This summer I went on a two-week vacation to Morocco. It was an amazing time full of new experiences from a night in a Berber camp in the desert to paradise-like rooftop terraces in the city of Marrakech. However, the most remarkable experience was the bargaining in the souks. As a European who has not been to an Arab country this is quite something new: The price is not what the seller tells you it is but is based on your skills in bargaining.
When listening to the lecture the other day on bundling, versioning and price discrimination in general I was reminded of this vacation and I hit me that those Moroccan vendors had been using all these techniques for centuries. Take anchoring: When talking to a local in Marrakech he explained that the vendors are not simply setting those anchors randomly but they were also doing this according to nationality. They had a ranking, the highest anchor price for the Japanese, followed by the Americans, other Europeans, foreigners who lived in the country and then by locals. It is common practice to price the good according to the customer’s willingness to pay even though this means Japanese customers pay twice as much as French customers. An important difference that needs to be noted is that you were entitled to bargain and both sides knew how they got to a certain price in the end.
The same philosophy of setting the price as close as possible to the customer’ highest willingness to pay applied at my internship at a German airline in the revenue (yield) management department. To clarify: At most of the legacy-carriers (e.g. British Airways, Air-France KLM and Lufthansa) pricing is not done by algorithms yet but are set by the ‘pricers’ in the revenue management department of the airline. Using this approach, a customer basically pays for flexibility. The less attractive the destination, the day of departure and the restrictions in booking conditions (cancellation, refund, change of dates) the cheaper the ticket. (Hecking, 2016) No-Frills airlines such as Ryanair do it differently and offer cheap tickets for the first customers but make the flight profitable for the airline by increasing the price for the last tickets and other additional factors.
Both approaches appear unclear to the customers but from the airline’s point of view the legacy carriers know exactly why a customer paid that certain price. The no-frills airlines usually do not have this knowledge and leave it up to algorithms to decide how much the customer should pay.
What the future holds in terms of pricing looks exciting and frightening at the same time. Take an everyday activity such as grocery shopping. The normal experience is that prices are printed on paper cards. In the end, if you have a bonus card or something similar you might get a discount but everyone pays the same price for a product. Looking at Amazons acquisition of Whole Foods (Petro 2017) and the newest development in face recognition software (The Economist 2017) this day-to-day activity might change. You go into your regular store but the price tags are digital so they can change within a second. Those fish finger you always paid two Euros for might now be 20 cents more expensive and as you have not bought beer in some time your usual brand is now 30 cents cheaper. Another person with other preferences and might have bought the same stuff as you but paid either more or less, depending on the data that was already gathered about him.
Concluding, price discrimination or a price based on your willingness to pay or even ability to pay, is not something new. Moroccan vendors have practiced and perfected this discipline over centuries. However, it is something new that you are not allowed to bargain with the cashier at your supermarket over the price of this bottle of wine: The customer is deprived of his ability to influence the price. Until now, the supermarkets acted like legacy carriers, setting a price that was fix for everyone even though the customers did not know why it was this cheap or that expansive. In the future supermarkets might be more like no-frill carriers leaving the price setting to an algorithm and not knowing why it is more expensive for this customer but not for the next one. Therefore, there might be a time coming where the situation of being too afraid to ask the person in the seat next to you how much he paid for the flight is also applicable to the person next to you in the line of the supermarket.
What do you guys think? Is this just a horror scenario or might it become reality?
Sources:
Tiong, Peng (2016), Airfares increase as you search: Price Discrimination?, http://pengtiong.com/blog/airfares-increase-as-you-search-price-discrimination
Hecking, Claus (2016), So fliegen Sie billig, http://www.zeit.de/2016/31/flug-preis-gebuehr-lufthansa-billigflieger
The Economist (2017), What machines can tell from your face, https://www.economist.com/news/leaders/21728617-life-age-facial-recognition-what-machines-can-tell-your-face
Petro, Greg (2017), Amazon’s Acquisition Of Whole Foods Is About Two Things: Data And Product, https://www.forbes.com/sites/gregpetro/2017/08/02/amazons-acquisition-of-whole-foods-is-about-two-things-data-and-product/#395fe308a808
