Conventional wisdom says the Internet gives consumers more power than ever. After all, the Web is full of sites with product details and price comparisons that shed light on purchasing the previously inscrutable: mortgages, cars, insurance, airline tickets and the like. Priceline and eBay even let consumers set the prices they want to pay.
However, the Internet also gives sellers more info about consumers than ever before. Eventually, two people might get the same pop-up ad for the same T-shirt, but one ad pitches it for $15 while another says it's $10. That is known as price discrimination, and it's not necessarily bad. Economists say it can make producers more efficient and promote competition. However, even in an uncertain future, one thing is sure: Consumers will hate it.
This vision of the Internet is the basis of a new analysis from Andrew Odlyzko, a former Bell Labs mathematician now at the University of Minnesota's Digital Technology Center. Odlyzko expects price discrimination to become more pervasive not only because so much personal data is being collected in online commerce but also because technology limits what people can do with online content.
On some levels, price discrimination can make producing goods and services more efficient. Say an airline has 10 seats left on a flight and needs $4,000 in revenue to make the trip profitable. If the airline charges $400 for each seat, that might not tempt enough people for the airline to make a profit. However, if the airline finds two business travelers willing to pay $1,200 per seat, it can charge a more enticing $200 for the remaining eight tickets.
Odlyzko believes that price discrimination simply could make people feel bad. After all, in the airline example, the people in the $1,200 seats may think they were robbed, while people in the cheap seats might kick themselves for not pursuing an even better deal. Even worse, the economy could suffer if technology helps suppliers engage in price discrimination against producers of important goods and services.
Odlyzko isn't entirely pessimistic. He expects the Internet to allow new tools for detecting price discrimination, even as companies try to hide it by bundling goods or services together at an attractive—but customized—price.
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