The Rise of Behavioural Discrimination

Abstract

The ongoing developments in e-commerce, big data and big analytics have transformed our online environment and the way we shop for goods and services. By increasing transparency, access to markets, and by reducing market barriers and our search costs, technological developments promise to lower the prices we pay, increase the selection of goods and services we are offered, and yield greater innovation. Indeed, we all expect to be better off in comparison to past decades when competition was less intense and largely confined to local offering by brick-and-mortar shops.And yet, is it possible that the initial promise of online competitiveness may give way to new dynamics that reduce our welfare? Are we still the winners in this story of innovation, or have we become targets of a new form of discrimination that increasingly extracts our wealth? In the online world, our anonymity and our ability to identify a single competitive price are becoming a thing of the past. Virtual competition heralds the age of personalisation with its benefits, and possible pitfalls. As a White House report summarized: “[s]ellers are now using big data and digital technology to explore consumer demand, to steer consumers towards particular products, to create targeted advertising and marketing offers, and in a more limited and experimental fashion, to set personalized prices.” Our article explores how e-commerce and the personalisation of our online environment can give rise to behavioural discrimination, a durable, more pernicious form of price discrimination. Online behavioural discrimination, as we explore, will likely differ from the price discrimination we have seen in the brick-and-mortar retail world in several important respects: First is the shift from third-degree, imperfect price discrimination to near perfect price discrimination; second is the overall increase in consumption as the demand curve shifts to the right; and third is the durability of behavioural discrimination. In Part I we consider the online shift from imperfect price discrimination to near perfect, or first-degree, price discrimination. We explore how online sellers, in tracking us, collecting data about us, and segmenting us into smaller groups can better identify our reservation price.Part II explores how sellers can use Big Data to target us with the right emotional pitch to increase overall consumption. Part III discusses how, as more online retailers personalize pricing and product offerings, it will be harder for consumers to discover a general market price and to assess their outside options. Personalisation and data-driven network effects can make behavioural discrimination more durable. Given the differences between price discrimination of yesteryear and online behavioural discrimination, Part IV examines whether we should treat the latter with the same indifference that we have treated price discrimination, or does it merit a fresh look?