Saturday, February 27, 2010

Personalization and differential pricing

Google's Chief Economist Hal Varian has a new paper out, "Computer Mediated Transactions" (PDF). An excerpt of his predictions on personalization:
Instead of a "one size fits all" model, the web offers a "market of one" ... [powered by] suggestions of things to buy based on your previous purchases, or on purchases of customers like you.

Not only content, but prices may also be personalized, leading to various forms of differential pricing ... [But] the ability of firms to extract surplus [may be] quite limited when consumers are sophisticated ... [And] perfect price description and free entry ... pushes profits to zero, conferring all benefits to the customers.

The same sort of personalization can occur in advertising ... Google and Yahoo ... [already] allow users to specify their areas of interest and then see ads related to those interests. It is also relatively common for advertisers ... to show ads based on previous responses of users to related ads.
Back in 2000, Amazon got slammed (e.g. [1]) for an experiment with differential pricing, but Hal appears to be predicting differential pricing will rise again.

The paper also talks briefly about how experimentation changes how companies make decisions ("when experiments are cheap, they are likely provide more reliable answers than opinions"), data mining, online advertising, legal contracts that use computer monitoring to enforce their terms, and cloud computing. The paper is from the 2010 Ely Lecture at the American Economics Association and video of the talk is available.


Daniel Tunkelang said...

As I recall, Amazon was incorrectly accused of redlining, even though they claimed their pricing variations were randomized without taking into account any user information. In any case, I don't believe that stores get any backlash from implementing differential pricing through targeted coupons and rebates. Positioning matters.

Unknown said...

Differential pricing is a natural progression from long-tail, small-independent, low-volume marketing to low-volumes of consumers.

In my opinion differential pricing is guaranteed to become prevalent and guaranteed to tightly-squeeze profit margins for direct sales from places like Amazon.

However I also imagine that the commodification of sales, sales-as-a-service which Amazon also offer will easily outweigh any such losses..

xavier said...

Coke unsuccessfully tried this;in select markets, they would charge more when it was hotter out. They were the only ones that got burned.

It may work for some businesses where the consumer doesn't have day-to-day knowledge/visibility of pricing (google) but it irked the hell out of folks to walk by a vending machine and see a differnt price everyday.

Don't we all hate the airlines that gouge us for last-minute purchases when the plane isn't full? I wind up paying but I know the bloke sitting beside me paid a lot less for the same service which equals one unhappy, unloyal customer = me.