Web analytics – Enhance Competition or Improve Price Discrimination for online transactions?

  In learning more about the concept of web analytics and the increasingly significant role the “byte-crumb trails” that consumers leave behind as they surf the web, one cannot but consider whether the information these trails generate will serve as a force that will enhance the competitive nature of the markets operating in the internet, resulting in an improvement for the consumers, or if it will be a force that will generate an increasing asymmetry of information between consumers and suppliers.

Perhaps our “byte-crumbs” will have different effects depending on the nature of the businesses in question when operating outside the Internet.

  For example, let’s take shoe stores. Before the Internet, shoe shopping, other than mail-order catalogs like LL Bean, was mostly a local transaction. With the advent of the Internet, consumers were empowered to compare prices for the same product across an entire country – if not the entire World- and purchase the pair that was more convenient. Moreover, customers were now exposed to a significantly larger market with access to see competitors’ pricing making the market extremely transparent and eliminating the local monopoly that the “mom & pop” shoe store on Main Street may have previously enjoyed in small towns all over the World. Using the “byte-crumbs” will have little effect other than understanding where they need to ship and potentially other products that can be offered based on the demographics of where the shoes have shipped (or been billed to) and some inference for tastes, as well as defining better strategies to better route purchasing intent from one shoe store to the other. Yet any attempt to discriminate prices for a single product based on any information in the profile would be futile and short lived given the availability of several other players providing the exact same product or near substitutes. Such an effect would deepen traits of competitive markets where the asymmetry of information is significantly reduced.

  But, for example, what happens with not-so-competitive markets, with high barriers of entry, such as airline operators? Established oligopolies where the alternatives on routes is more limited than the amount of carriers could use this information to significantly mark-up prices for the same route, from one customer to the next by simply using immediately available demographic and other profiling information such as the operating system, the location the query is originating from, the type of device (browser toolbars and some cookies could capture whether the system capabilities, which can be used to estimate income level, etc.) to discriminate prices. Using a high-end MacBook Pro to shop for an airline ticket online could signify paying a premium for a seat on an airplane over someone who is browsing with a Windows XP machine, given that one device is likely more expensive than the other. In this case, while the profiling tactics and available information might lead to a better understanding of different customers’ Willingness to Pay, this information could – and probably will – be used by providers to “tailor” prices to capture more of the consumer surplus in each individual transaction since airlines will not engage in price-wars to acquire customers. In essence, charging more for a non-differentiated product or service based solely on assumptions based on the profile.  What was once limited to discriminating business vs. leisure travel can now be fractioned up by as many dimensions as consumers are sharing through their online movements.

  In the physical world, this type of discrimination could be significantly harder to do, but with the limited alternatives, consumers are mostly trapped. With the empowering of the online world and the trails of “byte-crumbs” that deliver information about how consumers think, their estimated income level and more, this trait of oligopolies can deepen significantly and allow or near-perfect price discrimination. However, alternatives have emerged with online ticket aggregators and travel sites like Expedia, or Priceline which even allows consumers to “place blind bids” and have vendors provide services that would usually exceed a consumer’s Willingness To Pay for prices at or below that mark, but those types of bids have significant risks for both sides (i.e.: non-fulfillment from vendors) or that make the overall transaction a completely different type of operation.