yARN: The price is right - or is it?

yARN: The price is right - or is it?

People expect to be informed when they’re being used as experimental subjects.

One of the things I remember from the economics courses I took as a university student is that sellers would ideally like to set an individual price for each customer. Doing so would allow the seller to capture the difference between the lowest price they are prepared to accept and the highest price the buyer will pay.

That helps to explain the popularity of auctions among people selling their homes, as the process reveals the upper limit of all the potential buyers except the successful bidder. But auctions only really work for relatively scarce goods, so we’re not going to see Coles or Woolworths inviting bids for 500g of lean mince.

However, companies do manage to get away with charging different prices in different parts of the country, and it’s not unusual for identical products to be offered in different nations at varying prices - hence the Federal Government’s inquiry into technology pricing.

A characteristic of operating online is that it makes it relatively easy to conduct experiments. Google is very proud of the fact that it makes “data driven” decisions, and reportedly experimented with 41 shades of blue to see which ‘performed’ best.

Back in 2000, Amazon got egg on its corporate face when it ran an experiment to test the effects of offering the same item at different prices to different customers.

Founder and CEO Jeff Bezos described the experiment as “a mistake” and refunded the difference between the lowest price and the price accepted by affected customers.

He also said “We’ve never tested and we never will test prices based on customer demographics.”

All of this is brought to mind by a recent kerfuffle surrounding travel-booking site Orbitz. According to The Wall Street Journal, data mining by Orbitz had revealed Mac users were spending an extra $US20 to $US30 more per night on hotels compared with PC users, in part because they are more likely to stay in four or five-star hotels. (If you’re tempted to suggest that Mac users are used to wasting money, first read what Ramit Sethi has to say about conscious spending and then think about where your own money goes.)

The WSJ report stated “Orbitz executives confirmed that the company is experimenting with showing different hotel offers to Mac and PC visitors” with the implication that the former would see pricier deals.

But according to a USA Today report, Orbitz CEO Barney Harford subsequently stated “We are not using Mac vs. PC to drive different sort order” and explained that the insights obtained from the data have led Orbitz to use the computer type as one input to the site’s recommendation engine.

Whatever Orbitz is doing, it’s hard to see this sort of thing as anything other than manipulation. Just because Mac users in general are more likely to pick plusher hotels or more-expensive rooms, that doesn’t mean any particular Mac user is not looking for three-star accommodation.

Bigger companies are more likely to get caught out for doing these sorts of things because there are more people to notice what they’re up to. If your favourite online supplier of hand-mixed organic muesli experimented with website colour schemes to see if that affected conversion rates, you probably wouldn’t be bothered.

But if it tried presenting a subset of users with higher prices to see what effect that had, the first you might know about it would be when the price was increased for everybody.

I think the real issue here is transparency. People expect to be informed when they’re being used as experimental subjects. They know what’s happening when they take part in ‘real world’ market research, so why should it be different online? And shouldn’t users be explicitly informed when any type of search result is being filtered according to data other than their search terms and criteria? If not, there’s a very real risk of the company involved being seen as grubby and underhanded.

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