Corporations Learned The Maximum Amount They Can Charge For a Product

28:15You need a ride pretty much right now because your battery is going to run out. And so we can charge you more on that point. And, you know, I talked to a University of Chicago economist that said, well, that might be a proxy for it's late in the night, but that's not the way that they designed the experiment. It was two people at the very same time. One had 84 % on their battery and one had 12%, and the 12 % person was charged more from the same location going to the same place. So this kind of stuff just wasn't available a while ago. And one question is what the legal system is going to do about this in terms of court cases.

28:53Talking about the algorithmic surge pricing that I mentioned, there was a court case over a company called Rainmaker, which is was working with Las Vegas hotels and once again, aggregating prices, showing these particular casino hotels a picture of the market so that they could raise their prices. And the judge threw out the case because he said, well, they were only recommending certain prices. They weren't mandating it, even though the statistics that Rainmaker even submitted say that 90 % of the time the recommendation is taken and that they strongly encourage people to take the recommendation.

29:32Otherwise, they cut them off the service. So how the legal system is going to react here is an open question. But lawmakers and policymakers do have tools here. There are tools against unfair and deceptive practices that the FTC has and also, you know, agencies like the Department of Transportation has with respect to the airlines. There are other various anti-price gouging tools and things of that nature. And there are also antitrust tools because the one secret sauce here is market power. The idea that you can just sort of willy nilly raise your prices in a competitive market, that's going to create a situation where a competitor is going to undercut you because they know that you're charging too much and the market will sort of rebalance itself.

30:21If you have a tremendous amount of market power and therefore pricing power, you have the ability to continue this without kind of worrying about whether your customers will go away. You've created a moat around your business. So that's a key facet of this as well. If, you know, competition policy moves towards a place where these markets suddenly have more choices for customers, then these pricing strategies lose a little bit of their power. One thing I would just add is I think we're really in a new legal frontier when it comes to personalized pricing and price discrimination and protection of protected classes.

31:00You know, as you point out, any set of pricing that relies in whole or in part on geography in the United States, given the extraordinary segregation in the United States by geography, is ultimately going to have a racial bias, intended or unintended, right? And so, you know, there have been some really interesting studies. There was a study of Uber and Lyft rides in Chicago, and they looked at like over 100 million rides, I believe. And what they showed is that, you know, if either the destination or the pickup point had a higher percentage of non-white residents, low-income residents or low-income residents, you saw higher fares.

31:42Now, of course, supply and demand can play a large role in that. But these overlays around geography are going to be interesting to consider. And the next thing I would just say on this point is, you know, when you think about surge pricing, right, and you think, okay, well, in an area, you know, where there's sort of less supply, you might want to ration by price. If you're in a low-income area where there's only one store and there's not a lot of competition, surge pricing is going to hit that space harder because there's just going to be low supply. And that's likely to be a low-income area, a minority, or a black or brown area as well.

32:19And so I think the overlay of sort of the geography of concentration in the United States, the geography of segregation in the United States, and personalized pricing is absolutely going to create some winners and losers. And I think the question is whether or not existing law is up to the task or whether or not new laws will be required to protect consumers from discriminatory practices and pricing.

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33:33It's built to grow with your business. Whether you are just starting out or already scaling up. Plus, it's easy to use, customizable, and designed to streamline every process. So you can focus on what really matters, running your business. Thousands of businesses have made the switch. So why not you? Try Odoo for free at odoo.com. That's O-D-O-O dot com. Hey, Ryan Reynolds here. Wishing you a very happy half-off holiday. because right now Mint Mobile is offering you the gift of 50 % off unlimited. To be clear, that's half price, not half the service. Mint is still premium unlimited wireless for a great price.

34:13So that means a half day. Yeah. Give it a try at mintmobile.com slash switch. Upfront payment of$45 for three month plan equivalent to$15 per month required. New customer offer for first three months only. Speed flow after 35 gigabytes of networks busy. Taxes and fees extra. See mintmobile.com. You know, I mentioned, by the way, that I play devil's advocate here. And I would just say, if my battery on my phone was about to die, I'm fine with paying a few extra dollars to get the car over the other guy. I'm just going to throw that out there. But actually, Lindsay, I want to follow up on this point because you're leading to something that I was going to ask about, which is that, you know, one of the things we're sort of talking about is a time tax, right?

34:51Like some people are going to just roll up to the McDonald's and some people are going to take the time to download an app and put in their data. I am not one of those people. I'm not very well organized, et cetera. But I probably, in theory, if I really cared, like would have, you know, the time to like set all these things up and do the miles and everything. Talk to us about like the disparate impact of basically, yes, there are better prices out there if you're willing to jump over these hurdles and take that time and be fully just like aware of all of the different availability. It seems like difficult to me because I'm disorganized, but basically like targeting different sets of populations based on how informed they are and the capacity that they have to deal with all of these different rewards programs and things like that.

35:34Yeah, I like I don't even have airline points because I'm too disorganized to keep up with accounts for Delta and American and things like that. So I hear you 100 percent on that point. Look, I think it's a really interesting question, right? There is this temptation to sort of figure out how you can hack personalized pricing or use a VPN to get around dark patterns or how can I beat AI and get a good discount. But I think really what the issue that we put out of the prospect shows is that increasingly in almost every area of your life, right, if you look at your household budget and the rental market where RealPage is helping landlords fix prices in the grocery store for your family vacation, where you're having to deal with algorithmic price fixing in both airline costs as well as hotels, you're up against the machine here, right?

36:25And I honestly don't know that even consumers with considerable time are able to coupon clip their way out of this one, right? I mean, imagine a world in which you hear from your friend that there's a discount on, I don't know, Cheerios. I'm buying a lot of those for my toddler right now at the Kroger down the street. But, you know, they've installed electronic price tags on the shelves. You know, by the time you get in your car and drive up to the Kroger, like the price of Cheerios has already changed, right? And so I think this is not a space where even folks with sort of like a lot of time, you know, who used to sit down and get the Sunday papers and pull together three sets of coupons and organize them in a book and go to three stores to get three different deals.

37:06You know, even that is starting to look a little quaint and antiquated in a space with real time pricing and in a space where there are companies using, you know, predictive AI to move prices, you know, instantaneously. right? I just don't know that the consumer is going to win this one. I think we ultimately have to decide which pieces of this we're not happy to deal with, but we think they're legal, which pieces of this are illegal, and we should go ahead and enforce the law. And then honestly, which pieces of these items are unfair, and we just don't like it. And maybe if enough of us are focused on how unfair they are, we'll see the next Wanamaker coming back in and saying, hey, guys, like, I have the ability to use dynamic pricing.

37:51But like, you know, what you get when you come to Lindsay's store is like one frickin price. It may not be the lowest price, but like, I promise you, you and your neighbor will pay the same price. Right. So I think there are a number of ways that this unfolds. But, you know, I think that some of it is absolutely already illegal. Some of it probably should be illegal. And some of it is just maybe unfair and uncomfortable. And I think it's OK for consumers to think things are unfair that are legal. That's an opinion and a belief and a value we can all hold. And we can try to push for shopping to look different.

38:24Right. And also, I mean, it's pretty obvious to me that if you are, you know, a poor single mother working two jobs, you are going to have less time to try to game the system. And so you're not going to be able to find the types of deals that maybe other people with oodles of spare time can find. But there's another aspect of unfairness here, which we haven't really discussed just yet, which is in addition to seeing different prices. And actually, I would love to know why it seems that like people that are coded as poor by algorithms often end up being charged higher prices. So I'd love to ask you that, first of all.

39:03But then secondly, it feels like all these proxy profiles of customers where you can see their past behavior. You can see certain demographic info that also feeds into advertising, right? So the world that a poor person might live in based on the ads that they are seeing around them is very different to the world that a wealthier person is seeing. So the poor person is probably going to see things for payday lenders or, you know, buy now, pay later type stuff. And the wealthy person is going to see ads for, I don't know, brokerage accounts or luxury waterfront property. And that ends up feeling very unfair to me as well, and perhaps exacerbating inequality problem that we currently have.

39:47Yeah, I mean, the first really comprehensive study on why this phenomenon of poor Americans paying more happens was published in 1963. So this is nothing really new. And we see it in some of these personalized attitudes. There was a story several years ago about staples on their online products, offering different prices in different geolocations based on the IP address and the areas that saw the discount prices had higher average income. And, you know, ability to pay and willingness to pay are two different things. And I think that's an important concept to know here because sometimes they get conflated.

40:32Sometimes economists say, well, actually personalized pricing is a great thing because poor people will be able to access goods that if there was one fixed price, they wouldn't be able to access. And they're making an assumption that it's all based on ability to pay, that the way that a personalized price will go is that you'll be charged more as you go up the income ladder. But that's not really how it works. You know, it could be desperation, as Joe just assented to, that causes your higher price. It could be other factors like this being a basic necessity that determines the higher price. And so the willingness to pay is calculated under a number of different factors.

41:17It could be that the algorithm knows that you only have an hour between jobs or while you're going to school to grab some lunch. And so they're going to send you or serve you an offer that is more in that time of day when they know that you have to eat and you're out and about and that's where you're going to spend your dollar. So there are a whole number of ways where this does not look like you just pay more if you have more resources. Willingness to pay is a very different concept. One interesting thing about the Staples study that Dave mentioned that I think raises an important sort of macro point about this entire world of pricing strategies and tactics is that, you know, corporate concentration and consolidation undergirds it all and facilitates and accelerates it all.

42:11And so the reason that rich people who could afford to pay more for things at Staples, right, I mean, as a percentage of your budget office supplies is not large if you're wealthy. The reason they were getting better deals is because there were more competitors to Staples in wealthier geographies, right? Whereas lower income folks were paying more at Staples because Staples knew they had them over a barrel, right? And so the corporate concentration overlay is key here. And it is key in one other way as well, which is really featured prominently in the issue, which is that increasingly the business case for mergers is data.

42:52So, you know, we highlight the example of Walmart buying Vizio. Why is Walmart buying a TV company? Well, they're not buying a TV company. It's a smart TV manufacturer masquerading as a media company, right? They're buying streaming data so that they can pipe Walmart advertisements into your home. And so they also can collect data on sort of what you're watching and what you're clicking on. Similarly, in the piece, you know, there's considerable speculation that one of the major motivations for the Kroger Albertsons merger is the consumer data. And, you know, the grocers are making just as much money selling your data to the highest bidder as they are on selling you Cheerios.

43:32Right. And so I think the data, the value of the data for companies and the interlay with consolidation, both as a motivator for consolidation, but also as something that you can just do more aggressively if you aren't worried about competition is a key piece of why pricing looks different today. That's really interesting about the Kroger Albertsons. It's come up a few times because now, of course, with AI, like all these companies are just desperate to get any fresh data. And people have legitimately made the case. Actually, Kroger's is an AI play because it just has so much unique data that no one else has.

44:09So that that makes a lot of sense. I have one more big question, which is, you know, I started we mentioned in the intro, the one industry that has been doing this forever or it seems like is the airline industry. and both of you mentioned some of these third-party consultants that are sort of bringing some of those practices to other industries. Can you talk a little bit about that further? How direct or how bright is the line between what the airlines have been doing with frequent flyer miles for decades and then that sort of migrating over through consultants, et cetera, into other industries realizing that they can more or less do the same thing?

44:45Well, it's really interesting because we had, you know, a number of different authors write these different pieces. And, you know, I was the editor and they all came in. And it seemed like every single piece went back to the airlines initially as kind of the originator of a lot of these strategies. There is a consultant called IdeaWorks Company, and they've been around for a while. The guy who runs it is named Jay Sorensen. And for one of these articles, we actually talked to him. And it's not only that Ideal Works Company presents these reports and research mostly about junk fees or about ancillary revenue is what they call it.

45:26They even pulled this thing called an ancillary revenue masterclass, which literally is a junk fee bootcamp that explains, they bring in executives And they tell them, here is how you can raise money by adding different various fees onto things that used to be bundled with the ticket fare. And so now we have baggage fees and we have change fees and we have fees if you want a better seat with more leg room. And all of this comes from sort of the brainchild of IdeaWorks Company, which sends these reports that cheerlead when ancillary revenue numbers go up. It's become a huge business for the airlines to unbundle their tickets and add all of these extra fees, basically making your situation in air travel miserable unless you pay your way out of it.

46:21And so we've seen that there. We see it in algorithmic price fixing. And all of these strategies started with the airlines, or at least some of them, but they've migrated. They've moved on. In the junk fee example, one of my favorite things in the issue, there's this company called Suburban Propane. Obviously, they sell propane to various people, whether they use it in camping or whatever they use it in. And they have a fee schedule on their website. And I'm just going to read what the fees are. They have a safety practices and training fee, a tank rental fee, a transportation fuel fee, a restocking fee, a tank pickup fee, a minimum monthly purchase fee, a system leak test fee, a reconnect fee, a will call fee, a forklift minimum delivery fee, a diagnostic fee, an installation fee, an early termination fee, an emergency special delivery fee, a late fee, a return check fee.

47:20and a meter account maintenance fee. And I'd like to say that was an outlier, but I'm not sure it is. We are seeing these add-on fees in all sorts of industries. It originated in the airlines, and now it's gone everywhere. And you see the Biden administration actually taking this up as a cause. The term junk fee was kind of invented or coined by Rohit Chopra, who's the director of the Consumer Financial Protection Bureau, and they're trying to attack this issue. The Federal Trade Commission has put out a kind of ban on junk fees, which is more of a disclosure rule saying you have to do all upfront pricing.

48:03And the CFPB has tried to ban or cap credit card late fees, for example. We're seeing now kind of a politics being created out of these different pricing strategies and an attempted pushback on them. I have just one more question, which is going back to the introduction and the conversation between myself and Joe and the implications that this has for macroeconomics. If we think that companies are becoming more sophisticated in their pricing, if we think that we're seeing, I guess, late stage capitalism meet a technological revolution that creates the ability to have more sophisticated pricing, what does that mean for inflation?

48:48if maybe prices become more about data and algorithms rather than a function of supply demand or the Phillips curve? How do economists and central bankers actually handle that particular problem? I think it's a terrific question, and I'm not sure it's one that the central bank really is willing to handle just yet. You know, one of the things we put in our introduction is this colloquy between Sherrod Brown, who's the chair of the Senate Banking Committee, and Jay Powell when he was doing his semiannual report. And Sherrod Brown was asking Powell about these pricing strategies. And Powell seemed very, very uncomfortable.

49:34He didn't really want to talk about it. He said, well, you know, surge pricing, maybe it works out. even for the consumer, it doesn't have an inflation impact because if there are not that many people in the store, you get a lower price. And if there are people in the store, you get a higher price. But what he ended up on was saying that pricing is incredibly important and we have to give companies the freedom to do it. So he really sort of disassociated himself from this issue. And I think it's a fascinating question that you raised, Tracy, that if we see supply and demand and the usual kind of reasons for pricing become a little bit less, I'm not saying it's going to be completely less, but a little bit less of a factor.

50:21And we see sort of pricing get a little bit unmoored from those traditional factors. Then what does that mean for how the central bank operates? And I think our answer, and Lindsay can speak to this more, is that it has to mean that we need more of a whole of government approach to these particular issues. And for many years, we've kind of outsourced any question about inflation to the central bank and to monetary policy. And I think policymakers have to understand that that might not do the whole job anymore and that there are other factors and there are other agencies that can be brought to bear here.

51:02Yeah, policymakers are going to have to actually study individual firm behavior, industry level behavior, really start to get up to speed on new pricing strategies and tactics if they really want to understand what's going on in the economy. I think for many Americans, part of the reason why, you know, we haven't seen folks applauding inflation headed back to 2 % is because the word inflation doesn't really capture everything people are experiencing in this economy, right? Sure, inflation is a piece of it, but there's also just like plain old price gouging. There's also junk fees. There's also dynamic pricing.

51:40All of these different ways people are experiencing the economy when it comes to pricing sort of isn't captured, I think, fully with the word inflation. I think it's why people are so unhappy with the economy today. There's a lot underlying this shift. You know, of course, these techniques preceded inflation, but they do seem to have been unleashed and hypercharged during this period of high inflation. And it'll be interesting to see sort of what happens in the future. But it sure seems like the genie is out of the bottle here. And I think we're just going to see more of this type of activity rather than less.

52:12And I think that's why you're seeing this burgeoning sort of cottage industry of pricing data firms. Right. I mean, the handful of CEOs who thought they were just selling groceries, you know, need a firm to help them realize they're actually supposed to be selling data and they need a firm to help them think through how to maximize pricing in a world where cost cutting is hit bone and shareholders expect more and more returns. Like there's got to be a revenue play too, right? And a revenue play is going to be in part a pricing play. So I think we're in a new world here when it comes to pricing.

52:44And the Federal Reserve is not known for being nimble or fast moving or particularly innovative when it comes to thinking about the economy. They've been sort of running a same playbook for a long time here, right? So I think only time will tell whether or not they catch up. By the way, I checked out the sample two-day agenda of the IdeaWorks company ancillary revenue masterclass, and it really is a boot camp on charging more. 1015 coffee break, 1030 top 10 things you need to know about ancillary revenue and airlines, 11 ancillary revenue boost the bottom line, 12 lunch. It's really amazing. David and Lindsay, that was so fantastic.

53:23Really appreciate you both coming on Odd Lots. Everyone should check out the June 3rd edition of the American Prospect. Really fascinating stuff on a range of topics. Great chatting with both of you. Thanks a lot. Thanks for having us.

53:47Tracy, I thought that was fantastic. And there was a lot there. Actually, I thought Lindsay's point at the very end, I thought was a really great one, because obviously, mostly people don't like higher prices. And the inflation data, probably for better or worse, captures the general rise in prices over the last several years and the disinflation over the last couple of years. But then this idea that there's something else out there that's really annoying, maybe is a sort of polite way to put it, or like aggravating about this economy and this sort of psychological tax and feeling that to get the optimal price, you have to like download an app and all of this stuff that I think sort of compounds the aggravation of higher prices themselves.

54:25No, absolutely. And also just the point about, well, the genie's kind of out of the bottle. And maybe we are moving from an age in which it was all about driving costs lower and building factories in places like China or Vietnam or wherever in order to lower your cost of production. But the thing that we saw from the pandemic was that, A, you have supply chain issues. And so that production facility can close. And then B, you can also make money by raising your prices and selling less of your stuff. And this has been an ongoing theme on All Blots. And we spoke with Samuel Rines about this, of course.

55:05And you can see the strategy going back to Lindsay's point at the beginning of the conversation on the earnings calls. This is something that CEOs very openly discuss and talk about. Totally. By the way, our producer, Kale came through the reference, the 1967 book, The Poor Pay More by David Keplowicz looks really interesting. And it hadn't really clicked to me, David's point, which is that there is sort of ability to pay. And yes, you know, the rich in theory and practice have the ability to pay more, but then the sort of willingness to pay about like, okay, you're in a desperate situation, you need this.

55:40Or as Lindsay's point, like you may only have in your area, one competitor or wherever it is. And so the idea that ability to pay is the only measure by which a company would set a price is clearly wrong for some reasons that are obvious once you hear them. I think that's such an important distinction. And then the other thing I would just tack on to that is going back to the advertising point. So, you know, depending on whatever proxy profile the algo is building about you, all the prices that you're seeing, all the offerings might be very different to someone who is better well off. And so you never even, maybe if you're living in a certain zip code and you have certain demographics attached to you or certain buying patterns or certain credit scores or whatever, maybe you never even get ads for brokerage services, right?

56:29And so the idea of building wealth through the stock market is just something that you never encounter. And so all of that inequality becomes sort of codified. God, I'm depressing myself as I talk. Joe, this is depressing. Wait, are you a little bit less relaxed about some of this now? Please tell me you are. I still kind of think I still think I would be happy to pay more for an Uber if my phone was going to run out. But there are many aspects of this that I find uncomfortable. Surge pricing does not bother me the same way other things do. I do want to attend an Ideal Works Company Ancillary Revenue Masterclass.

57:05Maybe we could do that one day. I do not. Let me just throw that out there. No, I mean, that list of junk fees that David was reading, we're like a hair away from them basically charging for oxygen in order to breathe. Right. Like we're almost there. That seems excessive. On the plane, it's like, does that thing fall out? Do you pay extra to make sure that the thing will fall out? Yeah. Well, the one other thing I was going to throw in is I know they talked about the Federal Reserve being slow to approach this. And to some extent, you know, it's such a thorny issue. As soon as the word greedflation comes up, people immediately start arguing about it.

57:47Maybe you could couch it in different terms. You know, price pack architecture, more sophisticated pricing, personalized pricing and all of that. But I will say this is something that has come up in our conversations with Richmond Fed President Tom Barkin, where he talked. I think he might have even used the idea of genie out of the bottle, which is one thing that companies have learned from the past couple of years is that they can push price and experiment with demand elasticity. That's true. I think to David's point, what it says is that some of these things are like a whole of government approach.

58:22And so the idea is like also it's like the Fed does not have like tools to go after like junk fees or whatever. But yeah, I thought that was fascinating. Shall we leave it there? Let's leave it there. All right. This has been another episode of the All Thoughts podcast. I'm Tracy Allaway. You can follow me at Tracy Allaway. And I'm Joe Weisenthal. You can follow me at The Stalwart. Follow our guest, David Dayen. He's at D Dayen. And Lindsay Owens. She's at OwensLindsay1. And definitely check out that new edition of the American Prospect magazine. Follow our producers, Kerman Rodriguez at Kerman Armin, Dashiell Bennett at Dashbot, and Kale Brooks at Kale Brooks.

58:58Thank you to our producer, Moses Andam. For more OddLots content, go to Bloomberg.com slash OddLots. We have transcripts, a blog, and a newsletter. And if you want to chat with fellow listeners 24-7, go to our Discord, Discord.gg slash OddLots. And if you enjoy OddLots, if you like it when we dive into price pack architecture, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad-free. All you need to do is connect your Bloomberg subscription with Apple Podcasts. To do that, find the Bloomberg channel on Apple Podcasts and follow the instructions there.

59:36Thanks for listening.

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