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E-Commerce Vendors Use Online Technology to Create ‘Dynamic Pricing’

Let’s say you’re shopping online and select a product–a book, a pair of shoes, an airline ticket. Then you check back later and find the cost went up. Or you call a friend, who logs on and finds the same product, only at a different rate. That’s annoying, for sure. But is it legal? Sure it is, and in reality, consumers see it all the time. In its most innocuous form, it can mean seniors get a break on movie tickets or kids pay half-price at an amusement park. At its worst, it means companies can target consumers based on a wide variety of variables–including income, spending habits, even race–to charge different prices for the same products at the same time. And the Web has made such targeting much easier. In recent months, Consumers Union has found examples of dynamic pricing on several high-profile retail sites:

  • On BarnesandNoble.com, a hardcover book costing $20.80 on a Wednesday suddenly rose to $26.00 on a Friday.
  • The price for a pair of shoes on Zappos.com increased $3.95 within four days.
  • On Expedia and Travelocity, real-time comparisons of airfares and hotel rates differed based on the Web browser used for searches.

‘Price Discrimination’?

Amazon.com pioneered dynamic pricing. Almost eight years ago, reports surfaced that the retailer of books, DVDs, and CDs was changing prices, allegedly because of demand; Amazon called what it was doing a “price test.” Such practices were detailed in “Online Dynamic Pricing: Efficiency, Equity and the Future of E-commerce,” a legal paper written in 2001. The paper noted dynamic pricing was not new, but added: “What is new about today’s form of price discrimination is that current technology has made dynamic pricing not only widely possible, but also commercially feasible.”

That report was written by Robert Weiss, an attorney specializing in information technology law at Neal, Gerber & Eisenberg LLP in Chicago. He says there isn’t anything illegal about dynamic pricing, unless it’s to be directly tied to an issue such as race discrimination. He notes, “It’s pretty hard to make a legal case. But it does present some public relations issues.”

Indeed, his paper noted a 1996 lawsuit filed against Victoria’s Secret for allegedly mailing catalogues that offered different discounts to different groups of customers. The case was not only thrown out by a federal judge in New York but was deemed “a frivolous suit.” The paper concluded: “The rulings in [this case] seem to suggest that retailers can, for legitimate business purposes, make distinctions between buyers.”

Most consumers are unaware of the practice. In a report entitled “Open to Exploitation: American Shoppers Online and Offline,” published by the Annenberg Public Policy Center at the University of Pennsylvania in June 2005, a survey of 1,500 American adults found 64% didn’t know it is legal for an online store to charge different people different prices at the same time of day. And 71% didn’t know it is legal for an offline store to do so.

Finding Problems

WebWatch used a variety of Web browsers in recent weeks to shop leading retail sites specializing in books, DVDs, CDs, clothing, shoes, pharmaceuticals, and stationery supplies. Sure enough, we encountered dynamic pricing. In one case, while surfing Barnes and Noble’s site, we selected a new hardcover book, The Stories of Mary Gordon, and placed it in our online “cart” at a cost of $20.80. We added several other books as well but didn’t finalize the sale. Two days later, using the same browser, we found the cart had been emptied. We selected the same titles and found The Stories of Mary Gordon now cost $26.00. We continued to shop for the same book using a variety of Web browsers for several weeks, and the price remained at $26.00.

A few months earlier, Consumer Reports Shopsmart engaged in a similar online shopping spree. In one case, ShopSmart found a price increase at Zappos.com, an online retailer specializing in shoes. On a Saturday, a pair of Nine West Jonni high-heeled bridal shoes cost $79.00; by Wednesday the shoes were priced at $82.95.

When contacted by Consumers Union, Tony Hsieh, CEO of Zappos.com, said, “Part of [our] mission includes being responsive to consumer demand and offering a large selection of products…Accordingly, the pricing of products may fluctuate depending on consumer supply and demand.”

But price changes usually benefit the consumer, says Sucharita Mulpuru, senior analyst for Forrester Research. “It’s very unusual for prices to go up in fashion. They start high and go down.” Mulpuru says dynamic pricing is driven by such inputs as demographics, consumer behavior, and past purchase history. While dynamic pricing can be difficult to prove, she does say of any price increase, “If it’s because you put it in your [online] basket, I would say that’s dynamic pricing.”

Responding to recent published accusations of dynamic pricing at Amazon.com, Weiss says, “Apparently Amazon views [consumers’] shopping carts and they adjust the price accordingly.”

Mulpuru adds, “Amazon is the only site I know of that’s sophisticated enough to do this.” A spokesman responded, “Amazon does not engage in dynamic pricing. Period.”

How the Cookies Crumble

WebWatch has found leading travel sites can be price-sophisticated as well. The cost of most perishable products–fruit, vegetables, Christmas trees–starts to drop as the merchandise ages. Except in the travel industry, where rates increase the closer you get to the day of the flight, hotel stay, or car rental.

For years, Web blogs and word of mouth have perpetrated an urban myth that major travel sites adjust their fares based on who’s doing the searching. The theory is that cookies–those pixel tags used by many sites to “remember” your last online visit?are programmed to delete certain deals for proven shoppers. Since travel remains the single largest source of Internet commerce, the repercussions are enormous.

From September 14 to October 16, 2006, Consumers Union compared hundreds of rates in side-by-side testing of the three largest travel agency sites?Expedia, Orbitz, and Travelocity. We used one browser with a long history of shopping, comparing, and buying while the other browsers were erased of all cookies prior to each search. Our conclusion? There can, in fact, be differences in the travel products and prices offered simultaneously via two different Web browsers. But it’s not certain that cleansing your computer will always get you the lower rates; we actually found some better deals on the browser with cookies. Furthermore, some of the best deals may not always be available for booking ? when the time comes to actually finalize the reservation, the site tells you the price has gone up, or the fare you wanted is no longer available.

Real-Time, Real Different  Here’s a recap of some head-to-head discrepancies:

  • With Travelocity, we input identical queries for vacation packages to Bermuda and specifically choose departures from “New York, NY (NYC)” but the browser with cookies only turned up flights from LaGuardia Airport. The browser without cookies only turned up flights from Newark. The savings ranged from $6 to $56 on the browser with cookies.
  • Similarly, for vacation packages from New York to Honolulu via Travelocity, both browsers offered flights from JFK International Airport, but the browser with cookies automatically provided early morning flights which ranged from $5 to $6 cheaper than the later flights automatically provided by the browser without cookies (even though “afternoon” departures were requested).
  • On Expedia, the lists of lowest airfares sorted by price for flights from New York to Sydney were completely different. Both offered nearly the same lowest rates (one with cents and the other rounded up). But the browser without cookies offered multiple flights and fares?ranging from $1,770.13 to $1,950.13–not available on the browser with cookies. Meanwhile, the latter offered one fare–for $2,116–inaccessible on the cookie-less browser.
  • Identical queries for a hotel room in Honolulu via Travelocity produced the same results in the automatic “Travelocity Picks” default listings–but in different orders.
  • The browser with cookies provided:

$183
$266
$275
$339

The browser without cookies provided:
$183
$339
$266
$275

We then refreshed each browser and this time got identical results–in yet another order:
$154
$275
$266
$339

  • In another test with Expedia, the browser with cookies produced rates for a vacation package to Acapulco while simultaneously the browser without cookies reported: “Your request cannot be completed at this time. Please try again later.” A spokeswoman for Expedia said, “This is probably a system hiccup or something.”

In some cases, we used different computers. In other cases, we used different browsers on the same computer. So maybe the differences were due to technical “hiccups” caused by the splitting of nanoseconds as both browsers raced at lightning speed? Nope. In all cases we waited a few minutes and then refreshed the searches, only to obtain the same results.

Consumers Union contacted Travelocity and a spokeswoman said these problems were “definitely not browser based.” She added, “The total price of your search may vary for several reasons. The most likely reason is that the airlines are rapidly changing their fares and Travelocity’s caches are being updated with new pricing information based on the most recent search.” As for Expedia, a spokeswoman said, “There is no user differentiation based on browser type or computer type.” She said the different results were due to different search criteria (even though we input the same information identically); one browser offered more options because the user was able to “build” a trip while the other defaulted to complete round-trip itineraries.

Apparently we’re not alone in finding such differences. “It definitely happens,” says George Hobica, president of the Web site Airfarewatchdog.com. As to why, he explains it’s difficult to say because so many variables are at work. It could be the operating system and/or the browser and/or the presence of cookies. Even geographical location could affect findings if the site’s regional servers haven’t been updated.

Hobica recommends a tabula rasa: “I do think it’s a good idea if you’re searching for a lot of fares within a short time to clear your cookies, because it provides a fresh search.” For example, he notes with Travelocity, if you click on a low fare and then choose not to purchase, after clicking back again, you may find the fare has disappeared.

In addition, travel sites can track your comings and goings, which may be of interest to them if you’re shopping among rival sites. While Hobica doesn’t believe your surfing habits affect the prices you’re offered, you may want to enter from or depart to a “neutral” site. In their privacy policies, all three sites say cookies are not used to gather or store personal information, but clearly they’re tracking your buying patterns. And erasing cookies alone may not be the answer. Shopping around before you book–on more than one browser–could help. Assuming the great deal you spot doesn’t disappear before your eyes.

Mulpuru of Forrester Research is particularly critical of the “frustrating” online sale of airline tickets, saying, “This is a ridiculous algorithm. It’s all a veneer. There’s so much nonsense.”

The Challenge of Protection

Unfortunately, there are few protections against dynamic pricing for consumers surfing the Web. TRUSTe, the nonprofit organization that certifies online privacy policies, focuses on tracking and selling customer information to third parties, not analyzing the cost of products. As noted, the courts have not been proactive on this issue, and neither has the Federal Trade Commission. “There are probably better ways to protect consumers than lawsuits,” says Weiss. But, he adds, “Consumers haven’t been completely victimized, because now there are comparison shopping sites, so they have a lot of visibility.”

Mulpuru agrees that to an extent consumers are on their own: “For this kind of stuff, there’s nothing you can do.” Consumer awareness is key, she says. “The majority of online shoppers are not necessarily going to notice a difference of $2 or $3. But it adds up.”

Sidebar: Tips to Test Total Prices

Here are some key things to remember as you shop on the Web:

  • Compare prices on rival sites when purchasing online.
  • Try using a different browser–or better yet, a different computer–to see if rates increase or decrease.
  • Consider erasing all “cookies” from your browser in order to determine if your shopping history has affected prices.
  • Make sure you input all data correctly: quantities, exact product or model numbers, sizes, colors, etc. Typos can be costly.
  • Similarly, inserting a wrong date or airport code when booking travel can be an expensive error.
  • That said, it’s important to double-check the site has followed your instructions. In one case with Expedia, identical queries produced vastly different results because a request for “flight + hotel” instead generated rates for “flight + hotel + car.”
  • Stay alert to pricing fluctuations. If you’re browsing but not buying, record or print out the rates you obtain so you can make comparisons when you’re ready to purchase.
  • Consider making use of comparison shopping sites, such as PriceGrabber (www.pricegrabber.com) or mySimon (www.mysimon.com).
  • Be flexible. Consider alternative products at a lower cost. If you’re booking travel, alternative itineraries can be much less expensive.
  • If you see something, say something: Complain to the shopping site if you suspect price discrimination of any kind. Notify the Better Business Bureau and the Federal Trade Commission as well.
  • Use a credit or charge card (but not a debit card) for online purchases. Charge cards generally provide the most federal consumer protections in the United States. Under the Fair Credit Billing Act, your liability for unauthorized charges is limited to $50?if you report the billing error to the card company in writing within 60 days after the bill was mailed to you. Card companies and e-merchants may cover this fee in certain situations. Some charge card companies also will let you use a temporary “throw-away” number when making purchases online, so that payments are credited without your needing to share electronically your real account number or password. Inquire with your card company about this option. You may also want to consider setting aside a single card for online use. That way, if a security breach occurs, you will still be able to use your other cards.

Sidebar: Fares Still Jumping

In 2003, WebWatch first reported on what we termed “fare-jumping,” when airfares and other products on travel Web sites suddenly increased mid-booking. Over several investigative research projects, WebWatch repeatedly confronted Expedia, Orbitz, and Travelocity with similar findings, and was told the problems were due to technological glitches, though WebWatch has never found fare-jumping on other travel sites. Thankfully, at least, all three sites adhered to WebWatch’s request consumers be notified onscreen when a price suddenly goes up.

Unfortunately, fare-jumping still exists. Consumers Union recently found examples with both Travelocity and Orbitz. For example, Travelocity touted a round-trip fare from New York to London on Air India for $540 per person. When we selected the flight, we received this notice: “We’re sorry, the price for this trip has changed.” In fact, it had risen to $564.60 per person, an increase of $49.20. Such an error could be attributed to the fast-changing vagaries of travel pricing, had the wrong price been quickly corrected. In fact, we checked again five hours later and the incorrect rate of $540 was still posted as the non-existent, unavailable lowest fare.

As for Orbitz, it posted a rate of just $75 per night for the Holiday Inn Elk Grove when we shopped for a hotel room in Chicago. After selecting this price, a notification appeared: “The average nightly rate for this reservation has increased from $75.00 to $109.28.” Five hours later, the original rate was still listed on the “Best values” page, even though it had increased by $239.96.

As a consumer, make sure you’re aware of the bottom-line price–including all taxes, surcharges, and booking fees–before you finalize the sale.