Dynamic Pricing's Dark Side

Dynamic pricing—changing prices via software based on demand and user profiles—has moved far beyond airline seats and Uber rides. Today, e-commerce giants and retailers use sophisticated algorithms to offer unique prices and promotions based on what they can determine about you.

While originally marketed as a way to improve market efficiency, this "innovation" has raised urgent questions regarding consumer harm, discrimination, and a total lack of transparency.

Algorithms That Know Your Wallet

In 2022, the FTC issued a warning regarding "opaque algorithms" used to set personalized prices without accountability. These systems use a vast array of data points to infer exactly what you are willing to pay:

01 Your Browsing History

02 Your Precise Geographical Location

03 Past Purchasing Behavior

04 The Device You Use (e.g., Mac vs. Windows)

"When prices are different because of what a company knows about you, that’s not just market pricing—that’s price discrimination cloaked in technology."
— Ed Mierzwinski, Consumer Advocate

Price Gouging by Another Name?

A 2023 Wall Street Journal study found that some retailers adjust prices based on shoppers' previous high-priced purchases or how long they took to abandon a shopping cart. More strikingly, the study noted different prices for Mac and Windows users, suggesting that platforms assume Mac users have a higher "willingness to pay."

Disparity through Discriminatory Impact

Dynamic pricing often has a discriminatory effect even if unintended. By using "proxy variables" like ZIP codes or historical data, algorithms can indirectly penalize protected classes. Analysis from the Federal Reserve Bank of Cleveland found that personalized pricing creates greater inequalities, with lower-income customers often charged higher prices on average than wealthier, more informed shoppers.

The Transparency Crisis Unlike a brick-and-mortar store where a price is posted on a shelf, algorithmic pricing is done in secret. Most consumers have no idea they are being profiled, making traditional consumer protections like price-gouging laws difficult to enforce.

Regulatory Vacuums

While the EU’s Digital Services Act and states like California are moving toward requiring clearer disclosures, the regulatory landscape remains a vacuum. Consumer advocates are calling for rules that require informed consent before a unique price is assessed against an individual.

Addressing the dark side of dynamic pricing will require more than just corporate ethics; it requires new laws and clearer standards for what constitutes "fairness" in the algorithm age.