Price discrimination online

Most of you students are pretty ‘switched on’ in terms of what we old people still marvel at; the Internet. You have never lived in a world without internet – which is pretty much what my dad said (he was born in 1928) to me about TV. No, relax, this is not going to be some sort of rant about taking things for granted or any sentence starting with “…young people today…” I am a big fan of technology and consider myself quite the optimist; we are so much better off today on so many counts! (I also have to add that my students are faaaaaaaar more aware, mature and open-minded than my school generation was.)

Our economics syllabus deals with quite a few issues that link clearly to the Internet in general and, more specifically, online shopping. It turns out that some 50% of Europeans regularly buy goods and services online – and this figure rises considerably during the Christmas season. I am one of these and have been for many years now – at least when I’m living in a country with a reliable post and customs system.

I have noticed for some time that EU price differentials between countries have often increased and this contradicts economic theory which says that open and free markets should ultimately lead to price convergence. (Look up the ‘law of one price’.) A good that costs €10 in Spain cannot in the long run cost €15 in France – French consumers will start buying more of the good in Spain, so demand for the good will decrease among French sellers and increase among Spanish sellers. We would expect an evening-out of prices.

I started taking notice of price differences over the past few weeks as I have been doing some Christmas shopping online, often via Amazon and Ebay shops. Prices differ quite a lot between EU countries and it is increasingly clear that large on-line sellers price discriminate and sell the same goods for different prices in different countries.

Price discrimination, or more precisely, 3rd degree price discrimination, means that sellers sell a good at different prices to different groups of buyers. These groups are defined via price elasticities of demand. For example, last-minute air travelers commonly pay more than those who have booked three months in advance; the last-minute travellers (say, business people) will have fewer options/substitutes and thus lower PED than those who booked far in advance. To be able to successfully price discriminate, the seller has to hinder re-selling – Bob cannot be allowed to sell his €150 ticket bought in April to Linda in August when the airline’s price has gone up to €200.

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-Christmas spending

I have long suspected that large online retailers price discriminate on a country-wide basis in the EU and even in the EU nations that are part of the Euro-zone. Clearly it’s important that one looks at how and why prices between countries might differ; exchange rates, consumption taxes and transportation costs will all have an effect on retail prices. However, within the Euro zone countries there is no exchange rate and on-line shops of size will have logistical centres that pretty much negate transport costs. That leaves expenditure taxes but still a pretty unsatisfactory explanation since the lowest (Luxembourg) is 17% and the highest (Hungary) is 27%. The majority of Euro members have VAT rates between 19 and 25%. This simply does not explain the price differentials!

Log in to your Amazon account and run a few quick searches for identical goods on the US and UK sites. Substantial difference! UK prices tend to be some 20 – 30% higher and this is NOT explained by taxes or exchange rates. Quite obviously it is explained by price discrimination, since Amazon simply will not ship most goods from the US to the UK. (Note that you might need a VPN – Virtual Private Network – in order to do this!)

And that is seems to be the case right here in the EU, where large on-line retailers are selling the same goods in different EU countries and substantially different prices.Discounting transport costs, a good ordered from a German firm with a shipping address in Germany would be quite different than if the good were to be sent to Sweden or Italy. Answer; price discrimination.

But it gets even trickier when one starts looking at the above through the lens of first degree price discrimination, i.e. when a good is sold at the highest possible price to each individual buyer! I was not even aware of this until one of my IB2 students told me NOT to book my summer tickets too far in advance…or too late. She sent me an article about when to buy airline tickets and then I started looking a few things up. Turns out that we might need to be a bit careful when we buy things online.

Online sellers use ‘cookies’, which are small text files downloaded to your computer when you visit a site. This file will contain information about your computer so the site ‘recognizes’ you when you return to a site. This makes things smoother when you go back to read, say, BBC news and check your favorite pages. The issue is that some cookies can be rather sophisticated and if you are looking at an online seller, there is a treasure trove of data that can be used to price discriminate.

For example, the online seller could tell whether you visit the page often, what goods you have looked at, how much time you spent browsing, what type and price of goods you have purchased earlier, if your zip code is in an ‘upmarket’ area…and of course if you are in an expensive country or not.

Clearly there are some serious ethical – and legal – questions to be asked and answered here. There are laws protecting citizens of EU countries against personal discrimination; try selling goods under a sign of ‘Swedes pay more’ or ‘Men pay less’! Obviously these are extreme and unrealistic examples. Yet how far would this discrimination be from a seller using information about what type of computer the online shopper is using to then draw conclusions about what he/she is willing to pay for a good? Should it be allowed for firms to have one set of prices for Apple computer users and a different set of prices for PC users?

I find it very disquieting that it is so easy to track our personal habits in order to tailor-make a situation where we press the BUY button. In fact, immediately after this paragraph I am going to start searching for software or sites that can disable price discriminatory functions on e-sellers.

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