A study co-authored by the Leverhulme Centre for Demographic Science’s Dr Mark Verhagen offers valuable insights into the ethical dimensions of personalised pricing, a practice where prices are tailored to individual consumers based on their data.
While previous studies claim that personalised pricing outperforms unitary pricing, where everyone gets charged the same price, the study finds that there are many cases where the reverse holds true.
The authors find that the ethics of personalised pricing depends on factors like consumer income levels and how useful the consumer views the product, otherwise known as consumer utility. This differs from previous findings that claim personalised pricing generally outperforms unitary pricing from an ethical perspective. Using simulation studies, the researchers find that personalised pricing often only outperforms unitary pricing when the more affluent person gains the highest utility from a product. The researchers discover many other instances where the ethics of personalised pricing is questioned in comparison to unitary pricing.
In cases where personalised pricing outperforms unitary pricing, the researchers found that even small levels of consumer dissatisfaction – such as the perceived unfairness of different prices being offered and privacy concerns regarding how businesses differentiate prices – negatively impacts the ethics of this pricing method. These sources of consumer dissatisfaction, referred to as disutility in the study, are reinforced by previous survey results that show the public’s discomfort with personalised pricing and the strategy’s reliance on the collection of individual consumer’s data. The study encourages companies and governments alike to carefully consider the ethical implications of personalised pricing going forward.
Co-author Dr Mark Verhagen, Postdoctoral Researcher at the Leverhulme Centre for Demographic Science said, ‘We find that the ethics of personalised pricing versus unitary pricing depend on the situation. When factors like perceived unfairness and surveillance aversion are significant, unitary pricing often performs better. Our study highlights that the ethics of pricing methods are context-dependent, underscoring the need for careful consideration of various factors to ensure fair and ethical outcomes.’
The full article, ‘Does Price Personalization Ethically Outperform Unitary Pricing? A Thought Experiment and a Simulation Study’, can be found in the Journal of Business Ethics.
