Web Coupons, Privacy, and Price Discrimination

Suppose you’ve got a successful business, selling your product to a diverse set of customers. Life is good. But you’d like to increase profits even more. What should you do?

One option from the MBA playbook (among many) is to think creatively about your pricing. Maybe there’s a way to distinguish your customers from each other and charge them different prices. Perhaps you can charge higher prices to some of your existing customers without driving them away or charge lower prices to folks who aren’t yet buying from you, or a combination of the two.

Businesses have myriad ways of doing this but, not surprisingly, the web has opened up new vistas. Saturday’s New York Times has an interesting article about the extent to which web coupons can be used to distinguish customers, track their behavior, and optimize marketing and pricing strategies (ht Diana):

The coupon efforts are nascent, but coupon companies say that when they get more data about how people are responding, they can make different offers to different consumers.

“Over time,” Mr. Treiber said, “we’ll be able to do much better profiling around certain I.P. addresses, to say, hey, this I.P. address is showing a proclivity for printing clothing apparel coupons and is really only responding to coupons greater than 20 percent off.”

That alarms some privacy advocates.

Companies can “offer you, perhaps, less desirable products than they offer me, or offer you the same product as they offer me but at a higher price,” said Ed Mierzwinski, consumer program director for the United States Public Interest Research Group, which has asked the Federal Trade Commission for tighter rules on online advertising. “There really have been no rules set up for this ecosystem.”

The web thus offers new ways for companies to pursue the holy grail (from their point of view) of pricing: the ability to personalize prices for each potential customer.

Needless to say, this is sometimes bad news for consumers. After all, increased information can allow firms to jack up prices to consumers that the firms believe are unlikely to stop buying.

Less appreciated, however, is the fact that this can benefit consumers as well. For example, increased information can sometimes help firms offer lower prices to select customers who wouldn’t otherwise choose to purchase.

Without further information, it’s hard to know how such creative pricing will affect consumers in the aggregate. Except that the variety of prices will increase, making more of the marketplace look like the airline industry, in which it sometimes seems as though every seat was sold for a different price.