Opaque Algorithms Are Setting Prices Just For You

And disclosure that it's happening isn't enough.

Photo credit: Markus Spiske

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Delta Airlines’ leadership recently discussed on an investor call that it is turning pricing decisions for its tickets over to an artificial intelligence system. By year’s end, 20 percent of Delta’s fares will be determined by an AI system created by a company called Fletcherr that is designed to pinpoint exactly how much you, the individual flyer attempting to buy plane tickets, will spend on that particular route for that particular date and time.

“We will have a price available on that airplane at that time that’s available to you the individual … What we have today with AI is a super analyst, an analyst working 24/7 a day, trying to simulate ... real-time what should the price points be?” said Delta’s president. That real-time analysis will be based on data from you, the individual purchaser, that Delta is privy to, though of course the exact secret sauce it’s using to determine its prices is unknown.

This is a practice that’s known (among other names) as “surveillance pricing”: The use of personal, often sensitive data that is plugged into algorithms in order to set individual prices for individual consumers, divorced from any broader, underlying market condition or traditional form of supply and demand.

I suspect that people have grown somewhat numb to forms of surveillance pricing in the airline sector, where it’s a not-very-well-kept secret that searching for a flight online and then returning to search again will often result in higher prices. But surveillance pricing is, we think, growing in many sectors of the economy, though it is often hard to detect absent a corporate leader, like Delta’s above, bragging about it.

The goal is to squeeze every penny possible out of every individual shopper, rendering savvy shopping a thing of the past, because the precise price point you — individually — are willing to pay according to the algorithm is the price you’ll see, and someone else will see a price point tailored specifically to them, rendering comparison shopping impossible.

Surveillance pricing also has a close and equally problematic cousin: Surveillance wages, or the practice of paying workers different, individualized wages for the same work based on their individual characteristics. Surveillance-based pay is most noticeable in “gig” platform based work, such as driving for Uber or delivering groceries via Instacart, but is also popping up in other sectors such as health care.

There are also nascent political efforts to ban or regulate the practice, with some policies, to my eye, obviously destined to be more effective than others.

Early this year, before it flipped to control by the Trump administration, the Federal Trade Commission released an interim report noting that “details like a person’s precise location or browser history can be frequently used to target individual consumers with different prices for the same goods and services.”

After asking several corporations about their data collection and pricing practices, FTC staff found “that consumer behaviors ranging from mouse movements on a webpage to the type of products that consumers leave unpurchased in an online shopping cart can be tracked and used by retailers to tailor consumer pricing.”

“Initial staff findings show that retailers frequently use people’s personal information to set targeted, tailored prices for goods and services — from a person's location and demographics, down to their mouse movements on a webpage,” said former FTC Chair Lina Khan.

The current FTC chair, Andrew Ferguson, dissented from that report and has seemingly put the kibosh on future efforts to examine the effects of surveillance pricing. But state and federal efforts to regulate the practice are growing. Legislators in several states this year — including California, Colorado, and Illinois — introduced bills to ban surveillance pricing entirely.

“Imagine going to buy a pair of shoes or book a hotel room, only to find out you’re being charged more than someone else — for the exact same item — simply because of your ZIP code, income level or online behavior. That’s not a glitch. That’s surveillance pricing. And it’s happening to Californians every single day,” wrote California Assemblymember Chris Ward, who sponsors his state’s version of the legislation. “We’ve outlawed redlining in housing and employment. Retail and online shopping should be held to the same standard.”

Indeed, I’d like to think it offends the average Americans’ sense of fairness to be charged a different price than their neighbor for the same good, simply because of how long they lingered on a website, what else they searched for that day, or what they wrote to their friends on Facebook.

(If you’d like to see Ward and other leaders in this policy space, including Texas Congressman Greg Casar, discuss surveillance pricing in more depth, you can check out this webinar my shop, the American Economic Liberties Project, organized yesterday.)

And to be clear, bans on surveillance pricing would not upend discounts associated with loyalty programs or broad-based identities, such as discounts offered to veterans or seniors. It would simply ban individualized price discrimination based on sensitive personal characteristics gained from online activity, the sort of pricing that renders irrelevant all aspects of supply and demand, market conditions, or comparison shopping.

The one state to have actually advanced something over the finish line in this area is none of those listed above, but New York. There, as part of the state budget, the legislature recently approved and the governor signed into law a disclosure regime requiring corporations that use personalized, algorithmic pricing to disclose to the consumer that they did so.

Specifically, they must directly communicate that “this price was set by an algorithm using your personal data.” You can see an example here, though the law is currently on hold pending a lawsuit filed by the National Retail Federation, claiming the specific disclosure requirement is a First Amendment violation.

Corporate weaponizing of the First Amendment aside, I find this type of disclosure regime underwhelming, to say the least. What is the consumer supposed to do with that information? Is it meant to make them abandon the purchase, in favor of moving to some other site that probably also uses surveillance pricing? My suspicion is it will just make consumers feel a bit bad about living in a price dystopia before clicking “purchase,” and not much else.

To the credit of the law’s sponsors, they did include prohibitions on using certain sensitive data, such as “ethnicity, national origin, age, disability, sex, sexual orientation, gender identity and expression, pregnancy outcomes, and reproductive healthcare” in pricing decisions. But they didn’t eliminate the surveillance pricing apparatus that corporations are using to divorce prices from market conditions.

Taking that latter step is critical to avoid a world in which price opacity is a way of life and no one truly knows what anything really costs, except at the precise moment they’re trying to buy it.

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SIMPLY STATED: Here are links to a few stories that caught my eye this week.

• “As tech giants like Meta build data centers in the area, local wells have been damaged, the cost of municipal water has soared and the county’s water commission may face a shortage of the vital resource.”

• A new study found that certificate-of-need laws — which make opening new health care facilities more onerous — result in worse health outcomes for local communities.

• Hoboken, New Jersey, is the latest city to ban the use of algorithms that facilitate landlord collusion on rent prices.

• More state legislators are attempting to stop monopoly utilities from charging ratepayers for their political activities. (Read more on this issue here.)

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— Pat Garofalo