Delta Air Lines recently announced it would do it Expand the use of artificial intelligence To offer individualized prices to customers. This movement aroused concern among flyers and politicians. But Delta is not the only company that is interested in using AI in this way. Personalized prices has already spread In various industries, from finance to online gaming.
Custom prices- Where every customer receives a different price for the same product – is a holy grail for companies because it Boost the win. With adapted prices, people with free expenses pay more, while the price -sensitive wage less. Just as clothing can be tailored to any person, it fits adapted prices that are of each person ability and desire to pay.
I am a professor Who learns business school Students how Determine prices. My newest book, The power of cash: why the use of paper money is good for you and societyExplains problems with custom prices. In particular, I am worried that AI Price models lack of transparency And could benefit unfair from financial non -advanced people.
The history of adapted prices
For a large part of history, adapted prices was the normal way in which things happened. In the past, business owners have tailor-made every customer and then negotiated face-to-face. The price paid was dependent on the negotiating skills of the buyer and the seller – and despair.
An old joke illustrates this process. Once a very rich man drove in his carriage during breakfast. He told his driver hungry to stop in the next restaurant. He went in, ordered some eggs and asked for the bill. When the owner handed him the check, the rich man was shocked about the prize. “Are eggs rare in this neighborhood?” he asked. “No,” said the owner. “Eggs are in abundance, but very rich men are quite rare.”
Custom prices due to negotiations still exist in some industries. For example, car dealers often negotiate with a different price for every vehicle that they sell. Economists call this “first degree” or “Perfect” price discriminationWhat is “perfect” from the seller’s perspective, because it enables them to bring each customer the maximum amount they want to pay.
Currently, most American shoppers are not negotiating, but see fixed prices instead. Many scientists follow the increase in fixed prices to John Wanamaker’s Piladelphia Department Storewhich was opened in 1876. In his store, every item had a non -negligible price tag. These fixed prices made it easier for customers to shop And became very popular.
Why uniform prices are stuck
Set prices have various advantages for companies. Firstly, they apply stores to hire low -paid retail employees instead of employees who are experts in negotiation.
Historically, they also made it easier for stores to decide how much they should be charged. Many companies have established before the arrival of AI prices Prices using a “cost -plus” rule. Costplus means that a company adds a fixed percentage or marking to the costs of an item. The Markup Is the percentage that is added to the costs of a product that covers the profit and overhead of a company.
The Big-Box Retailer Costco still uses this rule. It determines the prices through Adding a maximum layout of approximately 15% To every item on the warehouse floor. If something costco costs $ 100, they sell it for around $ 115.
The problem with Costplus is that it deals the same all items. For example, Costco sells wine In many stores. People who buy expensive champagne are usually willing to pay a much higher layout Then customers who buy cheap box wine. The use of AI bypasses this problem by having a computer determine the optimum markup item per item.
What personalized prices means for shoppers
AI needs a lot of data to work effectively. The shift from cash to electronic payments has enabled companies to collect What is called a “gold mine” of information. For example, Mastercard says her data will leave companies “Determine optimum price strategies.”
So much information is collected when you pay electronically that in 2024 the Federal Trade Commission has issued civil summones For MasterCard, JPMorgan Chase and other financial companies that demand to know “how artificial intelligence and other technological tools can enable companies to vary prices with the help of data they collect on individual consumer finances and store habits.” Experiments at the FTC Show that AI programs can even work together to increase prices without human intervention.
To prevent custom prices, Some states have laws that retailers need To give a single price for every product for sale. Even with these laws it is easy to perform custom prices by using targeted digital coupons, that vary the discount of every shopper.
How to get AI prices too smart
There are ways to Go around Custom prices. All depend on the refusal of AI programs about purchases from the past and knowledge of who you are. First, when shopping in physical stores, Use paper money. Yes, good old -fashioned money is private and leaves no data path that you are following online.
Secondly, once online, your cache knew. Your search history and cookies offer algorithms with extensive amounts of information. Many articles Say that the protective power of cleaning up your cache is an urban myth. However, this information was based on how Airlines Prices Tickets. Recent analysis of the FTC shows The newest AI algorithms change prices Based on this cache information.
Third, many Computer prices algorithms look at your locationBecause location is a good proxy for income. I was once in Botswana and had to buy an airline ticket. The price on my computer was around $ 200. Unfortunately, before I booked I was called away for dinner. After dinner my computer showed that the costs were $ 1,000 – five times higher. It turned out after dinner that I used the VPN of my university, who told the airline that I was located in a rich American neighborhood. For dinner I was located in a poor African city. Closing the VPN reduced the price.
Last, often to get a better price in face-to-face negotiations, you have to walk away. To do this online, put something in your basket and wait before you reach the purchase. I recently bought glasses online. As a cash payer I did not have my credit card at hand. It took five minutes to find it, and the delay ensured that the site offered a large discount to complete the purchase.
The computer revolution has created the possibility to create cheap adapted products. The cashless society in combination with AI makes us for adapted prices. In a situation made to measure, seeing a high price does not mean that slightly higher quality is. Instead, a high price simply means a company that sees the customer as a willing to renounce more money.
Using in cash can help you beat custom prices. In my opinion, however, the rapid progress in AI means that we now have to start talking about how the prices are determined before the adapted prices fully take over.
Jay L. Zagorsky is an associate professor at the Questrom School of Business at AT Boston University.
This article has been re -published from The conversation Under a Creative Commons license. Read the Original article.
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