A FURTHER ARGUMENT IN FAVOR OF HANGING CAPITALISTS

Ah, the Tech Revolution - it was supposed to take us to Utopia, but somewhere along the line, the system malfunction and chose Dystopia as the destination.

From today’s digital edition of The Atlantic Magazine:

Welcome to Pricing Hell

On February 15, Ron Ruggless was sitting in his home office in Dallas, listening to a Wendy’s earnings call—something he does every quarter as an editor and reporter for Nation’s Restaurant News. When the new CEO of Wendy’s mentioned that the company might introduce “dynamic pricing” in 2025, Ruggless wasn’t surprised; many restaurants have started adjusting prices depending on the time of day or week. It seemed like minor news, so he wrote up a brief report. He didn’t even bother to post it on social media.

About 10 days later, Ruggless saw that Wendy’s was going viral. The Daily Mail and the New York Post had picked up the story, framing the new policy as “surge pricing.” On X, Senator Elizabeth Warren called the plan “price gouging plain and simple.” Burger King trolled Wendy’s: “We don’t believe in charging people more when they’re hungry.” Wendy’s went into damage control. In a statement, it claimed that it wasn’t planning to raise prices during high-demand times, but rather to lower prices during low-demand times. That distinction was lost on most observers—including, frankly, this one—and the narrative took hold that Wendy’s was the next Uber.

The anti-Wendy’s backlash made sense. Who wants to pull into a drive-through without knowing how much the food is going to cost? But it was also selective. Dynamic pricing is hardly new. Airlines have been charging flexible fares for decades. Prices on Amazon change millions of times a day. Grocery stores have begun using digital displays to adjust prices on the fly. The list grows by the week.

Prices aren’t just changing more often—they’re getting more complex, too. Fees, long the specialty of banks and credit-card companies, have proliferated across industries. Previously self-contained products (toothbrushes, movies, Microsoft Word) have turned into subscriptions, while previously bundled items (Wi-Fi at hotels, meals on airplanes) are now sold separately. Buying stuff online means navigating a flurry of discount codes, often just expired. Meanwhile, prices are becoming more personalized as companies hoover up customer data.

We’re used to thinking of prices as static and universal. Sure, they might rise with inflation or dip during a sale, but in general, the price is the price, and it’s the same for everyone. And we like it that way. It makes our economic lives predictable, and, perhaps more importantly, it feels fair. But that arrangement is under attack from two directions. The first is obfuscation: the breaking down of prices into components and the piling on of fees. The second is discrimination: the charging of different prices to different customers at different times.

Contempt for fees is strong enough to unite even Republicans and Democrats, and price discrimination isn’t any more popular. One survey showed that half of customers think of dynamic pricing as price gouging; surge pricing in rideshare apps leads to more customer complaints; and polls show that shoppers are worried about companies collecting their data to shape prices.

The battle is not just between businesses and consumers, but also between economists, who prize efficiency, and the rest of us, who care about fairness. And right now, efficiency is running away with it. For every Wendy’s, there are a thousand companies quietly implementing similar schemes, in an ongoing quest to get every last burger—or car, or ink cartridge, or hotel room—into every last hand, for every last penny. Despite the occasional outcry, the era of the single price is rapidly fading into the past. In many ways, it’s already gone.

Pricing occupies a murky space between the mind and the gut. Some early philosophers thought the price of a thing should be determined by its “intrinsic” value, whatever that means, while others argued that its utility mattered most. Plato was against variable pricing. “He who sells anything in the agora shall not ask two prices for that which he sells, but he shall ask one,” he wrote in Laws. He also inveighed against the hotel fees of his day, condemning people who show hospitality to travelers but then extract “the most unjust, abominable, and extortionate ransom.”

The rise of the market economy shifted the understanding of price to be whatever someone is willing to pay for it. But even then, price remained attached to our sense of right and wrong. John Wanamaker, the Philadelphia entrepreneur credited with inventing the price tag in the 1800s, was a devout Christian whose advertisements promised “no favoritism.” According to a hagiographic history of the Wanamaker empire from 1911, “One price to all was neither more nor less than the application to merchandising of the immortal note of equality sounded in the second sentence of the Declaration on Independence.” The price tag had practical benefits, too: You didn’t have to train employees to haggle.

Modern pricing “innovation” took off with the airlines. From the late 1930s through the 1970s, airfares were set by the government, so airlines competed on the basis of amenities. (In 1977, the syndicated columnist George F. Will reflected on his preference for United Airlines because it offered macadamia nuts instead of peanuts. “The macadamia nut is one of God’s more successful efforts,” he wrote. “It has a cachet that the pedestrian peanut cannot match.”) That changed with the Airline Deregulation Act of 1978, which preceded decades of “fare wars.” Discount carriers like People Express were soon undercutting the legacy airlines and encroaching on their routes. This forced the old-timers to revamp their pricing practices.

In his book Revenue Management: Hard-Core Tactics for Market Domination, the pricing consultant Robert Cross recalls watching a Delta employee hand out discounts for the last empty seats on a flight in the early 1980s. Cross knew the plane would fill up with business travelers at the last minute, so he suggested holding those seats and charging a higher fare. This idea—selling seats for a lower price if you book early and a higher price later—transformed the airline industry, and saved the legacy airlines.

From there, the field of revenue management, or adjusting price and availability based on real-time shifts in supply and demand, boomed. Multitiered pricing spread to airline-adjacent industries like hotels and cruise lines, and then beyond to telecoms, manufacturing, and freight. Companies adopted sophisticated software to track real-time supply and demand, and started hiring pricing consultants or even in-house pricers.

The internet, as you may have heard, changed everything. Consumer advocates hailed it as the great leveler, predicting that online shopping would facilitate price comparison and push prices down. Like many early forecasts about the internet, this one looks painfully naive in hindsight. Companies wasted little time making it harder for customers to compare prices. In 2004, the MIT economists Glenn and Sara Fisher Ellison found that online vendors were advertising the cheapest version of a product, then steering customers toward a pricier one. Websites also learned to block web crawlers that allowed their competitors to detect price changes.

One of the more powerful forms of price obfuscation was the fee. Retail platforms often listed products in order of price. “So, of course, certain retailers realized they could charge one cent for a video camcorder, and shipping would be $250,” Sara Fisher Ellison told me. Fees were often obscured until the end of a transaction—a practice dubbed “drip pricing.”

The airlines, having pioneered the use of dynamic pricing, now refined the art of the fee. In 2008, American Airlines began charging $15 for checked luggage. The practice spread and soon became a major driver of airline profits. In 2023, the airlines raked in $33 billion from baggage fees, and even more from other ancillary fees like seat selection, meals, and in-flight Wi-Fi. These add-on fees drove down the prices that were displayed to customers, thus making the offerings look more competitive. It was a win-win arrangement, with both wins going to the airlines.

The rest of the travel and events industry followed suit. Mysterious “resort fees” appeared on hotel bills. Car renters burned time poring over “facility fees,” transponder fees, and third-party insurance. Ticketing websites charged markups as high as 78 percent for concerts. Some fees sounded like jokes. In 2014, an airport in Venezuela charged customers a fee to cover its ventilation system, a surcharge widely mocked as a “breathing tax.” And fees mingled with the broader trend of digitization-enabled unbundling. Want to “unlock” your Tesla’s full battery life? In 2016, that cost an extra $3,250.

If the rise of the fee broke the expectation that prices are transparent, dynamic pricing challenged the assumption that they’re fixed. When Uber rolled out surge pricing in the 2010s, the company billed it as a way to lure more drivers when demand was high. But the phrase was perhaps too honest. It evoked a sudden price increase in response to extreme circumstances, and riders accused the company of gouging during emergencies. “It’s a term I tried to stamp out when I was at Uber,” said Robert Phillips, a pricing expert who worked there for almost two years. “It sounds like a digestive problem—I’ve got a little surge going on.”

At least old-school dynamic pricing applies equally to everyone at a given moment. That’s not the case with personalized pricing, which is made possible by the explosion of customer data available to firms. Everyone knows that companies use our data to target ads and decide which products we see. But the use of that data to set prices—to charge each person a different amount based on their calculated willingness to pay—is still taboo.

That doesn’t mean it’s not happening. Back in 2015, for example, The Princeton Review was caught charging higher prices to students who lived in zip codes with large Asian populations. Since then, the data that can be used to customize prices have become more fine-grained. Why do you think every brand suddenly has an app? Because if you download the Starbucks app, say, the company can access your address book, financial information, browsing history, purchase history, location—not just where you live, but everywhere you go—and “audio information” (if you use their voice-ordering function). All those data points can be fed into machine-learning algorithms to generate a portrait of you and your willingness to pay. In return, you get occasional discounts and a free drink on your birthday.

“Often, personalized pricing is embedded as part of a loyalty program,” Jamie Wilkie, a partner at McKinsey & Company who advises consumer and retail firms, told me. “If there’s a high-value customer who’s price sensitive, you may be able to give them a personalized offer. If they’re a lower-value customer, you may just want to reach out to them.” The New York Times recently reported that airlines—of course—are migrating to a ticket-sales platform that allows them to target consumers “with personalized fares or bundled offers not available in the traditional systems.”

Perhaps you don’t like the idea of being designated a lower-value customer, and missing out on the best deals as a result. Perhaps you don’t want companies calculating the precise amount of money they can squeeze out of you based on your personal data or a surge in demand. That’s a perfectly natural way to feel. Unless, that is, you’re an economist.

In a classic 1986 study, researchers posed the following hypothetical to a random sample of people: “A hardware store has been selling snow shovels for $15. The morning after a large snowstorm, the store raises the price to $20.” Eighty-two percent said this would be unfair.

Compare that with a 2012 poll that asked a group of leading economists about a proposed Connecticut law that would prohibit charging “unconscionably excessive” prices during a “severe weather event emergency.” Only three out of 32 economists said the law should pass. Much more typical was the response of MIT’s David Autor, who wrote, “It’s generally efficient to use the price mechanism to allocate scarce goods, e.g., umbrellas on a rainy day. Banning this is unwise.”

The gap between economists and normies on this issue is huge. To regular people, raising the price of something precisely when we need it the most is the definition of predatory behavior. To an economist, it is the height of rationality: a signal to the market to produce more of the good or service, and a way to ensure that whoever needs it the most can pay to get it. Jean-Pierre Dubé, a professor of marketing at the University of Chicago Booth School of Business, told me the public reaction to the Wendy’s announcement amounted to “hysteria,” and that most people would support dynamic pricing if only they understood it. “It’s so obvious,” he said: If Wendy’s has the option to raise their prices when demand is high, then customers can also benefit from lower prices when demand is low.

Economists think about this situation in terms of rationing. You can ration a scarce resource in one of two ways: by price or by time. Rationing by time—that is, first come, first served—means long lines during periods of high demand, which inconvenience everyone. Economists prefer rationing by price: Whoever is willing to pay more during peak hours gets access to the product. According to Dubé, that can benefit rich people, but it can also benefit people with greater need, like someone taking an Uber to the hospital. You can find academic studies concluding that Uber’s surge pricing actually leaves consumers better off.

When you think about it, though, dynamic pricing is a pretty crude way to match supply and demand. What you really want is to know exactly how much each customer is willing to pay, and then charge them that—which is why personalized pricing is the holy grail of modern revenue management. To an economist, “perfect price discrimination,” which means charging everyone exactly what they’re willing to pay, maximizes total surplus, the economist’s measure of goodness. In a world of perfect price discrimination, everyone is spending the most money, and selling the most stuff, of all possible worlds. It just so happens that under those conditions, the entirety of the surplus goes to the company.

Economists I spoke with pointed out that perfect price discrimination is all but impossible in real life. But technology-enabled personalized pricing is pulling us in that direction. Adam Elmachtoub, an associate professor of engineering at Columbia who studies pricing and fairness (he also works for Amazon), told me that personalization can be good or bad for consumers, depending on how you apply it. “I think we can agree that if personalized pricing worked in a way that people with lower incomes got lower prices, we’d be happy,” he said. “Or we’d say it’s not evil.”

Elmachtoub pointed to the example of university tuition. By offering financial aid to different groups, universities engage in personalized pricing for the purpose of creating a diverse student body. “We agree it’s a good idea in this setting,” he said. Likewise, he noted, it’s good that drug companies can sell medications for lower prices in poor countries.

Dubé argues that personalized pricing should benefit the poor overall, since, in theory, people with less money would exhibit lower willingness to pay. “By and large, when you personalize prices, the lowest-income consumers are getting the lowest prices,” he told me. Plus, he pointed out, there’s another, less controversial term for personalized pricing: negotiation. Consumers pay a personalized price every time they buy a car from a salesperson, who’s likely sizing them up based on the car they already drive, what they’re wearing, how they talk, and other factors. Data-driven personalized pricing merely automates that process, turning more and more transactions into miniature versions of going to a car dealership. Which, again, economists seem to believe is a point in its favor.

Most economists, but not all.

In a 2014 survey, prominent economists were asked whether they agreed or disagreed that surge pricing like Uber’s “raises consumer welfare” by boosting supply and allocating rides more efficiently. Out of 46 economists, only two disagreed. (Four were uncertain, and one had no opinion.)

One of those two was Angus Deaton, a Princeton economist who won the Nobel Prize in 2015 for his work on poverty, and who in recent years has publicly questioned the way his discipline looks at the world. Deaton argues that when it comes to pricing, economists are too focused on maximizing efficiency, without taking fairness into account. In a world of scarce resources, perhaps rationing by time is fairer than rationing by price. We all have different amounts of money, after all, whereas time is evenly distributed. Then there’s the way economists decide what’s good. The mainstream economist thinks that the best policy is the one that maximizes total economic surplus, no matter who gets it. If that benefits some people (companies) at the expense of others (consumers), the government can compensate the latter group through transfer payments. “A lot of free marketers say you can tax the gainers and give it to the losers,” Deaton says. “But somehow, miraculously, that never seems to happen.”

In other words, economics doesn’t pay enough attention to power. In the real world, corporations and consumers are rarely on equal footing. The more complex and opaque prices get, the more power shifts from buyer to seller. This helps explain why, in practice, poor people are often charged more than rich people for the same product or service. The poor pay higher rates for mortgages, bank loans, and other financial services. Wealthy Americans pay less on average for broadband internet. Neighborhoods with fewer grocery stores often have higher prices.

Or take Elmachtoub’s example of college tuition. Yes, poor students who get a free ride thanks to financial aid benefit from personalized pricing. But colleges also collaborate with a thriving “enrollment management” industry that bases financial-aid offers not on students’ need, but on how much an algorithm suggests they and their parents will be willing to pay. This can have perverse effects. As the higher-education expert Kevin Carey wrote for Slate in 2022, “parents of means who themselves have finished college are often sophisticated consumers of higher education and are able to drive a hard bargain, whereas lower-income, less-educated parents feel an enormous obligation to help their children move farther up the socioeconomic ladder and blindly trust that colleges have their best financial interests at heart.” Accordingly, many colleges offer more money to wealthier admitted students than they do to poorer ones.

The concept of willingness to pay contains endless potential for mischief. “I worry about a hotel website knowing that you absolutely must travel to get to a funeral that has recently been scheduled, or a situation where your kid urgently needs some medicine or supplies,” Rohit Chopra, the director of the Consumer Financial Protection Bureau and former FTC commissioner, told me. Improvements in AI technology make that process even easier and more opaque. When a bank denies you a loan, it has to provide a reason, Chopra pointed out. But with AI-based pricing, there’s no such transparency, as algorithms make pricing decisions that humans can’t understand.

According to Tim Wu, a professor at Columbia Law School who helped lead antitrust efforts as a special assistant to President Joe Biden, opacity is the point. The explosion of complex revenue-management schemes allows companies to increase their margins by innovating on pricing, rather than by improving their products or service. The closer we get to personalized pricing, Wu told me, the more we inhabit a world in which “everything in life is like paying for beer at the Super Bowl: Everything’s at your maximum willingness to pay.” There’s a joy—or, in economic terms, a utility—in paying less for something than you might have. “In that model,” Wu said, “you get none of it.”

Is there any way to reverse the march toward ever-more-vampiric pricing schemes?

Tackling junk fees is the low-hanging fruit. Most people, including economists, agree that companies should not charge fees that don’t correspond to actual services, especially when those fees are hidden or disguised. Even the CATO Institute, the libertarian think tank that never saw a regulation it liked, acknowledges that consumers “shouldn’t be charged for products without their consent, and businesses should disclose mandatory fees before purchases are made.” (It still opposes the Biden administration’s anti-junk-fee initiative, which it calls “incoherent” and overbroad.)

The problem is that the incentives are too powerful for companies to resist on their own. In 2014, StubHub switched to an “all-in” pricing model, in which customers saw full ticket prices up front. Revenues went down, so they switched back. “There’s a collective-action problem,” says Shelle Santana, assistant professor of marketing at Bentley University, who has studied drip pricing. If one company refuses to switch to all-in pricing, it can undercut the rest.

Such a clear, popular case for government intervention is rare, and the Biden administration has pounced. New rules and guidances have poured out of the FTC, the CFPB, and the White House over the past year, capping late fees for credit cards and limiting surprise charges at car dealerships, among other measures. Biden mentioned fees four times in his recent State of the Union.

But industry groups are pushing back. The U.S. Chamber of Commerce says the crackdown will make inflation worse by increasing compliance costs. (In other words, the costs of not charging excessive fees will be higher than charging excessive fees.) A lobbyist for the major airlines said the new transparency rules around add-on fees would cause “confusion and frustration” for customers. Live Nation, the company that owns Ticketmaster, promised to display the full cost of tickets up front for events at venues that it controls, but it has drawn criticism for not extending that policy to cover all events for which it sells tickets. Credit-card issuers are resisting limits on late fees, saying they’d be forced to reduce rewards for other customers, and Republicans in both chambers oppose the cap. Court battles could drag on for years.

And that’s the easy stuff. “The next frontier is going to be price,” Samuel Levine, the FTC’s director of consumer protection, told me. “Because that’s the dream, if companies can actually set personalized prices to maximize profits.”

Ultimately, preventing the dystopia of perfect price discrimination—or some more realistic approximation of it—means cutting off companies’ access to the data they use to determine how much to charge us. This isn’t complicated; it’s just a politically heavy lift. Getting Americans fired up about their personal data has been notoriously difficult, which helps explain why we still have no federal digital-privacy law. Perhaps if more voters understood that strong privacy protections would also protect them from price discrimination, Congress would feel more pressure to get something done. (A glimmer of hope appeared earlier this month when lawmakers announced a bipartisan bill that would limit the user data that companies can collect.)

Near-term solutions might depend on the companies themselves. If prices become too complex, that creates an opening for a firm to commit itself to clear, simple pricing, Bentley University’s Shelle Santana says. For example, Southwest Airlines allows two free checked bags. Mark Cuban’s pharmaceutical wholesaler, Cost Plus Drugs, markets itself as a transparent alternative to the usual stress of buying medicine. Boring Mattress Co. promises to help customers “escape mattress hell” by offering a simple flat-rate mattress with free shipping. Santana cited JetBlue’s early marketing. “Their whole campaign was, We like our customers,” she said. “As a flier, you’re like, You don’t even have to love me. Just don’t make me feel like I’m in hell.” In a world of constantly shuffling prices, could predictability become a competitive advantage?

Wendy’s might already be on it. A week after the dynamic-pricing flap, the chain announced that it would offer $1 burgers to celebrate March Madness. All you had to do was download the Wendy’s app.

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