How Price Optimization Leads to Better Products and Worse Transparency

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1 min read
Economic surplus

Dear friends,

In addition to creating tremendous value, AI is creating tremendous concentrations of power. Our community is wrestling with what constitutes fair use of that power.

The Markup published an article criticizing car insurance giant Allstate for price discrimination — charging different fees to different customers — based not only on their risk but also on their predicted willingness to pay. Is this behavior okay?

Digital technology enables online comparison shopping, which shifts pricing power toward consumers. But it also enables companies to create unique products for individual customers — say, a ride from point A to point B at a particular time, or a health insurance plan tailored to the customer’s personal history — and AI can help optimize prices to maximize profit for vendors. That can lead to both better products and worse price transparency.

If an online store sells the same hammer to different people for different prices, customers eventually will notice. That helps keep this form of price discrimination in check. But the temptation for sellers is still there. In 2016, Uber revealed that customers pay higher prices when their phone battery is low. (The company said it didn’t take advantage of this phenomenon.)

I wonder sometimes if I should comparison-shop more frequently than I do. Less because I’m anxious to save a few dollars on one purchase, but because I want to train vendors’ AI systems to think I’m sensitive to price and thus to offer me lower prices.

In college, my Economics 101 professor taught about supply and demand, and how our economy creates surpluses for both producers and consumers. But AI is prompting us to revisit old economic theories — along with our sense of what’s fair.

These are hard questions. I hope we can work on them together to give the world great products and services at even better prices.

Keep learning!



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