Today, the fine-graining of data and the isolation of consumers has changed the game. The old idiom is that every man has his price. But that’s literally true now, much more than you know, and it’s certainly the plan for the future.
“The idea of being able to charge every individual person based on their individual willingness to pay has for the most part been a thought experiment,” said Lina Khan, chairwoman of the Federal Trade Commission. “And now … through the enormous amount of behavioral and individualized data that these data brokers and other firms have been collecting, we’re now in an environment that technologically it actually is much more possible to be serving every individual person an individual price based on everything they know about you.”
Economists soft-pedal this emerging trend by calling it “personalized” pricing, which reflects their view that tying price to individual characteristics adds value for consumers. But Zephyr Teachout, who helped write anti-price-gouging rules in the New York attorney general’s office, has a different name for it: surveillance pricing.
“I think public pricing is foundational to economic liberty,” said Teachout, now a law professor at Fordham University. “Now we need to lock it down with rules.”
Price gouging
It all began with the new world of aviation that followed the Airline Deregulation Act, signed into law in 1978 by President Jimmy Carter. By gutting the Civil Aeronautics Board, which had tightly managed airlines, Carter did away with a slew of regulations, including price controls capping airfares.
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The airlines reorganized an existing quasi-independent service they owned called the Airline Tariff Publishing Company (ATPCO), headquartered near Dulles Airport outside of Washington, D.C. By today’s standards, ATPCO wasn’t especially high-tech, but it essentially functioned as a clearinghouse to share information across the industry, helping airlines to set airfares. Weeks in advance, airlines would send ATPCO scheduled airfares along with detailed route information, seat numbers, and discount loyalty offers. None of this was public information. ATPCO in turn compiled this data and made it available to other airlines, so they could respond accordingly.
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In hindsight, by not enforcing major penalties or banning ATPCO entirely, the DOJ effectively greenlit conduct that its own legal team deemed unlawful. Other actors across the economy took the hint and a proliferation of third-party price-fixing schemes sprung up, now seen in housing, agriculture, hospitality, and even health care.
These new pricing intermediaries are similar to ATPCO, but don’t just act as information exchanges between competitors. They actually set the prices for an entire industry by using machine-learning algorithms and artificial intelligence, which are programmed to maximize profits. To arrive at optimal prices, these software applications aggregate vast amounts of relevant market data, some of which is public and much of which is competitively sensitive information given to them by their clients.
Each algorithmic scheme has its own distinct features, but they all share the same underlying philosophy: Competing on price in an open market is a race to the bottom, so why not instead coordinate together to grow industry’s profits? In other words, it’s another version of the notorious Peter Thiel adage that “competition is for losers.”
For decades, the most ruthless form of American capitalism centered on cost-cutting. […] The results can be seen in ruined industrial ghost towns across the Midwest, and businesses strip-mined by leveraged buyouts. But there is a tipping point to all this cost-cutting. There’s only so much fat to cut before you hit bone. The strategy eventually had diminishing returns, and without a new strategy, profits would hit a plateau. That wouldn’t cut it on Wall Street.
Enter the age of recoupment. Instead of cutting costs, the new mantra is raising prices.
Price hikes are old as dirt. But today’s companies have reinvented them. They’re using a dizzying array of sophisticated and deceitful tricks to do something pretty darn simple: rip you off.
The new tricks have fancy new names. Charging you more for less is a corporate practice known as “shrinkflation.” Revealing part of the total price up front, only to tack on all manner of ridiculous-sounding fees and service charges: Industry insiders call that one “drip pricing.” Stealing your online shopping data to predict the maximum price you would be willing to pay for your next e-commerce purchase: That’s personalized pricing. Using software to coordinate pricing with other companies to make sure they don’t undercut each other: That’s algorithmic price-fixing (or plain old-fashioned collusion). And charging you more for an item when supply is limited: That’s Jay Powell’s favorite, dynamic pricing.
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With prices rising everywhere they turned, nobody could discern which were justified by companies’ own rising costs, and which were truly excessive. Highly engineered “dark patterns,” where people are tricked into signing up or paying more, were chalked up to the way things are now, rather than something more insidious. If a price surges, if a fee is tacked onto the bill, the culprit is the economy, not the company shoving their hands into your wallet.
CEOs hardly contain their delight on calls with investors. From the CFO of the international conglomerate 3M patting their team on the back for doing a “marvelous job in driving price,” to the CFO of the largest beer importer in the United States, Constellation Brands, who promised investors the company would “make sure we’re not leaving any pricing on the table” and “take as much as we can,” to the tech CEO who copped to “praying for inflation” and doing his “inflation dance,” these corporate executives were clear on one thing: Inflation was very good for business.
This report concludes that business pricing has added significantly to inflation in recent times.
‘Profit push’ or ‘sellers inflation’ has occurred against a background of high corporate concentration and is
reflected in the surge of corporate profits and the rise in the profit share of Gross Domestic Product. There
is much support for the view that prices have added much to inflation. This is to be found in research from
OECD, IMF, BIS, European Commission, European Central Bank, US Federal Reserve Bank, Bank of England
and many think tanks globally and locally and many detailed research studies. Claims that the rise in profit
share in Australia as explained by mining do not hold up. The profits share excluding mining has risen and
energy and other prices associated with mining have been a very significant contributor to Australian inflation.