Recently, Delta Air Lines announced it would expand its use of artificial intelligence to set airfare prices. This move sparked concern among flyers and politicians, and Delta later said it would not use AI to set individualized prices. But more businesses are interested in using AI this way. The practice has already spread across a range of industries.
Customized pricing – where each customer receives a different price for the same product – is a holy grail for businesses because it boosts profits. With customized pricing, free-spending people pay more while the price-sensitive pay less.
I’m worried that AI pricing models lack transparency and could unfairly take advantage of financially unsophisticated people.
Custom pricing through bargaining exists in some industries. Economists refer to this as “first-degree” or “perfect” price discrimination, which is “perfect” from the seller’s perspective because it allows them to charge each customer the maximum amount they’re willing to pay.
Currently, most American shoppers don’t bargain but instead see set prices. Set prices have several advantages for businesses. For one thing, they allow stores to hire low-paid retail workers instead of employees who are experts in negotiation.
Before the advent of AI pricing, many companies determined prices using a “cost-plus” rule. Cost-plus means a business adds a fixed percentage or markup to an item’s cost.
The problem with cost-plus is that it treats all items the same. For example, Costco sells wine in many stores. People buying expensive Champagne typically are willing to pay a much higher markup than customers purchasing inexpensive boxed wine. Using AI gets around this problem by letting a computer determine the optimal markup item by item.
AI needs a lot of data to operate effectively. The shift from cash to electronic payments has enabled businesses to collect what’s been called a “gold mine” of information.
To prevent customized pricing, some states have laws requiring retailers to display a single price for each product for sale. Even with these laws, it’s simple to do custom pricing by using targeted digital coupons, which vary each shopper’s discount.
There are ways to get around customized pricing. All of them depend on denying AI programs data on past purchases and knowledge of who you are. First, when shopping in brick-and-mortar stores, use paper money. Yes, good old-fashioned cash is private and leaves no data trail that follows you online.
Second, once online, clear your cache. Your search history and cookies provide algorithms with extensive amounts of information. Many articles say the protective power of clearing your cache is an urban myth. However, this information was based on how airlines used to price tickets. Recent analysis by the Federal Trade Commission shows the newest AI algorithms are changing prices based on this cached information.
Third, many computer pricing algorithms look at your location, since location is a good proxy for income.
Lastly, often to get a better price in face-to-face negotiations, you need to walk away. To do this online, put something in your basket and then wait before hitting purchase. I recently bought eyeglasses online. As a cash payer, I didn’t have my credit card handy. It took five minutes to find it, and the delay caused the site to offer a large discount to complete the purchase.
The computer revolution has created the ability to create custom products cheaply. The cashless society, combined with AI, is setting us up for customized prices. In a custom-pricing situation, seeing a high price doesn’t mean something is higher quality. Instead, a high price simply means a business views the customer as willing to part with more money.
Using cash more often can help defeat custom pricing. In my view, however, rapid advances in AI mean we need to start talking now about how prices are determined, before customized pricing takes over completely.
Jay L. Zagorsky is an associate professor at the Questrom School of Business at Boston University. Distributed by The Conversation and The Associated Press.
