1.1. Equality

The thought that BDPP can reduce inequalities may seem surprising, at least at first glance. BDPP allows firms to price people unequally. The thought that we could treat people equally by pricing them unequally seems odd. How then, one might ask, could BDPP allow us to treat people equally? There are many ways to treat people equally, and many different things we might want to equalize in society. We might want to equalize welfare (Dworkin Reference Dworkin1981a), or resources (Dworkin Reference Dworkin1981b), or capabilities (Sen Reference Sen and McMurrin1980), or access to opportunities (Cohen Reference Cohen1989; Arneson Reference Arneson1989), or regard, social standing, and status (Anderson Reference Anderson1999). The kinds of equality that are most relevant to BDPP are equality of welfare, equality of resources, and (as I discuss in sections 2 and 4) equality of social standing. The upshot of this section is that while pricing everyone equally (i.e., charging everyone the same price) is one way of treating everyone equally, it also seems to undermine other ways of treating people equally, specifically in terms of welfare and resources.^{Footnote 10}

First, personalized pricing reduces welfare inequalities. When consumers pay their reservation price, they get, in return, the exact amount of welfare that this monetary sum was worth for them. This appears to correct for a seeming inequality in treatment that is inherent in the basic price mechanism (i.e., without BDPP). Suppose that Bill can and is willing to pay more than the market price for a product (e.g., a gallon of milk). With equal pricing, Bill pays the market price and gains greater welfare than, say, Alex, who cannot or is not willing to pay more than the market price. Bill now has a surplus that he can use for other purposes; Alex does not. So, by purchasing an item at an equal price, those individuals with higher reservation prices will end up better off than those consumers who cannot pay above the market price.

It follows that equal pricing (i.e., charging different consumers the same price) does not treat consumers equally in terms of welfare. Charging consumers their reservation price seems like a better way of treating their welfare equally: each consumer ends up paying as much as the product is worth to them (in terms of welfare, translated into money). If Bill values a gallon of milk more than Alex does (or, alternatively, if Bill values money less than Alex does), then treating them equally in terms of welfare seems to require that we do not offer them the same price. Rather, if we want to equalize welfare, then it seems that charging Bill more than Alex is the way to go. And BDPP gets us there.

Second, and relatedly, personalized pricing leads to a more equal distribution of resources. When Alex and Bill pay their respective reservation prices for the same product (e.g., a gallon of milk), this reduces inequality of resources: Bill does not get to accumulate as much resources as he would have under equal pricing. In regular pricing, those with more resources pay a smaller percentage of their income for the same product than those with less resources do.

BDPP leads the wealthier to pay a higher percentage of their resources for the same product than without BDPP. Of course, those with less resources may also end up paying a higher percentage than they otherwise would have. However, the less resources they have, the more likely it is that they were already paying somewhere around their reservation price before we introduced the possibility of BDPP. With BDPP, the more resources one has, the higher the price they are charged. Because it charges the wealthier more than equal pricing does, BDPP makes accumulating resources more difficult.^{Footnote 11} And when all participants in the market pay personalized pricing for everything, then it is likely to become even more difficult. And as accumulating resources becomes more difficult, resources end up being distributed more equally. BDPP, thus, seems like a better option for treating people equally in terms of resources.^{Footnote 12}

Again, we see that there is something about equal pricing that does not treat consumers equally. So, treating people with price equality violates welfare and resource equality. Trying to achieve those kinds of equality will require not treating people equally in terms of charging them the exact same prices. Achieving equality of welfare and equality of resources (through the mechanism of the market) requires charging different consumers different prices.

1.2. Social Welfare and Efficiency

Finally, as economists have historically pointed out, price discrimination (of which BDPP is one subspecies) can increase overall social welfare by serving more consumers than a similarly imperfect market without price discrimination.^{Footnote 13} When firms price discriminate, they can serve consumers who cannot afford the (not perfectly competitive) equilibrium price by charging them a lower price. Firms can then compensate for this by charging those consumers who can afford to pay more higher prices. We see such positive effects in common practices of grouping, or third-degree price discrimination, that do not seem to elicit any moral uproar—for example, senior-citizen discounts for museums or public transit and tuition waivers or assistance funds (indeed, in the latter, we come very close to personalized pricing). In such cases, there seems to be nothing wrong, or at least nothing that warrants any moral indignation.

We can reach similar results with personalized pricing. Suppose that the would-be imperfectly competitive equilibrium price of a gallon of milk is $5. If Bill’s reservation price is $20 and Alex’s is only $4, then only Bill will purchase the milk (and retain a $15 surplus), and Chris (the supplier) will only make $5 in revenue. But, if Chris has the resources and is permitted to personalize prices, then both Bill and Alex will be able to purchase the milk (each at their personal reservation price), and Chris will make $24 in total revenue. This seems to allocate resources much more efficiently, increase total product and welfare, and include in the market previously underserved groups (namely, Alex).

To see how price personalization, in general, can lead to greater product access for previously underserved consumers, it is helpful to put things into more formal economic terms. Recall that one of the conditions for price discrimination, in general, is that the price discriminating firm has significant market power. For convenience, let us suppose that the price-personalizing firm is a monopoly.^{Footnote 14} So, we are dealing here with an imperfect market with a monopoly. For a monopoly, maximum profit is achieved when marginal revenue (MR) equals marginal production cost (MC). In a market without personalized pricing, MR has a steeper downward slope than the aggregate demand function (D), because the revenue from one more unit sold has a backward effect that decreases the revenue from previously sold units.^{Footnote 15} In a perfectly competitive market, production occurs at the equilibrium between D and MC. This means that in the case of a monopoly that does not personalize prices, the quantity of product sold is smaller than the quantity that would have been sold in a competitive market, and the monopoly price is higher than that set in a competitive market.

However, a price-personalizing monopoly will produce the same quantity as that produced by a perfectly competitive market. For a price-personalizing monopoly, MR=D, because the revenue from one additional unit does not carry back to revenue from previous units.^{Footnote 16} And since production is set at MR=MC for a monopoly, it follows that for a price-personalizing monopoly, production will be set at D=MC, i.e., at the same quantity that a perfectly competitive market would have produced. Personalizing prices will allow this monopoly to produce as much as a competitive market would have produced, and to price the last produced unit at the would-be competitive equilibrium price.

The general point here is that price personalization makes it possible for an imperfect market to serve all the consumers that would have been served in a perfectly competitive market; it’s just that each consumer would pay as much as they are willing to pay, and not a penny less.^{Footnote 17}

In addition, as Elegido (Reference Elegido2011) reminds us, the fact that people have given their consent to purchase a certain product at a certain price is evidence that this was worthwhile for them (from their own point of view). In the example above, Bill purchases a gallon of milk for $20, and Alex for $4. It seems fair to assume that this was a worthwhile purchase for Bill—as far as Bill was concerned (given his income, preferences, the cost of waiting for a better deal, and so on).^{Footnote 18} And, if Bill considered this a worthwhile deal, then it seems (a) that things are better overall; and (b) that Bill does not have a claim against Alex getting a better deal.

To see why, compare this with the case of time-limited deals: if Bill had just missed a $4 deal (which Alex was able to get just in time) and decided to go ahead and pay $20, then it seems that Bill was willing to pay $20. Prima facie, there seems to be nothing morally wrong in this case. If so, then we reach the following conclusion: even though Bill did not get as good a deal as Alex did, there is nothing wrong with not getting a better deal than someone else. Therefore, there is nothing wrong with Bill being priced $20 rather than $4.^{Footnote 19} In the case above, everyone gets the product they want at a price they are willing to pay. Thus, we get the benefit of increased market efficiency: everyone is better off now, without harm to anyone. It seems that this may be another case where markets improve overall social welfare.

In addition, there is a general point to be made here: we may say that the market consists of a constant struggle over consumer surplus. Sometimes consumers get more, sometimes firms get more.^{Footnote 20} What is important is that there is no need to assume that consumers have any moral right to get a good deal. Prices fluctuate all the time; and, so long as the terms and conditions of the competition between consumers and firms over consumer surplus are fair, that’s fine. Of course, this raises the question: are these terms and conditions fair? Below (in section 4) I argue that they are not.

2.1. The Beneficence Condition

Some may argue that BDPP is justified only and insofar as it generates a socially desired benefit that consumers can track.^{Footnote 21} I call this the ‘beneficence condition.’ BDPP, in such cases, generates a desired social outcome, and everyone can track this benefit: everyone knows who BDPP benefits, why it benefits them, and how others may also enjoy it. For example, senior-citizen transit discounts are meant to address the fact that there is more poverty amongst the elderly, and that the elderly do not have as much available income as other groups in society do.^{Footnote 22} In this and similar cases, price discrimination works to increase some social ‘good’ and is not used as an instrument for mere profit maximization: senior citizens, who normally have less available income, can more easily afford riding public transit.^{Footnote 23} Without the social benefit, price discrimination is likely to elicit an indignant public response. If price discrimination does not achieve socially desired or beneficial outcomes, then the beneficence condition is unsatisfied, and price discrimination is likely to ensue in justified public criticism.

Moreover, if these socially beneficial outcomes are simply a happy coincidence, an unintended by-product of a strategy that only maximizes profit, then this also justifies indignation: it is reasonable for consumers to want to know whether and how they benefit from certain market practices. In this sense, we may claim that there is a transparency requirement in service of the beneficence condition. If we had learnt that some consumers had received a better price than we did, we would want to know why. If there is no good reason, or if suppliers refuse to disclose their reasons, then this would seem suspicious. We would likely, and justifiably, want to know what is special about these customers who paid lower prices. Are the firms practicing nepotism? Is there any discrimination here against protected classes? Is there anything we can do to switch over to that group and also get a better price? And so on. Without transparency, price discrimination appears completely arbitrary, to the point that it doesn’t seem to contribute to any kind of social benefit.

Consider: in the case of senior-citizen discounts, everything is above board, and the reasons for differential pricing, as well as the criteria for receiving the discounts, are available to everyone. Even in the case of, say, group discounts or amount discounts, the price differentiation is transparent, which contributes to acceptance of the practice. In particular, transparency serves to satisfy the beneficence condition, which requires that consumers should be able to track the social benefit in question.

What we have here, then, is a condition or restriction on the moral permissibility of BDPP: without transparency, we cannot tell whether BDPP contributes to some social benefit. We, therefore, lack the ability to track any social benefit BDPP might produce. And, without the ability to track any social benefit, it would be reasonable to believe that a firm practicing BDPP is doing so for profit alone and for no other reason. The main point here is that transparency is important for justifying BDPP, because without it we have no way of knowing whether or how this practice will have socially desirable effects, nor do we have any way of knowing whether the firm could be using BDPP for mere profit seeking, or perhaps even for plain old discrimination (e.g., of protected classes).

This does not demonstrate that the benefits of BDPP discussed in the previous section are completely undermined by lack of transparency, or by BDPP not serving a socially desired benefit. But it does provide some counterweight against the benefits of BDPP. Recall the Amazon case: there was no transparency and no detectable social benefit. If the beneficence condition holds, then there was at least something wrong with Amazon’s conduct in this case.

2.2. Relational Equality

Earlier, we compared BDPP and time-limited offer versions of price discrimination. In both cases, Alex paid $4 for a gallon of milk, and Bill paid $20. In the BDPP case, the different pricing was the result of Chris using big data to find out each consumer’s reservation price and charging them that price. In the time-limited offer case, Alex and Bill paid different prices because Alex purchased the milk in time to get the better deal, while Bill missed the deadline for the offer and had to pay full price. However, there are two important differences between the BDPP case and the time-limited offer case. First, there is transparency in the latter case. Bill knows why he must pay $20 if he is to purchase the milk: he missed the deadline for the $4 deal. Second, and relatedly, the time-limited offer is not a case of personalized pricing (and so not a case of BDPP).

These differences highlight two important points. First, we see that transparency can play an important role in justifying some forms of price discrimination, regardless of any socially desired benefit that such pricing generates (if at all). In particular, it seems to help justify certain forms of ‘grouping’ and probably ‘versioning.’ In the time-limited offer case, price discrimination has no detectable social benefit. Thus, the beneficence condition might not hold for all forms of price discrimination.

Second, and in direct response to the arguments for BDPP, transparency will not help justify BDPP. In fact, if the firm using BDPP were transparent, this would help demonstrate what might be wrong with BDPP. To see why, suppose Bill receives this message while shopping online:

We can also think of Alex receiving a similar message, mentioning that since she is more price-sensitive than Bill, or has less money than Bill, she will be charged less.

The tone in these messages is similar to the tone found in messages that Elizabeth Anderson imagines one might receive in a society with egalitarian distributive justice (1999, 305). There, Anderson envisions how an egalitarian society might distribute resources to those who suffer from bad “brute luck”^{Footnote 24}—those who, through no fault of their own, are, e.g., untalented or disabled. These individuals would be informed that, unfortunately, they are not as able as other luckier individuals to succeed in accumulating resources in this imaginary society. Therefore, the state will compensate them appropriately. This, according to Anderson, is insulting and belittling. Now, while an egalitarian need not commit herself to this particular method of redistribution, there is a deeper point that Anderson illuminates here: it may be that distributive equality undermines relational equality (or as Anderson terms it, democratic equality), i.e., equality in social status and standing.

The messages that Bill and Alex would hypothetically receive from a firm practicing BDPP demonstrate that the firm does not treat them as equals in terms of their standing and social status as participants in the market with regards to each other, as well as with regards to the firm using BDPP. This is true even if we rephrase the messages to sound more positive (e.g., “Congratulations, Bill—you’re rich! Here’s your price. It’s kind of high, we know, but you can totally afford it!” or “Alex, we know money is a bit tight right now, so you get a lower price than others.”).

But what does ‘having equal status as participants in the market’ mean? I think that the most helpful way to think about this is by considering the notion of competition. Consumers usually, hopefully, are not in competition with one another over product or price. We all know that we are going to pay the same prices for the same products at the same time in the same place. Sure, there may be a time-limited offer, or an amount discount, but these are open to all consumers equally. This is true of other forms of price discrimination as well: senior-citizen discounts or student discounts are equally open to anyone who qualifies for them. One notable exception to this is auctioning and bidding. In bidding wars, consumers do compete with one another over product and price. This is an especially important exception, since it is a form of personalized pricing. Still, even this competition can be good or bad; it can have or lack fair terms and conditions. Some auctions can be genuine, while others are rigged, for instance. I believe that the lesson to draw here is that for consumers to have equal status with one another in the market, consumers have to (a) have the market equally available to them, so that they do not have to compete with each other over price or product; or (b) if such a competition between consumers is necessary, have the ability to participate in such a competition on fair terms.

The notion of competition can also help us make sense of consumers enjoying equal status in the market with firms. Here, recall the closing statements from the previous section: consumers and firms compete for consumer surplus; what is important is that this competition is fair. Thus, we may say that consumers and firms enjoy equal status in the market to the extent that they can compete for resources and prices on fair terms and conditions. Sure, the average consumer may not be able to haggle with a large firm about its prices; but if she can purchase a similar product somewhere else at a better price, then that’s a useful way for her to compete with the firm. In other words, consumers can compete with firms when firms need to compete over consumers.

In using BDPP, a firm does not treat its consumers as enjoying equal status with one another (as participants in the market). This is because BDPP treats consumers in a way that closes off the market to them, so that now consumers do not have equal access to the market. In this sense, consumers become competitors with one another. In addition, the use of BDPP undermines consumers’ ability to participate in this competition on fair terms. Such fair terms—for personalized pricing, in particular—would include the option to have a say in how high of a price one is willing to pay. BDPP takes that option away from consumers. In addition, BDPP undermines the equal status we might hope to see between consumers and firms. This is because when firms use BDPP, consumers do not have the ability to go somewhere else where they can pay a non-BDPP price. Firms using BDPP do not compete for consumers and do not need to do so; therefore, consumers cannot compete with firms who use BDPP.

We see, therefore, that BDPP requires treating consumers in a way that undermines their supposed equal standing in the market. Of course, this still does not show why or that extracting consumer surplus is itself somehow morally wrong; auctions seem fine from a moral standpoint. However, recall that we are not concerned with personalized pricing in general, but rather with BDPP. Using auctions to personalize prices and using big data to personalize prices may not be on the same moral footing.^{Footnote 25}

This, together with the beneficence condition, serves to counterbalance the supposed benefits of BDPP. First, recall that BDPP was supposed to have the benefit of improving resource equality and welfare equality. The point there was that treating people as equals in terms of resources requires not treating them as equals in terms of the prices that they get charged. But now we have turned the tables against BDPP: if we ignore the relational aspect of equality, then this undermines the value of distributive equality, whether in welfare or in resources. Furthermore, if BDPP does not produce transparent, socially desired benefits, then this counts (though not decisively) against its moral permissibility.

Second, recall that BDPP carries the promise of increased overall social welfare. However, the discussion of relational equality raises concerns about who would enjoy these benefits. Once we look at things from the perspective of relational egalitarianism, we see that it is possible for different individuals to have different standing in the market (because they have higher reservation prices). Moreover, and more pressingly, BDPP undermines the status of consumers in the market for the sake of increasing the status and standing of firms. Without BDPP, pricing depends on production costs (and where MC meets D). When pricing depends on production costs, firms end up pricing their products as low as possible to meet demand, which allows for a consumer surplus. But, with BDPP, all consumer surplus is lost to firms. This means that BDPP minimizes the benefit consumers could gain from participation in the market (more on this in section 4 below).

3.1. MFA: BDPP Is Wrong

According to MFA, most notably developed by Heath (Reference Heath2014),^{Footnote 26} managers are morally constrained by the point of having competitive markets, which is how they lead to a Pareto efficient distribution of resources and benefits (i.e., no one’s welfare can be improved without harming someone else). That, says Heath, is what makes markets valuable in the first place. One problem that MFA faces stems from the fact that the conditions for perfect competition are a set of idealizations that are not satisfied in the real world.^{Footnote 27} Thus, firms have plenty of opportunities to increase profits by exploiting market imperfections. As a result, real markets that are not perfectly competitive fail to produce Pareto-efficient outcomes. According to Heath, this teaches us that managers are morally required to avoid strategies and practices that exploit market imperfections because this undermines efficiency, which is what makes competitive markets valuable in the first place.

The MFA approach seems rather promising in analyzing the moral status of BDPP. Price discrimination is available to firms only under imperfect conditions. Under perfect conditions, if a firm tries to price discriminate, market forces will drive prices back to marginal production cost: when the conditions for perfect competition are obtained, no firm has sufficient market power to set prices or quantities, and there is full, symmetric knowledge of costs and prices. Consumers will switch over to purchasing from those firms that price products at lower prices than those set by the personalized-price firm.^{Footnote 28}

It seems that, from an MFA point of view, BDPP is unethical. Most notably, it exploits and exacerbates the information asymmetries that already exist in the market. Firms do not only have better knowledge of their production costs, but with the advent of big data, they may also know each consumer’s reservation price. In this sense, firms that use BDPP do not treat prices as exogenous—they are no longer price takers, as they should be (if they are to be regarded as behaving ethically by MFA). In particular, firms using BDPP do not need the price mechanism to discover consumer preferences and reservation prices; rather, they go into the market already knowing this information. Firms, thus, switch from being price takers to being all-encompassing price setters. From the point of view of MFA, this seems ethically worse than a nondiscriminatory monopoly, as well as non-BDPP forms of price discrimination. After all, the point of having a competitive market is (partly) that firms compete over consumer surplus, and in so competing end up minimizing their profits and maximizing that of consumers. Therefore, the MFA proponent will claim, BDPP is an unethical business practice.

3.2. Objection: There Is No MFA Problem

Unfortunately, things are not actually so straightforward. For one thing, recall that according to how Heath currently conceives of MFA, we should focus more on how a certain practice influences market efficiency. Imperfect markets may become more efficient when certain market failures are exacerbated, or when other imperfections are added into the mix; in fact, reducing (but not eliminating) market imperfection may reduce market efficiency.^{Footnote 29} So, it’s not entirely clear where MFA stands regarding BDPP. Furthermore, even if we maintained that MFA did prescribe a clear verdict deeming BDPP unethical, it is not clear that such a verdict would be justified on MFA’s grounds.

MFA will have a problem giving a clear verdict about BDPP because BDPP allows firms with market power to produce more than they would have otherwise. To see why, recall the discussion earlier (in section 1.2). There, we saw that a price-personalizing monopoly will produce the same quantity that a perfectly competitive market would have produced. The upshot is that BDPP allows market-powerful firms to reach more consumers than they would have reached otherwise. Thus, we see that exacerbating and exploiting market failures (i.e., market power and information asymmetry) end up increasing the overall welfare and efficiency in an imperfect market with price-personalizing firms.

More generally, MFA faces a choice between focusing on market failures and focusing on market Pareto-efficiency. If MFA focuses on market failures, then it can show what’s wrong with price discriminating strategies employed by market-powerful firms. However, there are reasons to avoid focusing on market failures as such (Norman Reference Norman2011; von Kriegstein Reference von Kriegstein2016). If MFA focuses on efficiency instead, then it is more likely to condone rather than condemn BDPP: as we have seen, there are strong economic arguments demonstrating how, in an imperfect market, price discrimination, in general, increases efficiency and total aggregate welfare. In addition, it is not clear if MFA condemns practices that would undermine efficiency in a perfectly competitive market, or practices that undermine efficiency in an imperfect market. In the next section, I offer an alternative formulation of MFA that remains faithful to its main spirit and helps capture what is uniquely wrong with BDPP.