How your personal data could make shopping more expensive as retailers anticipate how much you can pay

Maria Gonzalez-Miranda and Ivailo Izvorski say online shopping was supposed to bring down prices for consumers but big data has changed the game in an unexpected way

Consumers

Maria Gonzalez-MirandaandIvailo Izvorski

Published: 1:45pm, 18 May 2018

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Information technology is not just transforming markets; it is also making them ubiquitous, particularly for household consumers. From pretty much anywhere in the world, one can now search for goods and services, compare prices from multiple sellers, and give detailed shipping and delivery instructions, all with the click of a mouse or a screen tap.

No doubt, this is a dream come true for anyone who grew up shopping in real, hands-on markets, with sellers displaying their wares on store shelves, on public squares or along dusty roads. In many cases, routine purchases required long waits or extensive bargaining. But with online markets, savings are generated in many dimensions and transaction costs are sharply reduced at all stages.

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People shop at the wet market in Lok Fu in October 2017. While shopping for groceries in markets is still popular in Hong Kong, online shopping has taken over for other commodities. Photo: Sam Tsang

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Online markets have the potential to improve consumer welfare substantially, by fuelling competition on price, efficiency and customer experience, whether through search engines or single platforms such as Amazon. And if consumers spend smaller shares of their disposable income on each purchase, they will have room to consume more, thus boosting overall economic activity.

Online retailers use consumers’ internet activities and other personal data to deliver ‘targeted pricing’

But are online markets meeting this potential?

If anything, the description above is already dated. Nowadays, online retailers use consumers’ internet activities and other personal data to deliver “targeted pricing”. For example, airlines now use travellers’ data to customise ticket prices in ways that essentially cancel out the savings once offered by online markets.

Indeed, if you search online for a more expensive car or a more expensive holiday, that fact will be documented by tracking cookies or other means of online surveillance. With this data, digital advertisers and retailers will offer you more expensive watches, home furnishings or airline tickets than they would a lower-income user searching within the same categories. In some cases, they might even offer different prices to different people for the same item or service.

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An Amazon employee stacks shelves at a distribution hub in New York to cope with customers’ last-minute holiday orders in December 2016. Online shopping offers consumer convenience and the possibility of lower prices. Photo: AP

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Part of the segmentation of online markets involves web companies testing price points to estimate precisely the demand curve and its links to household characteristics. For example, an article in The Atlantic noted that, “As Christmas approached in 2015, the price of pumpkin-pie spice went wild … Amazon’s price for a one-ounce jar was either US$4.49 or US$8.99, depending on when you looked.”

Every consumer will be forced to pay the maximum of what they are willing to spend for each purchase

This form of price discrimination is legal as long as it does not occur on the basis of race, ethnicity, gender or religion. Price discrimination will not happen for every item and service, and the trend could be tempered by competition from offline retailers or new entrants vying for market share by offering lower prices to everyone. Alternatively, the data collected in some industries could become so widely shared across competing firms that they will all converge on a single price for each individual. In fact, companies today are probably already facing this kind of price segmentation, especially those that have amassed a lot of public data.

This suggests that markets could potentially become extremely fragmented, so consumers’ choices will be strictly limited to what has been selected according to their data profiles. This decreases overall welfare, because every consumer will be forced to pay the maximum of what they are willing to spend for each purchase, keeping nothing “extra” for themselves.

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Making matters worse, rapidly rising capital and skill requirements for production, among other factors, is sustaining a trend towards less competition among companies in advanced economies. This, together with making consumers pay the maximum they can, will have far-reaching macroeconomic implications. For consumers, the slice of the economic pie made available by their disposable incomes will shrink in real terms, leading to a fall in aggregate demand. Thus, at the end of the day, there will be less for everyone.

Amid the ongoing debate about how the dominant tech firms should be allowed to use personal data collected from users online, many of these firms have continued to decide these questions for themselves – and, by extension, for the rest of us, too. We must ensure that these decisions are compatible with the creation and maintenance of healthy, competitive markets. After all, a system that benefits consumers benefits everyone.

Maria Gonzalez-Miranda is practice manager, and Ivailo Izvorski is lead economist, in macroeconomics, trade, and investment global practice at the World Bank. Copyright: Project Syndicate

This article appeared in the South China Morning Post print edition as: Online shopping could become more expensive

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