22 Feb 2016

Personalized online shopping is both good and bad

Esmee writes*

We’ve all been there. After creating an account on a website in order to search for a hotel room offer for your next holiday, you re-open the webpage and on the side of your screen you see advertisements with discounts for the exact same hotel.

The increasing possibilities for “personalized shopping” are becoming more popular. Websites suggest products based on search history and account information. This form of personalized shopping, which has increased in frequency in the past few years due to technological advances, is often praised as a good development that saves effort for people with little time.

However, it also has disadvantages. A recent study [pdf] conducted by researchers from Northeastern University has shown that online retailers customize the prices of certain products and manipulate the products that are being shown, based on personal characteristics, such as age, income, or purchasing history.

These actions maximize profits by so-called “price discrimination”: retailers charge different prices for different customers for the same product, based on their price elasticity of demand. This strategy is based on the fact that not every consumer has the same sensitivity to price changes. Students for example, who have a low income and live off their STUFI [student subsidy], might be more sensitive to price changes of hotel rooms and represent an elastic demand, whereas business travelers are less sensitive to price changes and represent an inelastic demand. Companies use this information to charge the maximum price a specific consumer is willing to pay.

The Northeastern study has shown that online retailers such as Orbitz, a travel company, use this strategy to, for example, show MAC users more expensive hotels than PC users, because they assume that MAC users are willing to pay more for hotel rooms than PC users. Similarly, they show discount prices solely to their members. The technological advances have made it relatively easy for such companies to do this, and such strategies have significantly boosted sales.

Such practices are often argued by consumers to be unethical, and some even think it should be illegal. However, companies simply argue that they use “all the tools” that are available to them, in order to find out which products are appreciated most by their customers. In that case, as long as technology keeps advancing, the best solution for consumers to avoid price discrimination might simply be to search for products in multiple ways, using different browsers, accounts, and devices.

Bottom Line Whereas personalized online shopping is often seen as a good development, it has significant disadvantages for consumers when online retailers use people’s personal information to price discriminate and raise their profits.

* Please comment on these posts from my microeconomics students, to help them with unclear analysis, other perspectives, data sources, etc.

1 comment:

Bo-Peter Laanen said...

The economics of online advertisements based on personal information or cookies (which create the ads on other websites of things a user has bought or searched elsewhere) is surely controversial, though none the less there is room for the savvy internet user to fight back. Several options come to mind, though each has their own side effects on the economics of the internet as well.

Refreshing a web browser's cookies is a simple method that allows the user to delete their bread crumb internet trial, though this may be very inconvenient to the user. Why? Cookies also keep track of a user's website preferences and generally make the use of frequently used site easier to user. Every time cookies are deleted, the user has to spend additional time to fill in details, hence slowing down the speed at which a user can traverse the internet. This is of course an opportunity cost that most internet users are not willing to take. Thus I do not recommend this option.

The next option, and one that I use personally, is to use an AdBlocker. Google Chrome Browser users can easily install AdBlocker Plus as a plug in, allowing them to browse the internet without those flashy ad banners or reminders of items previously bought. This works just about everywhere, including on Facebook, Google, and YouTube. Yes even those video ads you get at the beginning of YouTube videos. What happens when us users don't see advertisements on our social media streams? Well those companies don't get the advertisement revenues that make up the majority of their revenue streams. What about the little guy's on the internet barely making money off of their internet advertisements? If a user feels inclined to support the producer's of a website, it is possible to turn off the ad blocker specifically for that site. Some make the argument that this should also be taken into account for YouTuber's many of whom make their livelihoods on these ad revenues, which they do work for hard! YouTube Red might be the answer for this (see another article on this site for more on that). Bottomline on adblockers: consumers have power in their hands to choose which websites receive revenue. Website content producers can also look at other revenue opportunities via sponsorships. A picture of a logo can't be blocked after all.

To get back to price discrimination based on a user profile, there is simple steps a user can take do price comparisons. Often by launching a private (Safari) or incognito (Chrome) browser it is possible to discover alternative prices for the same flight. This is because cookies are no longer visible, and in some cases it is not possible for the website to know your location (normally discovered via IP address). Apparently, just using Google Chrome lowers prices due to a user profile that will likely seek out more deals (http://www.groovypost.com/howto/news/dynamic-pricing-use-chrome-pay-less/).

In summary, it is possible to divert price discrimination, putting power back in the hands of the consumer. It is unfortunate that green internet users are taken advantage of, but price discrimination is unfortunately the digital version of haggling or profiling.

Extra note, there is a company (StyleScript.com) that is trying to develop a new form of personalized shopping by actually profiling a user based on their style tastes and preferences. The company hopes to be an alternative to the dumb ads we see today.

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