Monday, September 2, 2013

Will Big Data Create A Personalized Pricing Nirvana for Retailers?

In a fascinating blog post, Adam Ozimek makes the case that we will see much more individualized pricing (which economists call "first degree price discrimination") as more data mining becomes available.  

For instance, in a new working paperBen Shiller is able to use big data to massively improve his ability to predict demand for Netflix subscriptions by any given individual:

Adding the full set of variables ... including web-browsing histories and variables derived from them, substantially improves prediction – predicted probabilities range from close to zero to 91%….I find that web browsing behavior substantially raises the amount by which person-specific pricing raises variable profits.
As more and more data become available, it's easy to imagine retailers using these data to offer personalized prices for each consumer, especially for information goods where margins are large and pricing flexibility is greatest. "You want to watch Elysium tonight? Special price just for you!"  

This can substantially increase profits, and it is also likely to make products and services available at lower prices to some people who couldn't previously afford them, increasingly overall economic efficiency. At the same time, total consumers' surplus is often falls when differential pricing is introduced, as consumers with high valuations make larger payments to sellers for goods and services they would have purchased anyway.
However, that's not the end of the story.  Remember that big data can work for consumers, too.  Thanks to Google and other tools, consumers also have more and better search engines and recommendation services available.  That can intensify competition among sellers, which tends to increase consumers' surplus.
Who will come out ahead? Ultimately, it's an arms race, with those best able to use data and technology outcompeting other buyers and sellers.  In the long run, history suggests that the invisible hand tends to favor consumers as each new wave of technology is invented and diffuses.


  1. As another good example of how far big data can go in terms of predicting the human behavior and how the retailers are using it,”

  2. There is a growing need for some kind of control consumers would want to exercise, given the kind of information companies could gather and predict about them. There could be even different levels of controls at primary data, secondary data and analytics based predictions. Once the consumer has control, companies might have to incentivize the consumer for sharing data and this could add to the consumer surplus.

  3. Here is a world economic forum report on Personal Data as a new asset class: