Why Online Shoppers See Different Prices for the Same Item
This is the latest installment of "Question of Note," in which we take a listener's question — your question! — and find just the right the person to answer it. See them all here as we go along.
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Listener Aaron Oesting, who describes himself as a "digital nomad," moves around a lot. And in the process, he read a few articles (like these in LifeHacker and the Wall Street Journal) on a phenomenon that has him worried:
“I read a magazine article about how online retailers vary pricing based on the location of your IP address, so if you live in a more expensive community you might get more expensive pricing. And my question is: Is that practice right? And then second, am I really getting the best deal when I comparison shop online?"
To answer Aaron's question, we brought in Bob Phillips, a professor of business at Columbia University's Business School.
So the answer to his Aaron's question?
Yes, online retailers will set their prices based on how much they believe you're willing to pay, and the technology keeps getting more sophisticated. Amazon changes prices all the time based on time of day. Most large retailers experiment with different prices and adjust accordingly minute by minute.
Dynamic pricing isn't a new practice. In fact, haggling and adjusting price has been around much longer than the "fixed" prices we're used to in most brick and mortar stores. But for the most part, consumers today really, really, really don't like the idea that prices are going to shift on them, unless they're thinking about airfares (though that didn't go over so well at first either). Take the pushback against Coca-Cola's proposed summertime price hike.
However, according to Phillips, it's price discrimination that can present an actual problem: People being charged different prices based on a certain demographic factor, including location and/or socioeconomics.
"Price discrimination differentiation is simply put trying to charge different people, different prices for the same item, based on their willingness to pay."
Robert J. Hunter, Director of Insurance at the Consumer Federation of America, has spent quite a bit of time over the past few years digging into what he calls insidious price discrimination in the insurance industry. Insurance companies have always set rates based on risk, including assumptions based on gender and age. That said, the heavily-regulated industry does not allow consumers with the same agreed-upon risk to pay substantially different rates. And that, he says, is exactly what he found happening. The people least likely to comparison shop -- including, The Brookings Institute says, many lower-income consumers -- actually found themselves paying higher rates than their contemporaries. Consumer Reports calls this the 'Schmo Tax."
Thus, thanks to Aaron, we're bringing you a story that was until recently buried in actuarial literature meant for insurance brokers.
Hey, we do what we can.
Want to see whether you're paying different prices for the same goods and services? Try setting up a proxy server or VPN to obfuscate your IP address.
And if you want to get the best deal online? Shop around. Big Data will see you doing it and adjust your rates accordingly.