Transparency of Behavior-Based Pricing 

31 Dec 2019

Marketing

Xi Li, Krista J. Li, Xin (Shane) Wang 

Published in Journal of Marketing Research, February 2020 

Regular customers often find that the reward for their loyalty is higher prices. For example, telecommunications service providers offer price cuts to new customers while keeping the prices high for existing users. Similarly, online apps frequently offer coupons to lure new customers into buying their products.  

These are just some examples of behavior-based pricing. Nowadays, firms across a wide range of industries are collecting consumers’ digital footprint data (e.g., internet cookies, purchase histories, loyalty cards), and use that data to price discriminate against them. The common practice is to offer high prices to existing customers who value the product or service more, while at the same time lowering the prices for new customers to induce them to make an initial purchase. 

When consumers realize that firms are using their data to price discriminate against them, they often object. To alleviate consumers’ concerns for price discrimination, firms will frequently collect and use consumers’ data secretly. To protect customer privacy and consumer welfare, legislators and consumer advocates worldwide are calling for regulations that mandate that firms disclose their data collection practice to consumers. For example, the General Data Protection Regulation (GDPR) in the European Union requires firms to make their data collection process transparent to individual customers. 

However, do consumers necessarily benefit from such transparency? In a recent study published in Journal of Marketing Research, Xi Li, Assistant Professor of Marketing at the City University of Hong Kong and his coauthors Krista Li of Indiana University and Shane Wang of Western University find that regulations such as GDPR do not benefit customers. 

“In certain cases, regulations even backfire on customers because when they don’t know whether firms are collecting their data, they are afraid of price discrimination and become reluctant to make a purchase,” says Xi Li. 

The firm has to undercut its price to reduce customer hesitation and induce them to make purchases. Such a price cut benefits customers. When data collection becomes transparent, however, firms will raise prices, thereby hurting customers.  

“This research cautions public policy makers that regulations designed to protect consumer privacy and welfare can lead to unintended consequences.  Transparency does not always benefit consumers,” he added.