In one of our last classes we were talking about price discrimination in the case about Coca-Cola’s vending machines, which should adjust the price according to the weather. At the end of the case there were mentioned other possible threats concerning price discrimination and among them internet, which enables retailers to use a lot of information it provides about us. We can see in recent discussions that a lot of retailers have discovered the potential of internet in terms of advertising and promotion gaining from the easy targeting of the customer. Another advantage is undoubtedly the possibility of differentiation of the customers and customization among others in terms of price.
When we shop online, internet gives us the opportunity to easily compare prices across thousands of stores, therefore one would think that the online market is strongly competitive and force the retailers to offer the best price for the customer. On the other hand it also enables businesses to collect detailed information about our purchasing history, preferences, and financial resources and according to that to set different prices to different customers.
How does this price “customization” work? Retailers have couple of possibilities. First one is with help of "Cookies" stored on our PCs. They may alert the retailer to the fact that we have visited a certain site more than once and he can then respond to our “loyalty” by decreasing prices for us. Another option is to track the users’ history and separate so-called bargain hunters, who use specialized servers to compare prices of more retailers and then decide for the cheapest one. These as well as the constant coupon code users may be charged higher initial prices. Stores may also take account of which customers are demanding when it comes to customer service. Repeat complaints or constant returns might then lead again to a higher price.
Surprisingly for many customers, charging different price to different customers is at least most of the time legal. Only if the reason for the difference was some "suspect category" such as race, religion, national origin or gender or if the practice violated antitrust or price-fixing laws, first then it would be illegal. [1]
As an example we can look at the practices of the biggest online retailers. In September 2000, reports said that Amazon.com was offering the same DVDs to different customers at discounts of 30, 35 or 40 percent. Amazon said it was a random price test, which is used to figure out the ideal price point for its product, but after criticism, it decided to refund the difference to anyone paying the higher price and pledged not to do it again. [2] However we can still find complains of Amazon’s customers being charged different prices while using different accounts.
Obviously, when customers find out there are being charged different prices, they feel frustrated and cheated. However, there is a lot of price discrimination around us. Youth fares for trains, paperback vs. hardcover books, advance purchase vs. last-minute airline fares, haggling at bazaars and car dealers, ladies' night at bars, retailers sending coupons to their best customers but ignoring occasional ones. These are just examples of price “customization” if you want. Why do we consider these to be acceptable and are so sensitive regarding online shopping? The price discrimination is often less obvious and customers have less control. On the other hand an advantage of the internet is the possibility to share information and the internet users are known to talk a lot. Each company has to therefore consider the option of loosing large amount of customers when they find their practices out.
[1] http://www.cnn.com/2005/LAW/06/24/ramasastry.website.prices/
[2] http://news.cnet.com/8301-10784_3-9715959-7.html
[3] http://crookedtimber.org/2008/12/22/amazons-price-discrimination/
[4] http://www.washingtonpost.com/wp-dyn/content/article/2005/06/18/AR2005061800070_pf.html
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