Legal and Economic Aspects of Online Price Discrimination
21 Pages Posted: 31 Mar 2016
Date Written: March 30, 2016
Online shops can offer each customer a different price. Such personalised pricing can lead to advanced price discrimination based on perceived or assumed characteristics of consumers. An online shop can recognise a customer, for instance through a cookie, and categorise her as someone with a high or low willingness to pay, as a person who likes to compare products extensively before making a choice, or as a person who buys on impulse. The shop could personalise prices accordingly.
This paper studies the issue of online price discrimination from both a legal and an economic perspective. In economics, price discrimination and its effects on the welfare of producers (firms) and consumers have been studied extensively. The link between price discrimination and competition policy has received due attention as well. However, the link between online personalised pricing and non-economic concepts such as privacy and discrimination based on race, gender, or sexual orientation, received little attention so far. This paper aims to fill this gap by applying insights from various fields of law in Europe, such as data privacy law, consumer protection law, and non-discrimination law.
From an economic perspective, online price discrimination can under certain circumstances be welfare enhancing. Uniform prices often lead to a situation in which some consumers are not served, even though they have are willing to pay a price higher than the production costs. This reduces welfare both for consumers and suppliers, relative to a situation in which suppliers can charge these consumers a price that is only slightly above marginal costs.
However, On the even such welfare enhancing price discrimination could lead to distributional concerns, as it may deprive consumers of most of their surplus. Moreover, price discrimination in combination with market power will aggravate the distributional concerns associated with market power: a dominant position in the market will generate network effects which fuel the opportunities for price discrimination, and which may in turn tilt the market further towards monopolisation.
Abstracting from such economic concerns, many people simply regard online price discrimination as unfair or manipulative. The paper discusses how this dislike of personalised pricing may be linked to its economic aspects and how it may be understood through the lens of behavioural economics (e.g. regret aversion), other norms or values, such as equality or non-discrimination. This relates to the question which forms of personalised pricing may be acceptable and which not.
Next, a legal perspective is taken. The paper analyses what general contract law, consumer protection law, and non-discrimination law say about online price discrimination. It also examines whether European data protection law, in its current form and under the new Data Protection Regulation, applies to personalised pricing. Data protection law applies if personal data are processed. This paper argues that personalised pricing generally entails the processing of personal data and that therefore, data protection law generally applies. This has several policy implications. Most notably, it implies that a company must inform customers if it personalises prices.
Keywords: price differentiation, price discrimination, cookie, data protection law, OBA, behavioural targeting, discrimination, consumer law, personalised communication
JEL Classification: K12, K00, D10, D11, D20, D30, D40, D60, D70, L00, L11, L20, L51
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