For customers who don't have the freedom to choose where they shop, technological advancements - particularly artificial intelligence (AI) and intrusive personal data collection - are making price discrimination, inflation and lower-quality goods increasingly likely. Vulnerable consumers are most at risk.
Authors
- Raymond A. Patterson
Professor, Area Chair, Business Technology Management, Haskayne School of Business, University of Calgary
- Emily Laidlaw
Associate professor, University of Calgary
- Jian Zhang
Assistant Professor of Business Technology Management, University of Calgary
Flexibility-based price discrimination allows companies to charge different people different prices for the same produce or service, based on how easily they can walk away.
When consumers can easily find better deals elsewhere, they hold the power. However, AI tools are allowing sellers to become increasingly adept at uncovering how much flexiblity their consumers have. This practice raises serious ethical concerns .
Dynamic pricing allows companies to take advantage of customers who can't easily go elsewhere.
Dollar stores , for example, often serve low-income communities in smaller markets. When these retailers realize their customers have limited alternatives, they are less inclined to keep prices low. Product quality can decline as well.
Economic impacts of price discrimination
In our recent study , we examined how flexibility-based price discrimination affects a seller's profitability in a competitive market, and demonstrated how consumer welfare is affected. Using economic modelling, we studied how price discrimination can impact consumers from different socioeconomic backgrounds.
We found that companies don't just raise prices when customers aren't able to easily switch to a competitor - for low-income consumers they also reduce product quality as well. This double blow hits low-income consumers hard. As technology improves, the gap between high- and low-income consumers grows wider.
Our findings show that companies that take advantage of consumer inflexibility are likely to prosper, often at the expense of those with the least power to choose.
The same thing happens with provincial trade barriers and tariffs . Product quality, price and income are known to be intertwined , with higher income countries receiving higher quality goods. When consumers' ability to find the best possible deal is limited, companies will exploit that lack of choice, as is implied by our study.
Inflexible consumers with lower incomes suffer more from price discrimination than high-income consumers in the same situation. Any barriers that reduces consumer flexibility disproportionately harms low-income consumers, who are more likely to face lower-quality products as a result.
In markets where these consumers are targeted, low-quality products are often the norm. As an example, tests revealed the presence of lead, phthalates, toxic flame-retardant chemicals and polyvinyl chloride components in colourfully labelled children's products at American and Canadian dollar stores.
In contrast, high-income consumers may see their product quality improve. This is because high-income consumers are willing and able to pay for the improved quality and technology-enabled price discrimination can enable the seller to satisfy their needs better.
Technology and consumer resilience
Our study provides valuable insights for both lawmakers and policymakers. It demonstrates that new policies are necessary to protect vulnerable consumers with limited flexibility from price discrimination.
But this is only part of the story. When these same techniques are used to target wealthier consumers, it can result in positive social outcomes for them. The differing outcomes for high versus low income inflexible consumers will exacerbate wealth inequity.
For firms investing in new technologies like AI, flexibility-based price discrimination can inadvertently benefit competitors by partitioning the market - even if the competitor doesn't use the technology.
For companies, many things can cause or reveal consumer inflexibility, technology being a primary example. Technology advances rapidly. Catering to either high- or low-income customers causes businesses to make different strategic choices depending on how flexible their customer base is when it comes to new technological developments.
For customers, maintaining flexibility is critical. Flexibility can take many forms: having access to transportation to access a wider range of stores, avoiding consumer debt or having enough savings. It can also mean having a smartphone with unlimited data to make online price comparisons.
However, not all consumers can maintain this kind of flexibility. Working parents, for example, might not have the time or financial bandwidth to comparison shop for groceries across multiple stores. It can increase their vulnerability to higher prices and lower-quality goods.
Policy implications and the path forward
Whether flexibility-based price discrimination should be supported or restricted depends on who it targets. Flexibility-based price discrimination may require regulatory intervention or price subsidies to ensure ethical implementation. While ensuring the quality of low-end products is increasingly important, addressing the limitations on consumer flexibility caused by socioeconomic status is key.
The U.S. has recently removed internet subsidies for rural customers , and its impacts have been dire . Without internet access, consumers lose digital flexibility.
In Canada, Indigenous and rural communities similarly lack access to high-speed broadband and also must travel long distances to reach major shopping centres. Our results show that, as flexibility declines, so does consumer welfare for rural low-income populations.
If there is a positive side to all of this, it's that companies can adapt quickly to these shifts. Businesses like dollar stores are likely to benefit in the short term, although product quality will likely decline for people who can least afford it. This isn't just an ethical choice made by these companies, but an economic inevitability in a system where people have unequal access to rapidly evolving technology.
As trade tensions grow, mitigating consumer inflexibility should be a key policy focus for Canada. Support should start with low-income households by increasing their ability to choose how and where they shop.
In the long term, price discrimination will continue to prey on the socioeconomic, geographic and literacy-based barriers that underlie the digital divide . The goal should be policy reform to empower flexibility for those most affected.
Raymond A. Patterson currently receives funding from the Haskayne School of Business and the National Cybersecurity Consortium (NCC). Previous funding has been obtained from a variety of private and public sources.
Emily Laidlaw receives funding from the Social Sciences and Humanities Research Council and the National Cybersecurity Consortium.
Jian Zhang receives funding from the Social Sciences and Humanities Research Council of Canada.
