What is 'surveillance pricing' and why is the Biden administration cracking down on it?

By Venessa Wong and Zoe Han

Consumer advocates are concerned that companies want to use personal data to optimize pricing and boost sales

Technology tracking people's search and shopping history, their location, and even what device they use may personalize not only the advertisements they see, but the prices they are offered when they shop online - potentially creating a biased marketplace optimized for consumers to click the "buy" button.

The mechanics of "surveillance pricing," as the Federal Trade Commission is calling it, are now the subject of inquiry by the agency, which last week requested information from eight companies "that advertise their use of AI and other technologies along with historical and real-time customer information to target prices for individual consumers."

These companies collect consumer data and offer retailers and vendors pricing-strategy services. The regulator did not accuse them of wrongdoing, and said its goal is to understand the types of services being offered, what data is collected and how, what businesses are using these services, and the potential impact on surveilled consumers and the prices they pay.

MarketWatch reached out to the eight companies - Mastercard (MA), Revionics, Bloomreach, JPMorgan Chase (JPM), Task Software, PROS, Accenture (ACN) and McKinsey & Co. - and received responses from three of them.

What is surveillance pricing?

Surveillance pricing is a form of personalized pricing based on shoppers' individual characteristics. Those include demographics, location and browsing history, which are increasingly harvested from their activity online and in apps and processed by algorithms and AI, as well as shoppers' willingness to buy a product.

Surveillance pricing maximizes people's "willingness to pay, not the ability to pay," according to a June article in the American Prospect.

"If you really want or need something, and the seller knows it, with personalized pricing you will pay more," the article said. "Some might call exploiting the human impulse of desire unfair ... economists call it an efficient allocation of resources."

Who stands to be affected most by surveillance pricing?

"The premise of surveillance pricing is that I'm going to charge you a different price than other people, based on what I know or think I know about you," R.J. Cross, director of the consumer privacy program at PIRG, told MarketWatch. "The thing about these systems is they aren't perfect. They make assumptions based on our data, and sometimes those assumptions are wrong."

Cross cited a hypothetical example in which a nanny caring for a child in a wealthy neighborhood could get charged more for a product or service because of location tracking.

If people are constantly being charged different prices "that are changing all the time based on factors that [they] don't have access to and don't understand," it makes it very hard to budget, she added.

Lastly, Cross said, for people with low impulse control or mental-health conditions that lead to impulsive behavior, personalized pricing increases their risk of overspending. For example, she said, for people with bipolar disorder, "social-media posts can be analyzed to detect manic episodes. Mania can prompt overspending. I'd be very worried about dynamic pricing in this context."

Is surveillance pricing a real practice?

Companies do appear to be engaging in this practice. The American Prospect article cites several examples: In a 2015 experiment designed by two University of Chicago economists, ZipRecruiter, which connects businesses with jobseekers, asked prospective clients about their location, industry and employee benefits, then used an algorithm to deliver tailored prices based on their responses. Even though 60% of clients paid less with personalized prices, ZipRecruiter's profits went up 84%.

"In 2012, travel site Orbitz steered Mac users to pricier hotels, after learning that they tended to spend $20 to $30 more per night. The Wall Street Journal found out and Orbitz stopped," the American Prospect article also notes. "The Princeton Review was charging more for SAT prep to ZIP codes that contained a high percentage of Asians; the company stopped asking for ZIP codes. (It now appears to get the information it needs for differential pricing from a user's IP address.)"

An Expedia Group (EXPE) spokesperson said while the company did not own Orbitz when the experiment ran, "a small group of users of certain operating systems may have seen higher star-rated properties show up first in their search results," but the prices were the same. The spokesperson added that "this test only ran for a brief period of time more than a decade ago."

A Princeton Review spokesperson said the company "does not differentiate prices based on geography or IP addresses."

ZipRecruiter (ZIP) did not immediately respond to a MarketWatch request for comment.

Why is the FTC looking into this?

The agency said it wants to understand the impact of such practices on privacy, competition and consumer protection.

"Firms that harvest Americans' personal data can put people's privacy at risk. Now firms could be exploiting this vast trove of personal information to charge people higher prices," FTC Chair Lina Khan said in a statement. "Americans deserve to know whether businesses are using detailed consumer data to deploy surveillance pricing, and the FTC's inquiry will shed light on this shadowy ecosystem of pricing middlemen."

What do the companies have to say?

MasterCard said it is currently reviewing the request from the FTC and will cooperate in this process.

Revionics said in a statement to MarketWatch that its AI price-optimization software "does not, in any manner, use individual consumer data," but does consider market-level factors such as competitive prices and historical sales data to recommend prices, including lower prices, that are "beneficial for both consumers and the retailer" and that "will win the loyalty of their target customers." "Revionics does not, in any way, conduct operations related to the surveillance of consumers," the statement said.

A Bloomreach spokesperson said the company "welcomes the opportunity to assist the FTC's industry inquiry, along with other industry leaders." "We believe in fair competition and the protection and education of consumers, and are committed to that pursuit while providing the consumer with a better, more personalized experience," the spokesperson said.

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-Venessa Wong -Zoe Han

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07-30-24 1032ET

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