“We should all be worried about ‘dynamic pricing,’” Sen. Elizabeth Warren (D-Massachusetts) announced online this week. That would be a waste of Americans’ collective anxiety.
Warren said dynamic pricing is “when companies change their prices in real time,” but that’s hardly a helpful definition. What counts as “in real time”? It isn’t as though prices should be set once and forever frozen (like the ice cream she cited), or that consumers would be better off if bureaucrats get to decide how often a price is allowed to change.
Businesses use all sorts of time-based factors for prices. Air travel usually costs more when booked the day before a flight than when booked months in advance. Restaurants have promotions, such as lunch specials or happy hours, with prices changing based on the time of day (though happy hours are banned in Warren’s home state — something Massachusetts legislators are trying to change with a “fun agenda”). Finding yourself on the wrong side of price changes can be annoying, of course, but price controls would create much greater annoyances.
Adjacent to dynamic pricing is personalized pricing, or when a business charges two customers different amounts for the same good. Andrew Ferguson, the chairman of the Federal Trade Commission, put out a statement on Wednesday warning that businesses “that fail to tell consumers how their personal data is being used to set a price” could be breaking the law.
Some personalized pricing schemes, such as loyalty programs that reward frequent customers, are widely accepted. Some are already regulated or banned. For example, Obamacare limited the price of insurance for high-risk patients. The law has not lowered health care costs overall.
Charging people different amounts based on their online browsing habits would offend many consumers, but it’s unclear how often that occurs. Competition is the best check on personalized pricing: If a business takes it too far, other businesses would gladly take its customers.
Perhaps that’s why government, which faces no competition, has arguably implemented more aggressive personalized pricing than the private sector.
The individual income tax — the largest price Americans pay for the federal government — is calibrated through different rates, deductions and credits to a taxpayer’s individual circumstances. The personal information collected by the Education Department’s Free Application for Federal Student Aid form allows universities to charge families at exactly the level they are willing to pay. Welfare and public housing programs are keyed closely to the recipient’s means and family characteristics.
Previous government efforts to make private-sector prices more uniform have been deleterious to consumers. Beginning in the Great Depression, many states had ”fair trade” laws that prohibited retailers from charging prices that differed from those set by the supplier. In 1975, Congress banned the laws nationwide — not coincidentally, at a time of high inflation. The repeal of fair trade laws allowed discount retailers to charge their customers lower prices for the same goods.
Efforts to limit dynamic or personalized pricing by regulation would make it just as hard to lower prices as to raise them. Rather than meddling with businesses’ revenue strategies, politicians could take a look at the gusher of extra money the federal budget is pumping into the economy and ask themselves what effect that might be having on prices.
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