April 13, 2024

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To spike or not to spike, the algorithm is the question

To spike or not to spike, the algorithm is the question

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Surprise pricing is something anyone who takes a rideshare on a regular basis is used to. Try calling Uber or Lyft on a rainy day during dinner hour or around school pick-up or drop-off time, and you'll pay more than the usual price — sometimes a lot more.

However, when consumers encounter common online business models like “dynamic pricing” in the brick-and-mortar world, they may revolt. Consider the recent consumer backlash after US fast-food chain Wendy's announced on an earnings call that it was considering increasing burger prices during peak demand — and invested $20 million in new artificial intelligence systems to do so.

The first tweets following the announcement were amusing, with customers joking about arbitrating their lunch. But within a few weeks the social media comments turned ugly and politicians like Senator Elizabeth Warren began attacking the company for “price gouging.” Wendy quickly backed away from the idea.

The same phenomenon has occurred with movie theaters trying to raise seat prices during high demand (although airlines and hotels do this online all the time and most entertainment venues offer regular deals on known slow days). Moreover, surge pricing isn't the only algorithmic maneuver that comes under fire when translated offline to non-digital businesses.

The Federal Trade Commission and the Department of Justice, in the wake of numerous complaints from tenant associations, recently took joint action to combat algorithmic collusion in the residential housing market. Landlords are increasingly using rent maximization programs to keep prices higher than they would be under normal market conditions for tens of millions of apartments across the country.

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As the FTC report on the action noted, “the housing industry is not alone in using potentially illegal collusive algorithms.” The Department of Justice previously obtained a guilty plea to the use of pricing algorithms to set prices in the online resale of goods; She has an ongoing case against the use of algorithmic collusion by meat processors. Meanwhile, there are many private cases brought against hotels and casinos for online price fixing.

Platform technology companies have developed or improved technologies such as dynamic pricing, real-time auctions, data tracking, preferential advertising and all the other tricks of surveillance capitalism. But the behavior we take for granted online becomes somehow more problematic when these methods are deployed in the real world. People get angry about the price of burgers or their rent hikes, but they don't think twice when it comes to the cost of their commute — especially when they book it via an app.

I suspect some of this is due to our expectations that we will all be treated equally — or at least pay the prices set in a fair market — when we enter into an actual business. Historically, this assumption has been well monitored by regulatory bodies. When you walk into a retail store in the real world, you cannot be charged a different price or shown different offers or ads because of your income or skin color.

However, in the online world, this distinction is widespread, not just by large platforms but by any number of companies. As data becomes the oil of the digital economy, we have all become surveillance capitalists.

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Regulators are beginning to grapple with the messy world of algorithmic pricing. For example, the Federal Trade Commission alleged in a recent case against Amazon that the online retailer earned $1 billion from using a secret pricing algorithm that kept markets on various products artificially high. Amazon calls this a gross mischaracterization and says it stopped using the tool years ago. Whoever is right, such efforts take years to be sued. And in some ways, I think we've entered a period of fatigue around technology regulation, which reflects years of incremental gains that haven't really succeeded in bringing more transparency to digital markets as a whole.

The European Digital Markets Act, which came into force last week, may begin to change that. It has certainly already led to some behavioral changes on the part of platform giants, as they are forced to give users more control over their data and open their platforms more to competitors.

But I suspect that more change – and more demands for stricter and clearer regulation – will come as online business models make their way into legacy businesses where people have simply become accustomed to clearer rules. As consumers become more aware of how the tricks of surveillance capitalism are being used at companies they first used in the physical world, it may draw attention to the need for clear, straightforward rules – applying the existing laws of the physical world to online customers' protection.

I would like to see the Federal Trade Commission, for example, use its rulemaking authority to provide a “nondiscrimination” law that would make it illegal to charge people different prices for different goods, regardless of how and where they buy them. What is illegal in the physical world should also be illegal in the online world. This would put the onus on companies to prove they are not causing harm, rather than forcing regulators to create a distinct and more complex system for a particular industry.

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Whether online or off, all businesses should operate by the same rules.

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