Price Discrimination: How Your Data is Being Used Against You

Photo by Lukas Blazek on Unsplash

Did you know that you might be paying more than your friend is for the same airline ticket?

This idea is called price discrimination, which is when firms gain extra revenue and improved cashflow by charging consumers different prices for identical products depending on their desire to pay. 

You may not be aware of it, but price discrimination takes place in many transactions from buying plane tickets to buying clothes from Topshop. For price discrimination to take place, firms need to have information on the consumer to know how much they are willing to pay. 

How do firms use price discrimination?

Firms use browser history, cookies, loyalty cards, or any other sneaky ways to find out how you shop.

First, firms need to identify your ’Price Elasticity of Demand,’ which is how sensitive you are to a price change. For example, if a pair of jeans was originally £30, but then the price increased to £35, a price-sensitive person might not buy it whereas a price-insensitive person would still buy the jeans. From this data, the company would know who they should advertise the higher-priced jeans to.

Firms also need to be able to retain their customers and prevent them from switching to a different supplier by having a unique service that cannot be replicated or by selling a good at a specific moment in time. Both these ideas allow for customer retention even after a price change.

Firms use price discrimination to retain their customers as they will only increase the price of products for people who will be willing to buy it after the price rises. Therefore, they increase their revenue while keeping the same demand for their goods!

There are three types of price discrimination; the sub-markets that firms put their consumers in determines each type of price discrimination. Firms either separate their market into individuals, groups with particular characteristics, or last-minute buyers where firms can charge each group a different price.

A real-world example of price discrimination is travel websites online. These websites use your browsing history and cookies to decide what to display, whether it be holiday bundles or hotel stays. The catch is that you probably will not realise price discrimnation is happening as it is a ‘nudge’ meaning that suggestions are used to influence your behaviour and decision-making. Therefore, when websites display more expensive holidays because they know you can afford it, it is not making it compulsory to buy the holiday package. Instead, it is pushing thoughts into the consumer’s head. Therefore, price discrimination works as it influences consumers’ behaviour.

Although the Robinson-Patman Act of 1936 prevents price discrimination, many firms like Amazon, Skyscanner, and Apple still get away with price discrimination.

To protect yourself from price discrimination online, try going in incognito mode, setting price alerts, shopping-in store, or even becoming a member of a store. Firms are hugely incentivised by profit, so they will raise prices any chance they can. 

Price discrimination is a frustrating concept, but with research and smart decisions, you can avoid it.