Once, a very rich man was riding in his carriage at breakfast time. Hungry, he told his driver to stop at the next restaurant. He went inside, ordered some eggs and asked for the bill. When the owner handed him the check, the rich man was shocked at the price.
“Are eggs rare in this neighborhood?” he asked.
“No,” said the owner. “Eggs are plentiful, but very rich men are quite rare.”
I ran across that joke in a recent essay by Jay L. Zagorsky, a professor at Boston University, writing for TheConversation.com.
Professor Zagorsky was addressing “personalized pricing”, and he wrote, in his July 31 essay:
Recently, Delta Air Lines announced it would expand its use of artificial intelligence to set airfare prices. This move sparked concern among flyers and politicians. But Delta isn’t the only business interested in using AI this way. The practice has already spread across a range of industries, from finance to online gaming.
Customized pricing – where each customer receives a different price for the same product – is a holy grail for businesses because it boosts profits. With customized pricing, free-spending people pay more while the price-sensitive pay less. Just as clothes can be tailored to each person, custom pricing fits each person’s ability and desire to pay.
On the face of it, personalized pricing seems like a great idea, despite the fact that I’ve never owned any tailored clothing. I just buy my clothes right off the rack, and pay the price marked.
But why should an underpaid journalist like myself, for example, pay the same price for an airplane ticket as Warren Buffett or Elon Musk? Or the same price for socks, for that matter? The world has developed AI for a reason, and that reason might ostensibly be to save me money, when businesses finally come to understand how little money I actually have to spend on a plane ticket.
Not that I buy a lot of plane tickets. In fact, I can’t even remember the last time I bought a plane ticket.
Or socks, for that matter.
Luckily, people like professor Zagorsky have a job where they can sit around and study potential problems like “personalized pricing.” In his essay, he notes that, for much of human history, pretty much everything was sold based on customized pricing. Shoppers and merchants regularly honed their skills at bargaining for items in the marketplace, which back then was an actual “marketplace”. A merchant always asked for a higher price than they expected to receive, and the customer always offered a lower price than they expected to pay, so they could finally settle on a compromise price somewhere in the middle that left both parties semi-satisfied.
Assuming well-honed bargaining skills.
But what’s happening now, with AI-driven “personalized pricing”, seems, on the face of it, to leave me totally out of the bargaining process. Delta Airlines offers me a price based on their opinion of my financial resources, and I have no recourse but to accept it or refuse it. To make matters worse, the Delta Airlines AI might very well be looking at how much United Airlines is offering me for the same flight.
I spent years of my life, honing my bargaining skills while I was married to Darlene. All that honing, wasted.
The history of pricing took a turn in 1876, when John Wanamaker opened a department store in Philadelphia and began labeling each item with a fixed, non-negotiable price. This new merchandising approach was reportedly popular with shoppers, because they no longer had to spend time haggling over prices. A shopping excursion that previously involved a couple of hours of bargaining back and forth, could be completed in a matter of minutes.
The fixed prices also had benefits for Mr. Wanamaker, because he could hire unskilled sales people who could manage a cash register, but who had no expertise in negotiating prices.
The goal was to move the merchandise as efficiently as possible, out the door. A small step for a department store, a giant leap for a ‘consumer society’.
Setting prices became simpler, as well, using the “cost-plus” system. You just take the wholesale price of the item and double it, thus leaving an allowance to put the item “on sale for 10% off” and still make a profit when you needed to boost sales.
And still laugh all the way to the bank.
But the world is changing. Again.
Now that most sales are credit card sales, VISA and Mastercard and the rest of the industry knows exactly how much I spent at City Market this week, what I bought, and which of the items were ‘on sale’. (All of them. My mother taught me how to shop.). They also know what items I bought on Amazon, and ebay, and Etsy, and Walmart, and what items I put in my ‘shopping cart’ to buy later.
To put it plainly, the retail industry knows me better than I know myself. And now, thanks to AI, they will be doing their very best to try and outsmart me.
There are ways to hide, however. You can pay with cash, for example. A cash purchase really confuses them, unless you happened to scan your ‘frequent shopper card’ to get the in-store discounts.
Online, you can clear your computer or phone ‘cache’ prior to making a purchase. But that may not help, because they already know your computer’s IP address and your phone number. Heck, they already know what time you wake up in the morning, and the color of your eyes.
From professor Zagorsky:
The cashless society combined with AI is setting us up for customized prices. In a custom-pricing situation, seeing a high price doesn’t mean something is higher quality. Instead, a high price simply means a business views the customer as willing to part with more money.
The joke that began today’s column goes me hope, however. The rich man paid a higher price for his breakfast, simply because he was rich.
This might mean that the journalist will pay a lower price for his breakfast, just because he’s a journalist.
Underrated writer Louis Cannon grew up in the vast American West, although his ex-wife, given the slightest opportunity, will deny that he ever grew up at all. You can read more stories on his Substack account.