Have you ever had that situation where you suddenly hear of something and then it pops up two or three times in rapid succession? And it just forces you to think about things you literally hadn’t thought of in years (or perhaps never)?
I just had one of those. On May 11, I read an article in the Washington Post titled, “How a panic over egg prices hatched a bad law.” With “prices” in the headline, I just had to read it, especially with the subtitle, “Price testing yielded a false narrative that grocery stores were using personal data to charge customers.”
In it, Brian Albrecht, Chief Economist at the International Center for Law and Economics, talked about a study Instacart did last September whereby they tested different prices for the same carton of eggs at the same store at the same time — $3.99 for some, $4.79 for others.
The narrative that went viral was that the algorithm had learned who would pay more and thus charged them the higher price. He reported that 40+ bills targeting algorithmic pricing in food retail (does that sound familiar?) have been introduced in at least 24 states, and Maryland is now the first state to ban the practice, known as “surveillance pricing.”
Of course, that’s not what Instacart did. They were not changing the price based on personal data; they were likely simply running an A/B test on randomized groups which is a rather common practice in online retail.
Then on May 12, I received an email from Mayer Brown with the subject line, “New Class Action Targets ‘Surveillance Pricing’: What Businesses Using Personalized Pricing Need to Know.”
That’s twice in two days that I heard about fights against algorithmic pricing with its attendant risk that the public, and lawmakers, completely misread what’s going on. Given the recent legal and legislative history of algorithmic pricing, I fear a risk of being swept up in another bout of hysteria. To be clear, I have not yet seen any evidence of this happening. I merely fear it and think it wise to get ahead of the curve on the possibility.
The important thing is that there is a big difference between “surveillance” pricing and “dynamic” pricing…they are NOT synonymous!
Gemini provides a description with clear definitions and differences:
|
|
Dynamic Pricing (Market-based) |
Surveillance Pricing (Individual-based) |
|
Basis |
External factors like supply, demand, competitor pricing, and time |
Personal data, including browsing habits, shopping frequency, income, and location |
|
Target |
All customers see the same price at a given time |
Individual consumers (personalized pricing) |
|
Examples |
Ride-sharing surge pricing, airline tickets, and hotel rates |
A user on an expensive device paying more, or price adjustments based on previous search behavior |
|
Transparency |
Generally more transparent; consumers often understand why prices fluctuate |
Low; pricing is opaque and difficult for consumers to compare |
|
Acceptance |
Widely accepted as a market-driven practice |
Low, with rising regulatory focus for being intrusive |
These differences matter. An apartment operator raising the rent on a home because of high leasing velocity and low availability engages in dynamic pricing. This is legal, even with concepts in the new Maryland law. An operator charging a single mom more for a renewal because they know that person would experience more hassles moving and is thus less price sensitive to a renewal increase engages in surveillance pricing. Interestingly, this would be illegal under Fair Housing…as would most surveillance pricing approaches since they inevitably would penalize some protected class.
Surveillance pricing isn’t automatically a bad thing. Loyalty programs, coupons, senior or military discounts are all forms of surveillance pricing that are viewed rather benignly.
So, let’s be crystal clear about this. No reputable commercial pricing and revenue management (PRM) software engages in surveillance pricing. Not our REBA Rent…and not any of our main competitors. There is one small one I know of, so it’s important for anyone purchasing PRM software to be aware of these distinctions and be careful in their choice of systems.
As for Instacart’s price testing that kicked off the chain of events leading to Maryland’s new law? It’s still legal since it’s not surveillance pricing. The fact that nothing in Maryland’s law prohibits the practice that started the debate in the first place is more social commentary which is best left for a different blog than ours 😊