Many people had a vision of an online economy where consumers could quickly compare prices, but studies have shown that hidden discounts, the posting of multiple versions of the same product, and other “price obfuscation” strategies are designed to frustrate consumers and keep prices up.[i] Where prices are obscured and sellers impose price discrimination, economic models generally show that overall prices in the economy will end up higher than any model where consumers knew all prices.[ii]
This argument is not one initially made by critics of the online economy but has actually been made by boosters of the opportunity for companies to profit from it. Academic Hal Varian has a long history of examining various models of price discrimination and in 2005, he was appointed Chief Economist for Google. That same year, he co-authored an article in the industry-based academic journal Marketing Science touting the gains for companies engaging in online price discrimination, particularly against what the authors labeled “myopic” consumers who are unaware of how their data is used to structure different prices for them.
Varian and his coauthor argued that “significant initial investments in information technology can lead to competitive advantages” that lock-in user loyalty while collecting personal information to make price discrimination profitable.[iii] In a foreshadowing of both Google’s and other data platforms’ practices, the article argued for companies to lock-in users to particular services, block anonymous participation, and seek out the coveted “myopic” consumers to increase profits.[iv] While various economic models yielded different results in Varian’s and his co-author’s analysis, they generally agreed that, in many cases, any economic value added to the economy due to increased efficiencies “is entirely due to the increased profit received by the seller” while in other cases, consumer welfare actually falls overall.[v] In particular, the “myopic” consumers generally lose out financially under price discrimination using targeted consumer profiling.
Recent research on online advertising reinforces this analysis of consumer loss due price discrimination combined with consumer profiling. Comparing traditional regimes of mass-market advertising to online advertising, researchers Rosa-Branc Esteves and Joana Resende found that average prices with mass advertising were lower than with targeted online advertising.[vi] Similarly, Benjamin Reed Shiller found that where advertisers know consumers willingness to pay different prices, companies can use price discrimination to increase profits and raise prices overall, with many consumers paying twice as much as others for the same product.[vii]
[i] Glenn Ellison and Sara Fisher Ellison, “Search, Obfuscation, and Price Elasticities on the Internet,” Econometrica, Vol. 77, No. 2 (Mar. 2009) at 427-429
[ii] Steven Salop and Joseph Stiglitz, “Bargains and Ripoffs: A Model of Monopolistically Competitive Price Dispersions,” Review of Economic Studies, October 1977, 44(3), pp. 493-510.
[iii] Alessandro Acquisti and Hal R. Varian, “Conditioning Prices on Purchase History,” Marketing Science, 2005 24(3), p. 367.
[iv] Ibid, p. 374.
[v] Ibid, p. 372.
[vi] Rosa-Branc Esteves and Joana Resende, Competitive Targeted Advertising with Price Discrimination, Working Paper, March 2011, http://ideas.repec.org/p/nip/nipewp/08-2011.html (“price discrimination through targeted advertising may be detrimental to social welfare since it boosts industry profits at the expense of consumer surplus.)