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White House Reports on Big Data and Differential Pricing

AcxiomFebruary 16, 2015

In recent weeks we have seen two reports from the White House affecting marketers.

The first report was a follow-up from their May 2014 report Big Data: Seizing Opportunities and Protecting Values.  The new report is an Interim Progress Report updating the recommendations made last year.

Some of the key findings include calls to:

–        “Advance the Consumer Privacy Bill of Rights [introduced by the Department of Commerce in their 2012 report] because consumers deserve clear, understandable, reasonable standards for how their personal information is used in a big data era.”

–        “Pass National Data Breach Legislation that provides for a single national data breach standard, along the lines of the Administration’s 2011 Cybersecurity legislative proposals.”

–         “Ensure Data Collected on Students in School is used for educational purposes to protect students from having their data shared or used inappropriately.”

–        “Expand Technical Expertise to Stop Discrimination so that the federal government’s lead civil rights and consumer protection agencies can identify practices and outcomes facilitated by big data analytics that have a discriminatory impact on protected classes and develop plans for investigating and resolving violations of law.”

Progress on the matters mentioned in the report includes the Department of Commerce’s request for public comment on the 2012 Consumer Privacy Bill of Rights, taking into consideration new technologies such as those mentioned in the big data report. The Administration intends to release draft legislation soon.  Also, Obama introduced his Personal Data Notification and Protection Act on January 12 and the Student Digital Privacy Act focused on the use of student data for grades K-12.

The report also mentioned the 2014 FTC report on the data broker industry that called for greater transparency, suggesting Congress consider legislation to make data broker practices more visible to consumers and give them greater control over their personal data.

Note:  While we are likely to see bills introduced on these initiatives, they are not likely to be enacted into law during this Congress.

The report mentions the potential for big data technology to be used to discriminate against individuals, whether intentionally or inadvertently, reducing opportunities and choices, noting that civil rights community, industry and federal agencies have begun to identify possible principles and frameworks to guide uses of data.

The second report from the White House, Big Data and Differential Pricing, discusses the challenges when a large amount of data is gathered from multiple sources to produce new observations, measurements and predictions.  The question is whether companies will use the information to more effectively charge different prices to different customers (e.g. differential pricing).

The report points out that some benefits from differential pricing, such as senior citizen discounts at the box office, or tiered pricing for air travel, can be good for consumers and businesses.  However, big data raises concerns that some consumers can be made worse off and have little knowledge why.

Target marketing is not new, and some companies are experimenting with personalized pricing.  The report finds that many concerns about differential pricing can be addressed by enforcing existing antidiscrimination and consumer protection laws.  Additionally, providing consumers with increased transparency would promote competition and result in better informed consumer choices.

The conclusion is that whether differential pricing helps or harms the average consumer depends on how and where it is used.  In a competitive market, benefits typically outweigh costs, but it is most likely to be harmful when implemented through complex or opaque pricing schemes designed to disadvantage unsophisticated buyers.  The report gives the example of bundling a low cost product with costly warranties or shipping fees or burying important details in the small print of complex contracts.

The report differentiates risk based pricing from value based pricing.  Risk based pricing is where sellers charge prices that reflect differences in the cost of serving various groups of customers  (e.g. insurance rates) and favors those who are less risky.  Value based pricing favors those who are more price sensitive.

Expect to hear a lot more about price discrimination and differential pricing in the next year.