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Today we are going to take a look at a ubiquitous and relatively new practice of surveillance pricing.
Big Retail is watching you
How much should a milkshake or an airplane ticket cost? Standard economic theory will tell you: As much as someone is willing to pay for it. Setting that price used to be a fairly crude science, but with the advent of advanced algorithms and AI programs that can analyze the reams of data consumers inadvertently offer to marketers, the science has become so exact that it’s raising concerns about privacy, security, discrimination, virtual red-lining, and manipulating consumer behavior.
That’s prompted the Federal Trade Commission to subpoena eight major corporations, including Mastercard, JP Morgan Chase, and the global consulting firm McKinsey & Co., to learn more about the practice known as surveillance pricing, or the use of advanced algorithms and AI to set prices for individuals based on a customer’s ability or willingness to pay, rather than supply and demand. The FTC says it’s focused on the “opaque market” run by third-party information brokers who do the targeting for online retailers, and one thing that’s really got the FTC irritated is that the pricing is based on all that data consumers never fully realized was being collected.
“Firms that harvest Americans’ personal data can put people’s privacy at risk. Now firms could be exploiting this vast trove of personal information to charge people higher prices,” said FTC Chair Lina M. Khan. “Americans deserve to know whether businesses are using detailed consumer data to deploy surveillance pricing, and the FTC’s inquiry will shed light on this shadowy ecosystem of pricing middlemen.”
Surveys show consumers hate surveillance pricing and are deeply concerned about the way their personal data is being used. A poll last year by the Pew Research Center showed that 81% of Americans are concerned about how companies use the data they collect about them, and 77% have little to no understanding of what companies do with that data.
“There’s something inherently deceptive about using data that people didn’t realize they were giving permission for,” R.J. Cross, director of the Consumer Privacy Program at the Public Interest Research Group, a nationwide non-profit, said in an interview. “We currently live in a notice and consent regime, where we are accidentally consenting to having our data collected. We have this really broken concept of what it means to give consent. When the only button [on your screen] is a giant accept button, it’s hard to even say that anything is done with consent right now.”
It may be deceptive, and it may anger consumers, but it’s textbook economics, says Columbia Business School professor Brett House. “What we are seeing is a lot of backlash around the perception that people are being squeezed for dollars and pennies in response to their search histories and shopping behavior,” House said in an interview. “It is textbook microeconomics — you would expect firms to extract the greatest ‘consumer surplus’ in each market they service.”
That, said House, can offer consumers greater choice, but it also helps create monopolies. “To the extent that it allows for greater product differentiation and greater availability of choice, it may be a positive, but it may also serve to entrench incumbent firms and limit competition, and that is where the FTC inquiry comes in.”
What’s McKinsey doing here?
Most of the companies subpoenaed by the FTC, including Mastercard and JP Morgan Chase, are brokering the data, collecting it, combining it, analyzing it and selling it to the people who want to sell you stuff. But also on the list is the consulting firm McKinsey & Co.
The current FTC inquiry is focused on how McKinsey and other third-party consulting firms provide surveillance pricing services. These firms are known for providing expensive and expansive competitor reviews on wages and pricing data, which the FTC says could let their clients evade the price and wage-fixing restrictions the agency enforces.
McKinsey has a history of working along the edge of what are generally considered ethical business practices, working for opioid manufacturers, tobacco companies, fossil fuel companies, the U.S. government’s Immigration and Customs Enforcement, and authoritarian governments around the world, teaching its clients how to maximize their own benefit, with little regard for the consequences. As the magazine Current Affairs noted in an article last year, “Again and again, McKinsey has come to town and left people worse off.”
McKinsey has built a significant business around advising firms just how to maximize their profits. In fact, McKinsey offers a suite of services to its clients to “provide accurate product and market data, competitive intelligence, and data-driven consumer insights to effectively set and adjust prices.”
As New York Times investigative journalist Mike Forsyth noted in an interview following a series of articles he cowrote with Walt Bogdanich, “When McKinsey latches onto a big idea, it spreads and people get very enthusiastic, like it’s the flavor of the month.” Forsyth cites McKinsey’s promotion of outsourcing and offshoring in the 1990s to many of its clients. Eventually, the practice led to the demise of U.S. manufacturing and the rise of China as the world’s factory.
McKinsey projects tend to follow a template, Robert Barham, a former McKinsey employee, wrote in a post several years ago, that McKinsey pays scant attention to any negative consequences of the firm’s recommendations. “This approach involves gathering information, analyzing and interpreting that information, crafting your findings into actionable suggestions, filing off the complexities, and presenting it all for client consumption.”
McKinsey is known for recruiting the best and the brightest from the world’s top universities and business schools, but that doesn’t mean they do what’s best for the world, said the Times’ Bogdanich. “The best and brightest will sometimes do anything for money. And McKinsey is a perfect example of it.”
Is there a solution?
One of the key issues the FTC is looking at is whether consumers have consciously agreed to share their data. “Many consumers today are not actively aware that their devices constantly gather data about them, and that that data can be used to charge them more money for products and services,” the FTC said in a statement.
PIRG’s Cross says the answer is strong regulation that gives consumers a real choice to protect their data. “We should put strict rules on data — companies shouldn’t be able to collect data for more than what the consumers are expecting to get,” she said. “When I’m using my Mastercard, I expect Mastercard is using the data to help me complete the transaction. They don’t need to turn around and sell that data to other actors. It’s not what I expect.”
Columbia’s House agrees. “Most of us never click on terms and conditions, most of us accept cookies once and then pretty much forget about it,” he said. “A truly fair marketplace would consider requiring a frequent reminder of what we are giving up for what we are taking.”
Europe’s General Data Protection Rule, known as GDPR, is one model the U.S. could adopt. It offers consumers clear options for blocking cookies, reminds them more often to decide if they want their data collected, and offers them a “right to be forgotten,” making it fairly straightforward to get their info removed from marketers’ databases.
Cross notes that 17 states have already passed data privacy laws, some stronger than others, but Congress has yet to pass two bipartisan data protection bills, the American Privacy Rights Act, and the American Data Privacy and Protection Act.
We hope you’ve enjoyed this deep dive, prepared especially for Quartz members. Have a great weekend, and keep your data safe. — Peter Green, Weekend Brief writer