqy-6fcF8f-jmGJQa-nFiwK8-dYJCLV-dqSqiA-8Xtig-kL4BuF-4dJZm8-nk6kBB">Peter Werkman/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span></figcaption></figure><p>Flexible pricing models are all the rage. Uber, the rider-driver taxi application, openly utilises <a href="mailto:https://newsroom.uber.com/canada/en/rainyday/">surge pricing</a>, which can instantly double prices when a few raindrops start falling. A number of leading arts companies including the Royal Shakespeare Company and most recently Disney theme parks have implemented demand-led pricing initiatives, too. So why are football fans so exorcised when their clubs try to break away from old-fashioned approaches to pricing?</p>
<p>Football ticket pricing already often varies according to the seat’s view, match timing, live television coverage and opposition attractiveness, but it could also factor in the teams recent performance, real time demand changes, player injuries and selection or even the latest weather forecast. More closely matching supply and demand via a transparent and dynamic approach could also help reduce illegal reselling. </p>
<p>For leading English football clubs, ticket revenues – generating a fifth of average income – have been dwarfed in recent years by <a href="http://www2.deloitte.com/content/dam/Deloitte/uk/Documents/sports-business-group/deloitte-football-money-league-2015.PDF">growing income</a> from media, merchandising and sponsorship. Perhaps acting out of self interest, but also with a clear understanding of the vital role played by fans in creating the stadium atmosphere, supporter groups have flexed their muscle to campaign against ticket pricing changes. </p>
<p>Manchester United travelling away fans were unhappy to be <a href="http://www.independent.co.uk/sport/football/european/manchester-united-ticket-protest-louis-van-gaal-supports-fans-midtjylland-prices-welcome-to-a6881181.html">charged £71 each</a> to watch the team be beaten in far away Denmark. Fans of north-west rivals Liverpool bemoaned attempts by their club management to recoup some of the millions spent on stadium expansion through a <a href="https://theconversation.com/premier-league-clubs-should-learn-from-liverpool-fans-anfield-walkout-54683">£77 top price ticket</a>. A walkout by <a href="http://www.theguardian.com/football/2016/feb/06/liverpool-fans-walkout-thousands-ticket-price-protest">around 10,000 empowered</a> fans forced a significant management climb down and secured a two year season ticket price freeze. But fan pressure that forces low balling of the real value of match tickets can foster the conditions for dubious secondary re-selling. A more dynamic approach might be better.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/113410/original/image-20160301-31020-1xper8x.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/113410/original/image-20160301-31020-1xper8x.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/113410/original/image-20160301-31020-1xper8x.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=401&fit=crop&dpr=1 600w, https://images.theconversation.com/files/113410/original/image-20160301-31020-1xper8x.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=401&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/113410/original/image-20160301-31020-1xper8x.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=401&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/113410/original/image-20160301-31020-1xper8x.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=504&fit=crop&dpr=1 754w, https://images.theconversation.com/files/113410/original/image-20160301-31020-1xper8x.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=504&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/113410/original/image-20160301-31020-1xper8x.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=504&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Warning! We may be giving succour to touts.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/pittaya/5808948007/in/photolist-buqvv6-5oJFai-6zk2st-9sKFuX-67iAG8-bXm6N9-pCA3-h9zRG9-m8XykT-7RnYRN-DsC8e-9RjnRZ-5e3E5K-HyYgh-2rdDVK-yHTWju-4BEYoF-gfDmg-gfDmf-2xNjsZ">Pittaya Sroilong</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<h2>Demanding audience</h2>
<p>Sports fans are of course already accustomed to non-price-related rationing strategies. Clubs discriminate by limiting sales to season ticket holders and club members according to previous attendance, or by recognising their recent sales value with loyalty points. Gold, silver and bronze <a href="http://www.saintsfc.co.uk/news/article/20150630-201516-matchday-ticket-prices-2515326.aspx">fixture categories</a> are frequently used by clubs to gently vary availability and recognise more and less attractive opposition, lesser cup competitions and unappealing game times. All key demand factors.</p>
<p>Many increasingly commercially oriented sporting entities already <a href="http://www.sloansportsconference.com/%3Fp=2733">have a careful eye on yield enhancement</a>, with an array of hospitality packages targeted at the less price sensitive company entertainment budget holders. For example London-based Arsenal, whose league-leading <a href="http://www.independent.co.uk/sport/football/premier-league/deloitte-football-money-league-arsenal-made-100m-on-matchdays-more-than-real-madrid-and-barcelona-a6824791.html">match day take represents 30%</a> of their income, ask £450 per head for one of their match and a meal services. </p>
<p>It is the kind of <a href="http://www.independent.co.uk/sport/football/news-and-comment/english-ticket-prices-in-germany-would-lead-to-a-sstorm-claims-bundesliga-ceo-christian-seifert-9667352.html">profit focused approach</a> that can leave a bitter taste for fans. In the streets around Manchester City’s Etihad stadium you will see local businesses signal their own ethical reluctance to cash in on demand peaks with signs proclaiming “No match day pricing”. Football fans supposedly are more than just customers <a href="http://www.theguardian.com/football/2016/feb/10/premier-league-ticket-prices-fans-verdict">and research</a> amongst club supporter groups identified that the maximum price for a premier league ticket should be just £30, with some suggesting as little as £20. Asking a powerful lobby group what they want to pay of course is very different from establishing what they are actually prepared to pay, after all turkeys rarely vote for Christmas.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/113419/original/image-20160301-31065-g28s8m.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/113419/original/image-20160301-31065-g28s8m.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/113419/original/image-20160301-31065-g28s8m.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/113419/original/image-20160301-31065-g28s8m.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/113419/original/image-20160301-31065-g28s8m.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/113419/original/image-20160301-31065-g28s8m.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/113419/original/image-20160301-31065-g28s8m.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/113419/original/image-20160301-31065-g28s8m.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Chipping in.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/sstrieu/12026352503/in/photolist-jjJcBe-ots1ED-fpPyee-6rCEGa-owBLLG-b88XK-auoHSD-dtZn8N-i1nD4-fgLvNQ-D1CkL5-qkds2N-DibcEC-DsJSdV-DiaTR1-D1CogL-DqrtAN-DqqExE-Dqrc7W-CvmAaz-Dktau8-8P9FuE-858kv9-4RVhav-CUfftR-D1CAV3-D1CTgu-Cvn8gn-CvmCW6-D1D28b-5BvNuT-aj9fia-DqrkdW-7hWqJb-skxXEW-8yUbSv-qCtNY-d26K5y-9JWvx3-4DNEFT-s144b6-a5Gkf7-oqRrV-97YYD5-6Kbc9N-76G6Eo-daPWcg-68x9rD-6LDPax-daeEWU">sstrieu</a>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
</figcaption>
</figure>
<h2>easyPricing</h2>
<p>While the idea is nearly <a href="http://www.independent.co.uk/sport/football/premier-league/ticket-prices-fans-planning-mass-walkout-at-all-20-premier-league-clubs-over-cost-a6862436.html">heretical in some football communities</a>, dynamic pricing has been largely embraced by consumers in the travel industry. This strategy allows for attractive lead-in pricing which starts low and ratchets up with demand. Demand responsive pricing was popularised by new-entrant, low-cost airlines like easyJet following European Union liberalisation in the late 1990s. With the promise “book early for low fares”, hotels, car hire companies and airlines now routinely structure their lead-in offers to entice consumers, relying on <a href="http://www.independent.co.uk/arts-entertainment/music/features/the-price-is-really-right-dynamic-ticketing-could-transform-the-way-we-pay-to-see-live-events-8215701.html">demand driven, step pricing</a> to take a premium from those willing to pay higher fares closer to departure. </p>
<p>These so-called airline pricing models are also being used in the arts. The venerable <a href="http://www.thesundaytimes.co.uk/sto/news/uk_news/Arts/article1670330.ece">Royal Shakespeare Company</a>, under pressure to reduce their reliance on societal subsidies, found that a variable pricing model enabled them to balance the need to offer accessible pricing whilst generating sufficient revenues. Canadian circus creatives <a href="https://www.cirquedusoleil.com">Cirque du Soleil</a> trialled <a href="http://www.thesundaytimes.co.uk/sto/news/uk_news/Arts/article1670330.ece">dynamic pricing</a> for this winter’s London tour dates. With a modest 30% seat price differential they were able to sell more tickets and increase ticket revenues by 12%. Even Disney is getting in on peak pricing, with a <a href="http://www.nytimes.com/2016/02/28/business/disney-introduces-demand-based-pricing-at-theme-parks.html">20% higher tariff now charged</a> at its US theme parks during the busiest days. No mean squeak. Ahem. </p>
<p>Event organisers tread precariously as they seek to balance the value for money versus availability appeal of their offers, relying as they do on spectator word-of-mouth to build interest that drives sales. They also need to cultivate a positive, engaged audience, a fundamental element of live performances. It is the contagious fervour and noisy appreciation that paying customers generate that is fundamentally important in <a href="https://books.google.co.uk/books?id=0QXrBgAAQBAJ&pg=PA278&lpg=PA278&dq=live+audience+co-creation+football&source=bl&ots=ofbBGtcb7b&sig=rvDm4-gd7MQ-Qh9odmtP4BzAPxg&hl=en&sa=X&ved=0ahUKEwjN6aiH2onLAhXMOxoKHeIDDc4Q6AEIJDAB#v=onepage&q=live%20a">co-creating the event atmosphere</a>. Should event managers then leave audience make up merely to random chance when big data analysis can calculate an individual’s lifetime attractiveness, their value to corporate sponsors or likely social media impact? Not so far fetched, but perhaps a little too Big Brother. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/113420/original/image-20160301-31056-1ntkzyu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/113420/original/image-20160301-31056-1ntkzyu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/113420/original/image-20160301-31056-1ntkzyu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/113420/original/image-20160301-31056-1ntkzyu.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/113420/original/image-20160301-31056-1ntkzyu.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/113420/original/image-20160301-31056-1ntkzyu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/113420/original/image-20160301-31056-1ntkzyu.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/113420/original/image-20160301-31056-1ntkzyu.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Sunderland fans celebrate.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/ronmacphotos/6270740698/in/photolist-hceWQh-edi6XM-6SqRbj-cqrjdh-84a3pY-r8r92L-9aRuNf-cqrius-Dbchce-cqrjLq-cqrh7J-cqrgSo-cqrjwq-ek7Bov-rzNjdp-ris6qV-ay8bJW-ay5uMx-enFUaR-cqrhv1-cqrgCh-cqrgkY-eogBuN-9CeM9V-ek7Btk">Ronnie Macdonald</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<h2>Reducing waste</h2>
<p>Peak pricing has its critics of course, as families with school-aged children will testify when paying thousands more for a holiday during half-term, but I personally dislike more the panic buying engendered by stampede or <a href="https://econsultancy.com/blog/64333-what-is-scarcity-marketing-and-should-you-use-it/">scarcity marketing</a> strategies and would welcome a more open and transparent approach. Flexible pricing models in football would also put a lid on the <a href="http://www.theguardian.com/money/2015/dec/19/ticket-resale-sites-new-scrutiny-touting-seatwave-viagogo">amoral greed</a> of <a href="http://www.ft.com/cms/s/0/0b3444c4-a5a3-11e5-a91e-162b86790c58.html%23axzz40q0yRHZE">opportunistic re-sellers</a> and criminals who seek to profit from an all-too-frequent mis-match between supply and demand. </p>
<p>There is a critique that airline style pricing might unfairly advantage the wealthy. But there can be good news too for those of more modest means to benefit from low price off-peak offers filling otherwise empty seats. Using cross subsidisation to lower pricing that widens inclusion and diversifies participation rates should be seen positively for delivering social value, not as a negative. It should have consequent benefits for the football clubs.</p>
<p><a href="http://www.thinkaboutpricing.com/left-navigation/pricing-strategy.html">Examples from the arts</a> and hospitality industries show that dynamic pricing can offer a more meritocratic and efficient revenue management strategy, leading to more diverse and inclusive pricing policies. It can reduce wasted seats and allow those willing and able to pay more to do so ethically and legally. </p>
<p>Football industry pricing needs to innovate more, not to drive up already large revenues but to bring more transparency to the murky world of ticket sales and help resource widening participation initiatives.</p><img src="https://counter.theconversation.com/content/55513/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Justin O'Brien will draw part of his pension from former airline employer British Airways. </span></em></p>Fans are notoriously reluctant to let their clubs play fast and loose with clever ticket pricing, but it might be better for everyone.Professor Justin O'Brien, MBA Programme Director, Royal Holloway University of LondonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/406182015-04-21T20:43:48Z2015-04-21T20:43:48ZThe last two digits of a price can signal your desperation to sell<figure><img src="https://images.theconversation.com/files/78838/original/image-20150421-9008-181q238.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The last two digits of a product's price sends signals about how badly you hope to sell. </span> <span class="attribution"><span class="source">1.99 via www.shutterstock.com</span></span></figcaption></figure><p>While someone’s bargaining position can be shaped by competition, we economists know that there is a big gray area in our ability to predict negotiated prices. </p>
<p>Competitive options for buyers and sellers can define a limit beyond which they will not go, but there is still a range of prices that fall within those limits. Within that range, clearly sellers would like a higher price, while buyers would like a lower one, so each has an incentive to signal to the other their willingness to be a tough negotiator.</p>
<p>Sometimes, however, you might want to send a signal that you might be willing to be less tough. Why? Because negotiations take time, and you might want to get a deal done quickly. For instance, you may be moving to another city and wish to sell your house in a hurry. </p>
<p>The usual means by which such a signal could be sent is to simply lower your starting price. But for some goods — where quality is hard to observe, such as real estate — lowering the price may be difficult to do, at least in small increments. This is the traditional asymmetric information or adverse selection story, where if a seller has a product of high quality, they can’t use higher prices to convince the market that they are still not a low-quality seller in disguise. </p>
<p>So how else would you signal your willingness – or unwillingness – to be “flexible?” When there are sellers around with differing levels of patience, both signals are desirable for those who know how to use them.</p>
<p>In <a href="http://faculty.haas.berkeley.edu/stadelis/round.pdf">a new paper</a>, Matt Backus, Thomas Blake and Steve Tadelis look at this issue within the confines of eBay’s structured negotiation platform. While we often associate eBay with auctions (rather than straight out sales), that hasn’t been eBay’s main business for about a decade. Instead, most trades are listed for a specific or “buy it now” price, and the seller may give you the option of making them an alternative offer. </p>
<p>So a seller of an iPhone may list a price of $1,000, and someone might come back with a counteroffer of $800, to which the seller could then accept or make a new offer. This could go on for about three rounds (eBay rules) and may last about a week. </p>
<p>But if the seller wanted a quicker negotiation, what could he do? Backus, Blake and Tadelis discovered an interesting way to do just that, which is summarized in the following chart. </p>
<p>The chart shows that when the posted initial price is of a round number (the red dots), like $1,000, the average counteroffer is much lower than if it is a non-round number (the blue circles), like $1,079. For example, the graph suggests that you can actually end up with a higher counteroffer if you list $998 rather than $1,000. In other words, you are better off initially asking for a lower price if price was all you cared about.</p>
<p>Backus et al postulate that what is going on here is “cheap talk” – that is, an easy-to-make statement that may be true or untrue with no consequences for dishonesty – and not an otherwise reliable signal. There are some sellers who don’t just care about price and, absent any other way of signaling that to buyers, they set their price at a round number. Alternatively, you can think that the more patient sellers are using non-round numbers to signal their toughness. Either way, the last two digits of the price is cheap talk. </p>
<p>The rest of the paper does the econometrics to back all this up and is (except for one really interesting thing that I’ll get to in a moment) as robust as the graph suggests. End your price with “00” and you receive offers that are 5% to 8% lower, more likely to finish six to 11 days sooner and 3% to 5% more likely to sell at all. This is pretty interesting because the last two digits of a price essentially tell you nothing about anything else. Nor do they make much of a difference to the price. This is the first paper I am aware of that uncovers a plausible cheap talk equilibrium; that is, where people use a simple unverifiable statement and it is believed as intended. </p>
<p>But wait, there’s more. The authors wanted to see if their analysis would work in other markets and whether they could guess what the cheap talk prices would be. </p>
<p>While we know that round numbers seem to be the focal point, we don’t know that for sure. And so they checked. And what they found was that while the effect they observed didn’t happen for all other prices, it did arise for prices that ended in 99! These days, those prices are the “normal” ones used at any grocery store or shopping mall and, as it turns out, send the same type of signal as the “00” prices. If you look at the graph closely, you can kind of see that.</p>
<p>Does this arise elsewhere? The authors grabbed some real estate data and here are the results:</p>
<p>There is it again. So if you want to sell your house quickly, pick a round number. As it turns out, real estate agents then understand the signal. Alternatively, if you want to sell for a higher price and are willing to wait, your agent will advise you to pick an odd one. </p>
<p>This is one of those things I certainly didn’t know about, but it is clear that enough people in the market did. One wonders what other cheap talk signals lie in our economics future.</p><img src="https://counter.theconversation.com/content/40618/count.gif" alt="The Conversation" width="1" height="1" />
While someone’s bargaining position can be shaped by competition, we economists know that there is a big gray area in our ability to predict negotiated prices. Competitive options for buyers and sellers…Joshua Gans, Professor of Strategic Management, University of TorontoLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/334392014-11-03T05:30:53Z2014-11-03T05:30:53ZBuyer beware, online shopping prices vary user to user<figure><img src="https://images.theconversation.com/files/63217/original/8kyfqbm6-1414604663.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">You might not be getting a great deal....</span> <span class="attribution"><a class="source" href="http://www.shutterstock.com/pic.mhtml?id=172983224&src=id">Online shopping image via www.shutterstock.com.</a></span></figcaption></figure><p>People have a mental model of shopping that is based on experiences from brick-and-mortar stores. We intuitively understand how this process works: all available products are displayed around the store and the prices are clearly marked. Many stores offer deals via coupons, membership cards, or to special classes of people such as students or AARP members. Typically, everyone is aware of these discounts and has an equal opportunity to use them.</p>
<p>Many people assume this same mental model of shopping applies just as well to e-commerce websites. However, as we are discovering, this is not the case.</p>
<p>In 2010, shoppers realized that Amazon was charging <a href="http://www.bizjournals.com/seattle/stories/2000/09/25/daily21.html">different users different prices</a> for the same DVD, a practice known as price discrimination or price differentiation. In 2012, the Wall Street Journal revealed that Staples was charging users different prices based on their <a href="http://online.wsj.com/articles/SB10001424127887323777204578189391813881534">geographic location</a>. The paper also reported that travel retailer Orbitz was showing more expensive hotels to users <a href="http://online.wsj.com/news/articles/SB10001424052702304458604577488822667325882">browsing from Mac computers</a>, a practice known as price steering.</p>
<p>These reports of price discrimination and steering provoked a great deal of negative publicity for the companies involved. The lack of transparency also raises many disturbing questions. How widespread are the e-commerce practices of manipulating search results and customizing prices? What customer information do companies use to do it? When e-commerce sites personalize prices or search results, by how much do prices change?</p>
<h2>Price discrimination and steering in the wild</h2>
<p>My <a href="http://personalization.ccs.neu.edu">colleagues and I</a> at Northeastern University have taken an initial stab at answering these questions in a <a href="http://www.ccs.neu.edu/home/cbw/pdf/imc151-hannak.pdf">new study</a>. We examined ten major e-retailers – including Walmart and Home Depot – along with six hotel/rental car sites – including Orbitz and Expedia – to determine if they implement price discrimination or steering, and if so, what user attributes trigger the personalization.</p>
<p>We recruited 300 people from the crowdsourcing site <a href="https://www.mturk.com/mturk/welcome">Mechanical Turk</a> to run product searches on the 16 sites. We paired each of these real users, who each had their own real, idiosyncratic browser history, with an <a href="http://phantomjs.org/">automated browser</a> that ran the same searches at the same time as the real users, but did <strong>not</strong> store any cookies. </p>
<p>By comparing the search results shown to these automated controls and to the real users, we identified several cases of personalization. We saw price steering from Sears, with the order of search results varying from user to user. We saw price discrimination from Home Depot, Sears, Cheaptickets, Orbitz, Priceline, Expedia, and Travelocity, with product prices varying from user to user. </p>
<p>So what user attributes trigger personalization? The problem is that real users have a long history of browsed sites, searches, clicks, and online purchases that we as researchers don’t know. Thus, when we observe personalized results in our experiments, we can’t tease out the underlying cause.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/63417/original/jttzyw3p-1414773307.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/63417/original/jttzyw3p-1414773307.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/63417/original/jttzyw3p-1414773307.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/63417/original/jttzyw3p-1414773307.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/63417/original/jttzyw3p-1414773307.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/63417/original/jttzyw3p-1414773307.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/63417/original/jttzyw3p-1414773307.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/63417/original/jttzyw3p-1414773307.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">What is your browser history telling that shopping site about how much to charge you?</span>
<span class="attribution"><a class="source" href="http://www.shutterstock.com/pic-140850265.html">Shopping image via www.shutterstock.com</a></span>
</figcaption>
</figure>
<h2>What makes you seem like you want to pay more?</h2>
<p>To figure out what user attributes drive e-commerce personalization, we conducted another round of testing using fake accounts that we created. All the accounts were identical except for one specific attribute that we changed. In particular, we tested for personalization based on browser (e.g. Chrome, Firefox, IE), platform (e.g. Windows, OSX, iOS, Android), logging-in to a user account, and purchase history (we had one account book cheap hotels and rental cars for a week, while another account booked expensive hotel rooms and rental cars).</p>
<p>Our fake accounts uncovered many different personalization strategies employed by e-commerce sites. For example, Travelocity reduced the prices on 5% of hotel rooms shown in search results by around US$15 per night for smartphone users. Interestingly, Cheaptickets and Orbitz gave unadvertised “Members Only” discounts of about US$12 per night on 5% of hotels rooms to users who were logged-in to their accounts on the site.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/62985/original/zzf54pc7-1414470691.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/62985/original/zzf54pc7-1414470691.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/62985/original/zzf54pc7-1414470691.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=466&fit=crop&dpr=1 600w, https://images.theconversation.com/files/62985/original/zzf54pc7-1414470691.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=466&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/62985/original/zzf54pc7-1414470691.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=466&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/62985/original/zzf54pc7-1414470691.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=586&fit=crop&dpr=1 754w, https://images.theconversation.com/files/62985/original/zzf54pc7-1414470691.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=586&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/62985/original/zzf54pc7-1414470691.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=586&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Price discrimination on Cheaptickets: users who log into the site receive ‘Members Only’ discounts of about $12/night on 5% of hotels.</span>
<span class="attribution"><span class="source">Aniko Hannak et al.</span></span>
</figcaption>
</figure>
<p>Expedia and Hotels.com conduct what marketers and engineers call A/B tests to steer a subset of their users toward more expensive hotels. By dividing visitors into different groups, companies are able to use A/B tests to see how users respond to new website features and algorithms. In this case, visitors to Expedia and Hotels.com were randomly assigned to groups <em>A</em>, <em>B</em>, or <em>C</em> based on the cookies stored on their computers. Users in groups <em>A</em> and <em>B</em> were shown hotels with an average price of US$187/night, while users in group <em>C</em> were shown hotels with an average price of US$170/night.</p>
<p>Home Depot served almost completely different products to users on desktops versus mobile devices. A desktop user searching Home Depot typically received 24 search results, with an average price per item of US$120. In contrast, mobile users receive 48 search results, with an average price per item of US$230. Bizarrely, products are also US$0.41 more expensive on average for Android users.</p>
<h2>Why do sites do this?</h2>
<p>Initially, we assumed that the sites would not personalize content, given the extremely negative PR that Amazon, Staples, and Orbitz received when earlier cases were revealed. To our surprise, this was not the case! </p>
<p>Unfortunately, the business logic underlying much of this personalization remains a mystery. None of the discounts we located in our experiments were advertised on sites’ homepages, so the deals do not appear to be part of marketing campaigns. When we spoke to representatives from Orbitz and Expedia, they confirmed our findings, but did not elaborate on the rationale for the design of their websites. Representatives from Travelocity confirmed that they do offer deals for mobile users, with the goal being to motivate them to use the site more and install the Travelocity app.</p>
<h2>What’s a bargain-hunting shopper to do?</h2>
<p>What is clear from our study is that price discrimination and steering on e-commerce sites is becoming more prevalent, and more sophisticated. As a user, it’s almost impossible to know if the prices you are being shown have been altered, or if cheaper products have been hidden from search results.</p>
<p>If you are looking for the best deals and are willing to work for it, we recommend searching for products in your normal desktop browser, an incognito or private browser window, and your mobile device. Of course, e-commerce companies are constantly experimenting with new personalization techniques, so in the future, an entirely different attribute may trigger personalization.</p>
<p>Ultimately, we hope that our study will encourage companies to be more transparent about how they personalize prices and search results. Rather than using opaque and creepy algorithms to secretly alter content, companies could stick to the kinds of real-world incentives that shoppers already know and love, like coupons and sales.</p><img src="https://counter.theconversation.com/content/33439/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Christo Wilson receives funding from the National Science Foundation (NSF) under grants CNS-1054233 and CHS-1408345. Any opinions, findings, conclusions or recommendations expressed in this material are those of the author and do not necessarily reflect the views of the National Science Foundation.</span></em></p>People have a mental model of shopping that is based on experiences from brick-and-mortar stores. We intuitively understand how this process works: all available products are displayed around the store…Christo Wilson, Assistant Professor of Computer and Information Science, Northeastern UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/128782013-03-22T04:39:15Z2013-03-22T04:39:15ZClash of the titans: Apple, Adobe, and Microsoft under fire at IT pricing inquiry<figure><img src="https://images.theconversation.com/files/21612/original/p3m75d56-1363925755.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Microsoft, along with Adobe and Apple, faced a parliamentary committee about price discrimination of IT products.</span> <span class="attribution"><span class="source">AAP</span></span></figcaption></figure><p>Today, an Australian parliamentary committee grilled the IT titans - Apple, Adobe, and Microsoft - on price discrimination against Australian consumers. The IT companies were <a href="http://www.smh.com.au/digital-life/digital-life-news/evasive-microsoft-adobe-fail-to-justify-prices-20130322-2gjkr.html">evasive under questioning</a>.</p>
<p>The <a href="http://www.aph.gov.au/Parliamentary_Business/Committees/House_of_Representatives_Committees?url=ic/itpricing/index.htm">House of Representatives Committee on Infrastructure and Communications</a> issued <a href="http://www.afr.com/p/technology/apple_microsoft_and_adobe_to_front_GHjE8wy4pjkUg1jvJh7f5J">a summons to Apple, Adobe, and Microsoft </a>to appear before the Parliament. </p>
<p>The Committee is investigating the impacts of prices charged to Australian consumers for IT products. The Committee has been examining claims by consumer advocates CHOICE Australia and the Australian Communications Consumer Action Network that Australian consumers have been the victims of price gouging.</p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/aTjWmO4K9zk?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">Choice Australia talks about IT Price Discrimination: Sunrise</span></figcaption>
</figure>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/9biB9QyDPA8?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">Choice Australia talks about IT Price Discrimination: The Today Show.</span></figcaption>
</figure>
<p>The inquiry into IT pricing has grown into a larger public debate about copyright law, consumer rights, and competition in the digital economy. <a href="http://www.businessspectator.com.au/article/2013/2/12/business-spectator/technology-spectator-tech-giants-face-music#ixzz2O39Uylig">Harrison Polites</a> has observed that the Labor member for Chifley, Ed Husic, has
transformed the inquiry into “a debate in microeconomics that has significant implications for Australia’s national economy”.</p>
<p><strong>Apple’s cloak of invisibility</strong></p>
<p><a href="http://www.adelaidenow.com.au/technology/smartphones/apple-to-be-slapped-with-hefty-tax-bill-by-ato/story-fn5tich0-1226571571083">Husic</a> has said that Apple has sought to hide under “a cloak of invisibility” in a number of Australian policy debates.</p>
<p>With some reluctance, Apple’s <a href="h//www.aph.gov.au/Parliamentary_Business/Committees/House_of_Representatives_Committees?url=ic/itpricing/subs/sub062.pdf">written submission was published</a>. At <a href="http://www.itnews.com.au/News/337434,apple-australia-passes-the-buck-in-price-inquiry.aspx">the IT pricing inquiry</a>, Apple Australia vice-president Tony King blamed <a href="http://www.theage.com.au/digital-life/digital-life-news/apple-blames-rights-holders-for-70-markups-20130322-2gjkr.html">copyright rights-holders for price discrimination in Australia</a>. However, the relationship between Apple and copyright owners has been competitive — and sometimes collusive.</p>
<p>Apple has been under investigation for its collaboration with publishers on setting e-book prices both in the <a href="http://www.businessweek.com/news/2013-03-08/apple-ceo-may-testify-in-justice-department-s-e-books-suit">United States</a> and <a href="http://t.co/bOyx7Vex2D">the European Union</a>. Tim Cook, the chief executive of Apple, has been <a href="http://www.ft.com/cms/s/0/7068bc16-8c2f-11e2-b001-00144feabdc0.html">ordered to testify in the United States case</a>.</p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/ckv5nBGuJs8?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">The Department of Justice action against Apple on e-book price fixing.</span></figcaption>
</figure>
<p>One has to wonder whether Apple has sought to collaborate with copyright owners in price-setting in Australia.</p>
<p>CHOICE Australia has observed disparities in pricing on iTunes between Australia and the United States. Rihanna’s latest album <a href="http://www.businessweek.com/news/2013-03-21/rihanna-costing-49-percent-more-as-australia-probes-apple-music"><em>Unapologetic</em> costs A$22.99 in the Australian iTunes store, but only $15.99 in the United States</a>. <a href="http://www.smh.com.au/technology/technology-news/getting-to-the-bottom-of-great-tech-ripoff-20120803-23krt.html">Australian fans of the Boss, Bruce Springsteen</a>- such as the Treasurer Wayne Swan - would pay $AU16.99 for his Greatest Hits on iTunes, whereas purchasers Born in the USA would only pay $US11.99. <a href="http://www.news.com.au/technology/biztech/watchdog-choice-has-tough-questions-for-apple-microsoft-and-adobe/story-fn5lic6c-1226602766888">Matthew Levey from CHOICE Australia wondered</a>: “Why is it costing Australians 70% more to rock out to AC/DC’s Back in Black on iTunes?” Parliamentarian Paul Neville was particularly aggrieved about the high cost of the works of Led Zeppelin on Australia’s iTunes. </p>
<p>Stephen Jones MP raised questions about whether Apple was a dominant market power in the IT field, much like Woolworths in agriculture. King denied that Apple was like Woolworths. He suggested that Apple was comparable to JB Hi-Fi, much to the scepticism of the committee.</p>
<p><strong>Adobe’s acrobatics</strong></p>
<p>In contrast to Apple, <a href="http://www.aph.gov.au/Parliamentary_Business/Committees/House_of_Representatives_Committees?url=ic/itpricing/subs/sub081.pdf">Adobe</a> sought to deflect criticism of its pricing in the Australian policy debate.</p>
<p>Adobe’s managing director Paul Robson <a href="http://t.co/86lIQHji75">appeared before the committee</a>, and failed to justify why Australian consumers paid <a href="http://www.heraldsun.com.au/opinion/no-good-answer-on-the-great-aussie-rip-off/story-fnh4jt62-1226603328421">higher prices for software</a>. At one point, he suggested <a href="http://www.computerworld.com.au/article/457033/adobe_fly_us_cheaper_software/">Australians could fly to the United States</a>, if they wanted cheaper prices of boxed Adobe products.</p>
<p>Elsewhere, Adobe’s chief executive, Shantanu Narayen, <a href="http://www.afr.com/p/technology/tech_giants_will_have_to_cut_prices_daDpoGUkeNPlmAKglJC5NL">has defended the software prices in Australia</a>. He has maintained: “You always have to look at different pricing in different regions and we do the research just like other companies … We look at the appropriate pricing and the value associated with products everywhere.”</p>
<p>Under pressure, Adobe announced that it would cut its Australian prices in respect of cloud-based software services <a href="http://www.businessspectator.com.au/news/2013/2/13/technology/adobe-cloud-product-price-drop-sees-australians-pay-slightly-less-us">the Creative Cloud</a>. </p>
<p>However, Adobe has come under attack <a href="http://www.businessspectator.com.au/article/2013/2/15/business-spectator/technology-spectator-adobes-pricing-smokescreen">for making token concessions in the IT Pricing debate</a>. Such statements have been seen as a public relations smokescreen.</p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/78yigV0GYGQ?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">Adobe CEO refuses to answer Australian pricing questions.</span></figcaption>
</figure>
<p><a href="http://www.choice.com.au/media-and-news/consumer-news/news/parliament-summons-tech-giants.aspx">CHOICE Australia CEO Alan Kirkland</a> said: “If Adobe was genuine about treating consumers fairly, it would have reduced prices across all of its products.” </p>
<p>Adobe has been reliant upon technological protection measures, digital locks, and geoblocking. Husic suggested that Adobe took a medieval approach to IT pricing, with “regional fiefdoms”. Stephen Jones MP commented that Adobe “digitally handcuffed” its consumers.</p>
<p>Adobe threatened that if geoblocking was prohibited in Australia, it would reconsider its willingness to invest in local IT.</p>
<p><strong>The Microsoft monopoly</strong></p>
<p>The United States multinational software company Microsoft - founded by Bill Gates and Paul Allen - made a <a href="http://www.aph.gov.au/Parliamentary_Business/Committees/House_of_Representatives_Committees?url=ic/itpricing/subs/sub067.pdf">written submission to the inquiry</a>. Microsoft’s <a href="http://www.itnews.com.au/News/337464,microsoft-to-aussies-well-charge-what-you-can-bear.aspx">Pip Marlow appeared before the inquiry</a>.</p>
<p>CHOICE Australia has <a href="http://www.choice.com.au/media-and-news/consumer-news/news/choice-lodges-submission-on-it-price-discrimination.aspx">been damning about prices charged by Microsoft</a>in Australia compared to the United States:
“Software is another product that is broadly the same regardless of where it is sold, yet still attracts price differentials.” Microsoft’s Office Professional 2013 software package costs <a href="http://www.businessweek.com/news/2013-03-21/rihanna-costing-49-percent-more-as-australia-probes-apple-music">A$599 to download in Australia, but merely $399.99 at the United States Web store</a>.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/21570/original/q6xptmbc-1363888574.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/21570/original/q6xptmbc-1363888574.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=786&fit=crop&dpr=1 600w, https://images.theconversation.com/files/21570/original/q6xptmbc-1363888574.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=786&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/21570/original/q6xptmbc-1363888574.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=786&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/21570/original/q6xptmbc-1363888574.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=988&fit=crop&dpr=1 754w, https://images.theconversation.com/files/21570/original/q6xptmbc-1363888574.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=988&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/21570/original/q6xptmbc-1363888574.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=988&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">CHOICE Australia: How Does Price Discrimination Work?</span>
</figcaption>
</figure>
<p>Microsoft has been unapologetic about its price discrimination in relation to its services. The company maintains that “the costs of providing the services - including establishing, maintaining, supporting and advertising the services - needs to be recovered and a profit from those operations derived, in order to contribute to the overall return on the company’s investment”.</p>
<p>Microsoft has long been an intellectual property maximalist, both in terms of litigation and policy debates. Along with <a href="http://www.youngwitness.com.au/story/1366172/court-action-for-radio-stations/?cs=12">Adobe, Microsoft is currently suing a Dubbo radio</a> station for copyright infringement, with the accusatory rhetoric of “software piracy”.</p>
<p><strong>Law reform</strong></p>
<p>Given the great public interest in the inquiry into IT pricing, it will be striking to see whether the Committee will respond to <a href="https://theconversation.com/when-the-price-is-not-right-technology-price-gouging-in-australia-10582">proposed legislative action</a> to address geo-pricing and geo-blocking.</p>
<p>The inquiry has highlighted the need for copyright law reform to protect the interests of consumers. In the wake of <a href="http://www.scotusblog.com/case-files/cases/kirtsaeng-v-john-wiley-sons-inc/">the March 2013 case of <em>Kirtsaeng</em> vs <em>John Wiley & Sons</em></a>, there is a need to reconsider Australia’s ancient parallel importation restrictions.</p>
<p>Similarly, there is a need to revise the copyright laws regarding digital locks - technological protection measures.
Digital locks <a href="https://www.eff.org/pages/unintended-consequences-fifteen-years-under-dmca">have had many unintended consequences</a>- including jeopardizing consumer rights, chilling free expression and scientific research, and impeding innovation and competition. The author Cory Doctorow has been an eloquent critic of digital locks:</p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/nZFg-uq5zBA?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">Cory Doctorow on digital locks.</span></figcaption>
</figure>
<p>In a piece for <a href="http://www.wired.com/opinion/2013/03/you-dont-own-your-cellphones-or-your-cars/">Wired</a>, Kyle Wiens wrote that there was a need for real copyright law reform to unlock content. “Copyright is impacting more people than ever before because the line between hardware and software, physical and digital has blurred … once we buy an object — any object — we should own it.”</p>
<p>The Australian Competition and Consumer Commission (ACCC) has been impressive during the debate over IT pricing in Australia. </p>
<p>The chairman of the ACCC, Rod Sims, <a href="http://www.afr.com/p/technology/accc_to_fight_tech_vendors_9wEo3HsjuRgdZfTHohQ4WO">has observed that his agency</a> will take action if there is evidence of violations of Australian consumer law or competition law. He has observed: “If we can find one where we think the representation made looks to be significantly divorced from reality and we think it’s one of general use, then we’ll certainly take action”.</p>
<p>However, some of the government departments and agencies seemed somewhat apathetic about the topic of IT pricing, and lacking initiative in formulating policy responses - which is disappointing, given the great public interest in the subject.</p>
<p>Ultimately, the inquiry into IT Pricing will be judged by the efficacy of its outcomes - whether they have an instrumental impact in lowering the prices of copyright works in Australia.</p>
<p><strong>International trade</strong></p>
<p>The inquiry into IT pricing, and the interrogation of Apple, Adobe, and Microsoft, has generated much domestic and international interest.</p>
<p>There has been much interest in <a href="http://www.stuff.co.nz/technology/gadgets/8432980/Aussie-MPs-to-grill-tech-barons-on-gouging">New Zealand as to whether there should be a similar inquiry into IT pricing</a>. Northwestern University law students from Chicago have flown from the United States to follow the inquiry. International press agencies - like <a href="http://www.bloomberg.com/news/2013-03-21/rihanna-costing-49-more-as-australia-probes-apple-music.html">Bloomberg</a> and <a href="http://www.bbc.co.uk/news/business-21406745">the BBC</a> - have sought to cover the public grilling of the IT titans.</p>
<p>The inquiry has also raised questions as to the impact of the <em>Trans-Pacific Partnership</em> upon consumer rights. The United States Trade Representative’s controversial proposed ban on parallel importation in that agreement runs counter to both <a href="http://keionline.org/node/1686">recent United States precedent</a>, and the Australian inquiry into IT pricing.</p><img src="https://counter.theconversation.com/content/12878/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Dr Matthew Rimmer is an Australian Research Council Future Fellow, working on Intellectual Property and Climate Change. He is an associate professor at the ANU College of Law, an associate director of the Australian Centre for Intellectual Property in Agriculture (ACIPA), and a member of the ANU Climate Change Institute. Dr Matthew Rimmer receives funding as an Australian Research Council Future Fellow working on "Intellectual Property and Climate Change: Inventing Clean Technologies" and a chief investigator in an Australian Research Council Discovery Project, “Promoting Plant Innovation in Australia”. </span></em></p>Today, an Australian parliamentary committee grilled the IT titans - Apple, Adobe, and Microsoft - on price discrimination against Australian consumers. The IT companies were evasive under questioning…Matthew Rimmer, ARC Future Fellow and Associate Professor in Intellectual Property, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/105822012-11-23T03:57:33Z2012-11-23T03:57:33ZWhen the price is not right: technology price gouging in Australia<figure><img src="https://images.theconversation.com/files/17561/original/vd5tb87b-1352781120.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">When it comes to IT products, Australian consumers pay more than their American counterparts.</span> <span class="attribution"><span class="source">AAP</span></span></figcaption></figure><p>Apple Inc. has often portrayed itself as the champion of consumers, with its advertising campaigns on <a href="http://www.youtube.com/watch?v=HhsWzJo2sN4">“1984”</a>, <a href="http://www.youtube.com/watch?v=ImE8ZyoKUaQ">“Think Different”</a>, and <a href="http://www.youtube.com/watch?v=4ECN4ZE9-Mo">“Rip, Mix, Burn”</a>. However, this reputation has been called into question after Apple refused to appear before the Parliament’s inquiry into <a href="http://www.aph.gov.au/Parliamentary_Business/Committees/House_of_Representatives_Committees?url=ic/itpricing/index.htm">IT Pricing in Australia</a> and explain its pricing policies in Australia. </p>
<p>Apple is not alone. <a href="http://www.theaustralian.com.au/australian-it/it-business/adobe-answers-husic-on-it-pricing-inquiry/story-e6frganx-1226433994831">Adobe</a>, Amazon.com, Nintendo, <a href="http://www.smh.com.au/technology/technology-news/it-price-wars-government-no-white-knight-20120829-24zpl.html">Lenovo</a>, and others have come under criticism for price discrimination in Australia. Furthermore, there has been a concern that information technology companies have engaged in a deliberate strategy of <a href="http://www.technologyspectator.com.au/it-price-inquiry-committee-slams-tech-giants-stonewall-strategy">stonewalling</a> the Australian Parliament.
<a href="http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;db=COMMITTEES;id=committees%2Fcommrep%2Fbef11fc9-4248-404c-bd88-1879f279d8c0%2F0004;query=Id%3A%22committees%2Fcommrep%2Fbef11fc9-4248-404c-bd88-1879f279d8c0%2F0000%22">CHOICE Australia</a> has provided compelling evidence to the inquiry that Australian consumers suffer from significant and unjustified price discrimination - particularly in respect of music downloads from iTunes, PC games, console games and computer software. For instance, Apple has been selling AC/DC’s complete collection on iTunes for $229.99 in Australia - but only $149 in the United States.</p>
<p>Given <a href="http://www.smh.com.au/technology/technology-news/aussies-gouged-on-tech-prices-inquiry-hears-20120730-23991.html">the evidence presented to the inquiry</a>, there is a need for a range of legislative and regulatory changes to help stop unjustified price discrimination against Australian consumers of digital products. In particular, there is a need for reforms to copyright law and disability law, as well as action under Australian consumer law and competition law.</p>
<p><strong>Copyright law and consumer rights</strong></p>
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<figcaption><span class="caption">Ed Husic MP discusses the IT pricing inquiry on The Drum.</span></figcaption>
</figure>
<p>Since Federation, Australian consumers have suffered the indignity and the tragedy of price discrimination. From the time of imperial publishing networks, Australia has been suffering from cultural colonialism. <a href="http://purl.library.usyd.edu.au/sup/9781920898458">John Keating complained in the Australian Parliament</a> that import monopolies resulted in “blackmail”.</p>
<p>In respect of pricing of copyright works, Australian consumers have been gouged, ripped-off, and exploited. In <a href="http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/cth/HCA/1977/52.html">the Cook Books case</a>, Justice Lionel Murphy lamented that parallel importation restrictions were being used to raise the prices of copyright works: “Copyright is being used to manipulate the Australian market.”</p>
<p>Digital technologies have not necessarily brought an end to such price discrimination. Australian consumers have been locked out by technological protection measures; subject to surveillance, privacy intrusions and security breaches; locked into walled gardens by digital rights management systems; and geo-blocked.</p>
<p>In the <a href="http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/cth/HCA/2005/58.html">Sony Mod-Chip case</a>, Justice Michael Kirby feared that digital rights management systems also had an anti-competitive effect:</p>
<p><em>“In effect, and apparently intentionally, those [technological] restrictions reduce global market competition. They inhibit rights ordinarily acquired by Australian owners of chattels to use and adapt the same, once acquired, to their advantage and for their use as they see fit.”</em></p>
<p>The <a href="http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22committees/commrep/28ce1b90-91fd-436d-aef7-7d087bc1f764/0001%22">Australian Recording Industry Association</a> appeared before the Committee, and made an emotional case about the threat posed to the music industry by copyright piracy.</p>
<p>In response, Ed Husic MP observed: “If you are on the one hand trying to pitch at an emotional level to stop piracy, what do you reckon consumers think when you then use price discrimination to justify the way the costs are structured here in Australia?”</p>
<p><strong>Amazon.com and access to knowledge</strong></p>
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<figcaption><span class="caption">Cory Doctorow discusses E-Book Pricing at Bloomsbury’s London Office.</span></figcaption>
</figure>
<p>There has been much concern about the ownership of digital products bought from Amazon.com. Linda Morris captured this sentiment with her piece, <a href="http://www.smh.com.au/technology/technology-news/no-such-thing-as-ownership-when-its-an-ebook-20121102-28phs.html">“No such thing as ownership when it’s an e-book.”</a>, in which the position of readers was compared to that of tenant farmers.</p>
<p>In a pithy submission, <a href="http://www.aph.gov.au/Parliamentary_Business/Committees/House_of_Representatives_Committees?url=ic/itpricing/subs/sub076.pdf">Andrew Leigh MP lamented</a> the technological restrictions on the Amazon Kindle. He emphasised the need to take into account larger considerations about access to knowledge: “Access to the world’s knowledge is as important as access to the world’s music, and Australians have a right to be treated equitably by Amazon.com.” </p>
<p>The author <a href="http://craphound.com/context/Cory_Doctorow_-_Context.xhtml">Cory Doctorow commented</a> upon the problem of digital rights management (DRM) in respect of Amazon: “The Kindle is a "roach motel” device: its license terms and DRM ensure that books can check in, but they can’t check out". He laments: “Readers are contractually prohibited from moving their books to competing devices; DRM makes that technically challenging; and competitors are legally enjoined from offering tools that would allow readers to break Kindle’s DRM and move their books to other devices.”</p>
<p><strong>The book famine and disability rights</strong></p>
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<figcaption><span class="caption">Ruth Okediji interviews Chris Friend of the World Blind Union (WBU)</span></figcaption>
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<p>Article 30 (3) of the United Nations Convention on the Rights of Persons with Disabilities (2006) provides that ‘States Parties shall take all appropriate steps, in accordance with international law, to ensure that laws protecting intellectual property rights do not constitute an unreasonable or discriminatory barrier to access by persons with disabilities to cultural materials’.</p>
<p>In June 2012, <a href="http://www.hreoc.gov.au/about/media/news/2012/62_12.html">the disability commissioner Graeme Innes</a> encouraged the Australian Government to address this issue. He observed that only 5% of all books produced in Australia are published in accessible formats such as large print, audio or braille, while in developing countries it is just 1%. He commented: “People with a print disability throughout the world are currently experiencing a "book famine”, yet the Australian government has failed to take action that could change the situation.“ He observed: "Australia could lead the change to international law in this area and, at little cost to us, provide the opportunity to read to millions more people with print disability throughout the world.”</p>
<p><a href="http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;db=COMMITTEES;id=committees%2Fcommrep%2F8b3e43fb-82a1-4d21-9a70-1a1ef2e6ea25%2F0001;query=Id%3A%22committees%2Fcommrep%2F8b3e43fb-82a1-4d21-9a70-1a1ef2e6ea25%2F0000%22">Wayne Hawkins, the disability policy advisor for ACCAN</a>, appeared before the committee. He commented that “there is a significantly higher impact on vulnerable consumers and particularly consumers with disability”.</p>
<p>He observed that “the assistive technology that people like myself—people who are blind—use such as the braille readers, braille displays, are considerably more expensive in Australia”.</p>
<p>It is time the legislation was introduced to put an end to these discriminatory practices under copyright law, and related fields. </p>
<p>There needs to be greater effort to pass a <a href="http://www.huffingtonpost.com/2012/07/26/blind-treaty-2012_n_1706543.html">Copyright Treaty for the Blind</a> at the World Intellectual Property Organization.</p>
<p><strong>Consumer law and the digital economy</strong></p>
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<figcaption><span class="caption">Rod Sims of the ACCC on consumers, competition, and regulatory issues.</span></figcaption>
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<p>In 2012, the current chairman of the Australian Competition and Consumer Commission Rod Sims <a href="http://www.accc.gov.au/content/index.phtml/itemId/1050215">emphasised that one of his key priorities was addressing the challenges of the digital and online economy</a>. </p>
<p>Sims observed: “The two main challenges – for the ACCC - are: 1. Ensuring consumers enjoy the same protections in the digital and online economy as they do elsewhere; and 2. And, crucially for competition, ensuring the digital and online economy produces the benefits of new and innovative competitors to challenge incumbents that it promises, and that this promise is not eroded by anti-competitive conduct.”</p>
<p>The ACCC have been involved in a number of high-profile consumer law disputes with <a href="http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/cth/FCA/2012/646.html">Apple</a>, <a href="http://www.hcourt.gov.au/cases/case_s175-2012">Google</a>, and <a href="http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/cth/FCAFC/2012/20.html">Optus</a>. The Commission also made some cautionary remarks about <a href="http://www.theage.com.au/technology/technology-news/warning-to-firms-on-facebook-comments-20120812-242vr.html">Facebook and advertising standards</a>. The ACCC has also taken firm action against companies <a href="http://www.accc.gov.au/content/index.phtml/itemId/1084336/fromItemId/142">engaging in misleading and deceptive carbon price hikes</a>.</p>
<p>The ACCC should build upon its success investigating cases of misleading and deceptive advertising by IT companies by also considering issues of price, the terms of access to a particular product or a particular service and the need for international warranties.</p>
<p><a href="http://www.afr.com/p/technology/accc_to_fight_tech_vendors_9wEo3HsjuRgdZfTHohQ4WO">Rod Sims has warned</a> that the ACCC will take legal action if vendors lie about the reasons for price discrimination against Australian consumers.</p>
<p><strong>Competition Law, Mergers, and Conspiracies</strong></p>
<p>In light of alleged overseas conspiracies involving price fixing by Apple and large multinational publishers, there is clearly a need for the ACCC to investigate whether there have been any such restrictive trade practices in respect of information technology products in Australia.</p>
<p>On the 11th April 2012, <a href="http://www.justice.gov/atr/cases/applebooks.html">the United States Department of Justice</a> filed an antitrust lawsuit against Hachette, HarperCollins, Macmillan, Penguin and Apple Inc. over the pricing of e-Books. The Department alleged that the defendants had conspired to raise retail prices of E-Books in violation of Section 1 of the Sherman Act. <a href="http://online.wsj.com/article/SB10001424052702304444604577337573054615152.html">United States Attorney-General Eric Holder noted</a>: “As a result of this alleged conspiracy, we believe that consumers paid millions of dollars more for some of the most popular titles.” </p>
<p>There is also a need to consider the impact upon consumers and competition of mergers of large content providers - such as that between the record companies <a href="http://www.themusicnetwork.com/music-features/industry/2012/09/20/why-the-accc-approved-the-universalemi-deal/">Universal and EMI</a>; the publishers <a href="http://www.reuters.com/article/2012/10/29/us-pearson-idUSBRE89S0C120121029">Penguin and Random House</a>; and <a href="http://www.huffingtonpost.com/2012/10/30/disney-buys-lucasfilm-star-wars-7_n_2045632.html">Disney and Lucasfilm</a>.</p>
<p><strong>The Trans-Pacific Partnership and Parallel Trade</strong></p>
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<figcaption><span class="caption">The Trans-Pacific Partnership.</span></figcaption>
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<p>Parliament should make reforms to copyright law, disability law, consumer law, and competition law in order to address the problem of discriminatory IT pricing in Australia.</p>
<p>In addition, there is a need to ensure that trade agreements such as the proposed <a href="https://theconversation.com/a-mercurial-treaty-the-trans-pacific-partnership-and-the-united-states-7471"><em>Trans-Pacific Partnership</em></a> do not harm the interests of Australian consumers in obtaining a fair price for digital products.</p>
<p><a href="http://digitalcommons.wcl.american.edu/research/21">Sean Flynn</a> of Information Justice has warned that the United States Trade Representative has been pushing for parallel importation restrictions. He notes: “The issue of parallel trade arises because rights owners desire the ability to segment markets and determine their own prices and policies for entry into each market”.</p>
<p>There is a need to ensure that the Australian Parliament’s IT Pricing inquiry is not undermined or subverted by the <em>Trans-Pacific Partnership</em>.</p><img src="https://counter.theconversation.com/content/10582/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Dr Matthew Rimmer is an Australian Research Council Future Fellow, working on Intellectual Property and Climate Change. He is an associate professor at the ANU College of Law, an associate director of the Australian Centre for Intellectual Property in Agriculture (ACIPA), and a member of the ANU Climate Change Institute. Dr Matthew Rimmer receives funding as an Australian Research Council Future Fellow working on "Intellectual Property and Climate Change: Inventing Clean Technologies" and a chief investigator in an Australian Research Council Discovery Project, “Promoting Plant Innovation in Australia”. </span></em></p>Apple Inc. has often portrayed itself as the champion of consumers, with its advertising campaigns on “1984”, “Think Different”, and “Rip, Mix, Burn”. However, this reputation has been called into question…Matthew Rimmer, ARC Future Fellow and Associate Professor in Intellectual Property, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.