A Price of One’s Own: An investigation into personalised pricing in essential markets
We wanted to explore how the growth of ‘big data’ might affect the prices people pay for essential services. Our research ‘A Price of One's Own [ 0.5 mb]’ sets out our reflections on Frontier Economics’ investigation into Personalised Pricing in Essential Markets [ 2.1 mb].
One of the most important things markets do is set prices for goods and services. But, except in highly competitive markets, prices tend not to be uniform: they are set in part by what companies know about what we are willing to pay. This is price discrimination and it’s all around us.
Price discrimination is as old as the marketplace and can make markets work better by lowering prices for many consumers. But technological change is making it more prevalent, more intense — and more personalised. More personal data about us is being produced than ever before — for example, by 2020, 53 million smart meters in UK homes will be generating unparalleled levels of data about our energy use. Alongside this, internet shopping makes previously public marketplaces more private - there’s a limit on how much price personalisation supermarkets can do, because everyone can see the price other people are paying. As markets go digital, this check on pricing strategies is diminished.
These are all potentially far-reaching changes to our economy. But we wanted to answer a specific question: if firms use this explosion of personal data to personalise prices, what will this mean for the prices people pay for essential services?
Our research found that personalised pricing isn’t currently widespread within essential markets. This is because:
Firms need data they don’t have. Many essential service providers do not yet have the ability to collect, store and analyse big data on the scale necessary for personalised pricing.
The return on investment is too low. Personalised pricing requires investment in new IT systems & algorithms. Since consumers tend not to like the idea of personalised pricing, firms aren’t yet taking the risk on investing.
There are also specific economic conditions under which personalised pricing can emerge. For this pricing strategy to become widespread, two main things are important:
Providers must be able to charge more for services than the cost of producing them. After all, if lots of providers sell a product cheaper than the price a provider expects they’re willing to pay, many customers will just switch away.
Providers must be able to use data to segment consumers into smaller groups associated with common behaviours or characteristics. This information can be used to work out who’s willing to pay more and who will only buy at bargain prices.
In the postal and water sectors, it’s unlikely that personalised pricing would emerge under current price protections. Price caps mean that it’s relatively hard for providers to price above cost, or to segment between users. This might change in coming years, as it’s possible that the water sector will see the introduction of competition and an associated loosening of prices, and the use of online accounts for post and parcel delivery will make it easier to segment consumers.
In the energy and telecoms markets, personalised pricing looks more likely. The pricing of energy and telecoms is more flexible, with an enormous range of tariffs on offer in both markets. These markets also have better access to consumer data, including personal data and usage data, providing firms with a fuller picture of their behaviour.
For the most part, our research finds that truly personalised pricing lies in the future. But the challenges it presents should be tackled now. Many of the measures that currently protect consumers could also serve as important safeguards in the future:
Current price protections are vital - but these must be kept up to date, to ensure those who are least able to manage don’t get left behind.
Regulators need to keep up with technological changes - by maintaining oversight about how data is used to inform pricing strategies and monitoring the cost of essential services for different consumer groups.
- More needs to be done to ensure that technological developments - such as automated switching services - are used to benefit all consumers, not only those who already shop around.