FTC Eyes Firms' Use Of Data to Personalize Pricing

"The Federal Trade Commission (FTC) is seeking information about how artificial intelligence and other technological tools may allow companies to vary prices using data they collect about individual consumers' finances and shopping habits.

The FTC said its study aims to reveal the inner workings of personalized pricing, a way of varying prices down to the individual level that has long been the holy grail of marketing. The commission says the algorithms and models that drive pricing strategies are opaque and may rely on surveilling consumers' online footprints.

"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," Chair Lina Khan said in announcing the review.

The FTC is issuing civil subpoenas to financial companies and consultants that help companies decide pricing strategies: Mastercard, JPMorgan Chase, McKinsey, Accenture, Revionics, Bloomreach, TASK and PROS. Their clients tend to be in the retail, restaurant, grocery, travel, finance and hospitality industries, officials said.

Revionics said that its software recommends optimal pricing to retailers but doesn't use any individual consumer data. Its software can recommend price decreases as well, the company said. A Mastercard spokesman said the company was reviewing the FTC's request and would cooperate with the inquiry. Other companies that received the FTC's request didn't respond to messages seeking comment.

FTC officials said they decided to undertake the study after hearing claims that public companies make on earnings calls about their pricing power. They also cited consultants' advertisements about the prowess of their models.

Price discrimination among different consumer groups is a common strategy in marketing. Companies try to maximize profits by offering prices that are acceptable to different groups of consumers, defined by attributes such as age, socio-economic status and for certain goods and services.

But online advertising and data analytics have made it easier to target smaller groups of consumers. The FTC's reference to "surveillance pricing" suggests it believes that consumers don't understand how their personal information may be used to tailor prices to them.

Some of the FTC's concern stems from the growth of a similar concept, dynamic pricing, which allows companies such as grocery stores and fast-food restaurants to quickly vary prices during busy periods.

Consumers have rebelled against dynamic pricing in some contexts, such as when fast-food operator Wendy's considered it, but it has long been used by airlines, hotels and ride-hailing services.

Consumers have little insight into the reasons that prices change, and the agency should know if there are significant privacy and competition risks that companies don't disclose, officials said.

The FTC is seeking information about the types of pricing services that the eight consultants offer, the data they use to generate pricing models, the types of consumers targeted and the impact on prices.

Executives at retailers such as Lowe's, Kroger and GoodRx have talked about using consumer data to deliver personalized pricing to shoppers. The companies said they mostly do so by offering discounts through loyalty programs.

Lowe's finance chief Brandon Sink said last month during a conference that the goal of the company's DIY loyalty program is to increase repeat visits to its stores and to be able to market products on a more personal basis.

"We're going to continue to leverage that data, continue to drive personalized offers, personalized pricing," Sink said.

Some companies have talked about pushing higher prices to consumers with the help of personalization.

"We've been very careful in how we manage our price up," said Verizon Consumer Group Chief Executive Sowmyanarayan Sampath during a conference in May. "It goes back to how we orchestrate this. With personalization, we are able to give offers that are targeted at customers."

The FTC has written similar studies about drug middlemen and the mergers-and-acquisitions of technology giants such as Meta Platforms and Apple. It recently launched one examining investments in artificial intelligence by Microsoft and Alphabet.

Under Khan, the commission has also said it would begin drafting new federal rules targeting online surveillance and lax data-security practices by technology companies. If adopted, the rules could impose significant new responsibilities on businesses that handle consumer data, including potentially barring certain kinds of data collection and handling practices." [1]

1. FTC Eyes Firms' Use Of Data to Personalize Pricing. Michaels, Dave; Pacheco, Inti.  Wall Street Journal, Eastern edition; New York, N.Y.. 24 July 2024: A.1.