Economics focus

They're watching you

Oct 16th 2003
From The Economist print edition
The internet is eroding privacy. t a!so a!!ows unprecedented price
discrimination. "re the two re!ated#
$O% T&E internet' no(ody )nows you're a dog'$ ran the caption of a
cartoon in the %ew *or)er in 1++3' showing one grinning pooch at the
)ey(oard and another !oo)ing on. n fact' p!enty of peop!e )now not on!y
that you're a dog' (ut !ots of other things a(out you' inc!uding your
favourite (rand of dogfood. The internet and associated techno!ogies
have had a devastating impact on privacy. The effect' argues "ndrew
Od!y,)o of the -niversity of .innesota in a new paper$' wi!! (e to usher
in an unprecedented !eve! of price discrimination.
That is not what most peop!e e/pect. 0ecause the internet ma)es it
easier to compare prices' the consensus has (een that se!!ers' a(i!ity
to charge different amounts to different (uyers wi!! (e eroded. %ot so'
argues .r Od!y,)o. Than)s to the internet' !ots more opportunities for
price discrimination are emerging. The most o(vious e/amp!e is air!ines.
"ir!ine we(sites now discriminate in e/traordinari!y refined ways'
setting fares that may vary not 1ust (y c!ass (ut (y the date of (oo)ing
and the time of the f!ight. 2ome manufacturers are starting to do the
same3 4e!! 5omputer' .r Od!y,)o notices' charges different prices for
the same computer on its we( pages' depending on whether the (uyer is a
state or !oca! government' or a sma!! (usiness. "nd such discrimination
is (eing e/tended to other parts of the economy. 62TO7' a non8profit
organisation that ma)es avai!a(!e on!ine (ac) num(ers of scho!ar!y
1ourna!s' ana!yses the e!ectronic data it thus accumu!ates to charge
!i(raries and academic institutions different fees' depending on their
use and circumstances.
Of course' not a!! products and services can (e priced in such ways.
9rice discrimination wi!! (e undermined if secondary mar)ets deve!op in
which peop!e who can (uy at !ow prices rese!! to those who wou!d
otherwise have to pay higher prices. n the case of air!ines' that
cannot happen3 government security re:uires that a passenger's name must
match the one on the tic)et. The resu!t is that the tic)et cannot (e
so!d to some(ody who might otherwise have to pay more for it. t is
harder to discriminate in sophisticated ways among train passengers'
say' (ecause there are fewer identity chec)s to prevent tic)ets (eing
reso!d.
;enera!!y spea)ing' goods are easier to se!! on than services. That is
why "merican private universities are e/treme!y good at charging
students who can afford high fees and giving re(ates to those who can't<
and a!so why drug companies have (een so unwi!!ing to set prices for
"42 drugs that discriminate in favour of poor countries. The e!ectronic
co!!ection of data' which is the conse:uence =and cause> of the erosion
of privacy on!ine' provides new ways to see who is !i)e!y to pay what
and to monitor whether secondary mar)ets are deve!oping.
9!ay fair
9rice discrimination' points out .r Od!y,)o' ma)es economic sense.
5ustomers are wi!!ing to pay different amounts for the same product or
service' depending on how we!! off they are and how much they need it. "
company wi!! ma/imise its revenues if it can e/tract from each customer
the ma/imum amount that person is wi!!ing to pay. n primitive street
mar)ets' p!enty of price discrimination goes on' through a mi/ of
hagg!ing and !oca! )now!edge. 0ut in supermar)ets and restaurants' the
goods genera!!y have a sing!e' pu(!ished price tag.
"nd that is how customers prefer it. 9eop!e genera!!y resent the idea
that some(ody e!se shou!d pay !ess than they have had to do. n the 1+th
century' rai!ways charged more for some freight routes than others. 0ut
customers (itter!y resented that. n "merica' they eventua!!y won
government intervention' in the form of the nterstate 5ommerce "ct of
1??@$$the first serious federa! regu!ation of private (usiness'$ .r
Od!y,)o o(serves.
Today's customers wi!! a!so hate the trend towards price discrimination
on and through internet8associated techno!ogy' even if some of them
en1oy !ower prices and are (etter off as a resu!t. 5ompanies wi!!
therefore have to find increasing!y c!ever ways of hiding it. They
a!ready discriminate in the non8e!ectronic wor!d3 petro! stations' for
e/amp!e' charge more in some parts of town than in others. 0ut two
techni:ues !oo) !i)e!y to f!ourish3 !oya!ty c!u(s' which e/tract
additiona! information from mem(ers and give them discounts< and
$(und!ing$' or the offering of pac)ages of services' part!y in order to
ma)e it harder for consumers to compare the prices of individua!
components.
The wor!d of e!ectronic communications is fu!! of e/amp!es of (und!ing'
such as the charging arrangements offered (y te!ecoms companies and (y
internet8service providers. 5urious!y' individua! customers turn out
great!y to prefer paying a sing!e fee for' say' un!imited te/t8messaging
or +0 hours of te!ephone ta!)8time' rather than paying for each item'
one at a time$even though that might (e a cheaper option. .any (und!ing
arrangements ta)e the form of site8!icensing agreements' under which
companies or other organisations pay a sing!e fee for un!imited on!ine
access to a data(ase' say' or a software pac)age. " company may fee! it
has a (argain if it pays a sing!e fee that gives a!! its emp!oyees
access$even though it might cost !ess to charge on!y the emp!oyees who
are !i)e!y to ma)e use of the pac)age. .r Od!y,)o's e/p!anation is that
at !east with such $(und!es$ (oth individua!s and companies can (e sure
of the tota! (i!!. Aith charging (y item' they cannot.
2uch devices offer the (est way to s:uare the circ!e. "s e!ectronic
media e!icit more persona! information' discrimination wi!! increase.
.ost consumers are !i)e!y to resent it. On!y (y disguising what is
happening can se!!ers discriminate' yet )eep (uyers happy.
$ $9rivacy' Economics and 9rice 4iscrimination on the nternet$.
"vai!a(!e on!ine at
http3BBwww.dtc.umn.eduBCod!y,)oBdocBprivacy.economics.pdf