White House Return to Big Data Focuses on Price Discrimination

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Today, the White House released an interim progress report detailing the Administration’s efforts on privacy in big data since its landmark report last spring. The update highlights the President’s recent calls for new privacy legislation, including efforts on student privacy and the Consumer Privacy Bill of Rights, and also calls for deeper understanding of differential pricing — or what is commonly called price discrimination. The White House Council of Economic Advisors released a companion report, exploring how companies can use the information they collect to more effectively charge different prices to different customers.

The nineteen-page report notes that industry is already using big data for targeted marketing and beginning to experiment with personalized pricing. According to FPF Senior Fellow Peter Swire, the report is “a readable discussion of price discrimination from an economists’ perspective. In a non-ideological way, it explains the terminology used by professional economists.”

Much of the report summaries existing concerns about the use of big data and price discrimination in general. Most economists, the report notes, consider price discrimination in the context of differences among consumers in their willingness to pay for good. While the report focuses on this sort of value-based pricing, it also notes the need for further discussion about the impact of big data on “risk-based” pricing, where sellers charge prices based on differences in the cost of serving different groups.Without much elaboration, the report cautions that “[b]ig data encourages risk-based pricing by enabling more fine-grained measurement of various risks,” citing the ability to track individual driving behaviors as a potential example.

As for the rise of value-based pricing, the report concedes that “current knowledge is mainly anecdotal.” It suggests that companies are either “moving slowly or remaining quiet, perhaps due to fears that consumers will respond negatively, but also because the methods are still being developed.”

It concludes that many concerns about price discrimination could be addressed through existing antidiscrimination, privacy, and consumer protection laws, and it recommends that companies provide more transparency about industry data practices. Swire further explained that two quotations distill the report’s key takeaways:

 (1) “The challenge for policy in this area will be to promote the application of big data where it can discourage excessive risk-taking and help solve adverse selection problems, while preventing unfair discrimination against consumers who have little control over newly-measureable risk factors.”

(2) “However, given the speed at which both the technology and business practices are evolving, commercial applications of big data deserve ongoing scrutiny, particularly where companies may be using sensitive information in ways that are not transparent to users and fall outside the boundaries of existing regulatory frameworks.”

 While further conversation about the potentially negative impacts of big data are warranted, the report takes a bullish approach toward concerns about price discrimination. As our digital footprints grow, the report states that broad trends suggest price discrimination is not yet having a negative impact on online consumer activities, and instead, consumers “are making use of the Internet and the variety of choices and tools it provides to ensure that they get a good deal.”

-Joseph Jerome, Policy Counsel