The politics of price discrimination

Next time you get a bargain online, think about the relative cost to your privacy
Written by Rupert Goodwins, Contributor

There's an old journalistic adage: follow the money. It's a principle that privacy proponents would do well to follow, especially when confronted by a populace that really couldn't care less.

Apathy is the biggest ally of those who nibble away at our rights. People have a strange idea of what rights are worth defending: try dropping the speed limit on motorways by five miles an hour and the cries of outrage will violate most weapon test ban treaties. But say that you're about to track everyone's movements by mobile phone and sell the lot to supermarkets, and all you'll get is a silent shrug.  Nobody cares about losing their rights and privacy until something goes badly wrong -- by when, it's too late. But pin the tail on the donkey of dosh and you'll get their attention.

An excellent and most interesting paper by Andrew Odlyzko of the University of Minnesota explicitly links privacy and economics by showing how the Internet facilitates price discrimination -- a subject that's guaranteed to get people's blood up.

Price discrimination has always been intrinsic to business. Whether it's you letting the chief from the next village get a good goat-to-beer exchange rate because you fancy his daughter or The Economist  offering six month subscriptions at tuppence ha'penny for new readers, the principle is the same. One person's business is worth more to you than another, and you're prepared to pay.

Price discrimination only works if you can tell your customers apart and control how you sell to them, and this is where privacy online and off crops up. In the first case, the Internet is an Aladdin's Cave of personal secrets: how much of your economic and personal life is mediated through the keyboard these days? Imagine a market researcher sitting in your monitor, taking copious notes and flogging them off to the highest bidder -- that's how the Internet looks to a marketing department. That's before the great databases from retailers, finance companies, government departments and service providers are merged, mined, purified and flogged on -- and the only thing stopping it is your right to privacy.

The second part of price discrimination -- making sure you charge the right people the right prices -- is where the right to anonymity comes in. The airline industry thrives on knowing its customers: because of security reasons, tickets have to be sold to known people and can't easily be transferred. That means low-cost carriers like RyanAir can discriminate massively, safe in the knowledge that nobody can buy up loads of cheap tickets and flog them to people who would otherwise only qualify for the wallet-draining latecomers specials. The more times you have to divulge your personal ID, the better the marketeers like it.

People love getting a better deal than the next guy -- the trouble kicks off when the next guy finds out and innate notions of fairness kick in. There's even a parable about it in the New Testament, where a vineyard owner pays late-starting workers the same amount as those who'd been slogging their guts out all day. The original workers felt hard done by: Jesus explained that it was up to God to dispense largesse as he saw fit, and anyway you got what you signed up for. Theologically sound, but lousy people management.

As Odlyzko's paper says, how you present your discrimination is often more important than what it is. Coca Cola experimented with soft drink machines that put the price up on hot days: once this became public knowledge, the idea was dead. People felt that the company was taking advantage of their vulnerability. But had Coca Cola presented it as a machine that discounted when the weather turned cold, they'd have got prizes. From an economic viewpoint, both approaches are the same; from a PR perspective, they're chalk and cheese (both with added phosphoric acid).

Perversely, it's the poor who suffer most from price discrimination. If you've got a lot of money, you'll be attractive to companies who'll fall over themselves to throw some loss leaders your way: if you can only afford a couple of quid, then you'll have less choice and higher prices. And don't even think about the cost of credit. With the Internet, not only will the classic digital divide exclude those without a thousand quids' worth of computers and a thirty quid a month broadband habit, but the best deals will always be there for those who can demonstrate the plumpest purchasing history.

The three main problems with loss of data privacy are in order of importance the increased power the state and big business get over all individuals, the increased discrimination against those least able to defend themselves, and the way you may be more efficiently drained of your cash. Privacy campaigners may have to swallow their sense of moral scale and push the last idea the hardest. Rest assured it's the main motivator for the other side: it's not just journalists who follow the money.

Editorial standards