MARIA GONZALEZ-MIRANDA , IVAILO IZVORSKI–When online markets for consumer goods and services first emerged, they were hailed for empowering shoppers, encouraging competition, and reducing transaction costs. But much as changed since then, and if current trends continue, online markets will become markets in name only.
WASHINGTON, DC – Information technology is not just transforming markets; it is also making them ubiquitous, particularly for household consumers. From pretty much anywhere in the world, one can now search out goods and services, compare prices from multiple sellers, and give detailed shipping and delivery instructions, all with a mouse click or a screen tap.
No doubt, this is a dream come true for anyone who grew up shopping in real, hands-on markets, with sellers displaying their wares on store shelves, on public squares, or along dusty roads. In many cases, routine purchases required long waits or extensive bargaining. But with online markets, savings are generated in many dimensions, and transaction costs are sharply reduced at all stages of the process.
Online markets have the potential to improve consumer welfare substantially, by fueling competition on price, efficiency, and customer experience, whether through search engines or single platforms such as Amazon. And if consumers spend smaller shares of their disposable income on each purchase they make, they will have room to consume more, thus boosting overall economic activity.
But are online markets meeting this potential?
If anything, the description above is already dated. Nowadays, online retailers use consumers’ Internet activities and other personal data to deliver “targeted pricing.” To take one particularly controversial example, airlines now use travelers’ data to customize ticket prices in ways that essentially cancel out the savings once offered by online markets.
Indeed, if you search online for a more expensive car or a more expensive vacation, that fact will be documented by tracking cookies or other means of online surveillance. And with these data, digital advertisers and retailers will offer you more expensive watches, home furnishings, or airline tickets than they would to a lower-income user searching within the same categories. And in some cases, they might even offer different prices to different people for the same good or service.
Part of the segmentation of online markets involves web companies testing price points to estimate precisely the demand curve and its links to household characteristics. For example, a May 2017 article in The Atlantic notes that, “As Christmas approached in 2015, the price of pumpkin-pie spice went wild. … Amazon’s price for a one-ounce jar was either $4.49 or $8.99, depending on when you looked.”
This form of price discrimination is legal as long as it does not occur on the basis of race, ethnicity, gender, or religion. Taken to the extreme, it means that data about our preferences, incomes, and spending patterns could soon be used to determine an individually calibrated price for all transactions. In that scenario, 100% of consumer surplus could potentially be extracted 100% of the time.