Suppose every diner had to print a disclosure saying “Warning: price adjusted for seniors based on the restaurant’s analysis of how income and shopping behavior evolve with age” next to the senior discount. Many seniors would be spooked and forgo the senior discount, despite the discount being intended to benefit them. The Federal Trade Commission’s (FTC) proposed statement on personalized pricing would put a similar warning label on digital equivalents.
Last month, the FTC proposed an enforcement policy statement on personalized pricing and requested public comment. While the statement avoided some of the most common pitfalls of public discourse around personalized pricing by focusing its attention on prices, the FTC still called for a disclosure remedy despite no evidence of any harm.
The Commission took the position that if consumers expect a uniform price, a business that personalizes prices must clearly and conspicuously disclose that the price is personalized, as well as the basis for the personalization and the types of data used. The FTC stated that failing to do so would likely amount to an unfair or deceptive practice. As drafted, the disclosure obligation applies to discounts below a shelf price, not just to price increases.
The FTC’s own example of an adequate disclosure is a notice telling consumers that a price is based on the consumer’s “estimated willingness to pay derived from data about that consumer’s previous purchases.” If that disclosure is located next to a loyalty or membership discount, it amounts to a warning label scaring consumers about benefits.
Chilling Consumers From Taking Advantage of Discounts Hurts Lower-Income Consumers Hardest
Personalized pricing in American retail overwhelmingly consists of personalized discounts. As I wrote last month, the FTC’s own research spotlight found targeted promotions and discount codes routed to specific shoppers, frequently infrequent or price-sensitive shoppers. Loyalty programs, app-only coupons, and purchase-history offers exist primarily to reach consumers who would not buy the product at the retail price. Those consumers are disproportionately lower-income households, because price sensitivity tends to rise as disposable income falls.
The empirical literature the FTC cites is consistent with that picture. Dube and Misra’s randomized field experiment found that more than 60 percent of customers received personalized prices below the optimal uniform price. Rhodes and Zhou showed that in a general oligopoly model when market coverage is high, which is the case when marginal costs are low or sellers are numerous, as in most retail categories, personalized pricing benefits consumers. My analysis from last year showed how a single price excludes the marginal shopper, while a targeted discount lets that price-sensitive shopper participate in the market.
A mandatory warning label works against that mechanism by scaring consumers intended to benefit. The behavioral evidence on how shoppers respond when firms tell consumers how their data shaped an offer is unambiguous, including evidence cited in the FTC’s own statement. Priester, Robbert, and Roth show that consumers judge individually personalized prices as less “fair” than segment prices, and that consumers with stronger privacy concerns react more negatively. Kim, Barasz, and John find that transparency about data use backfires when it reveals attributes the firm inferred about the consumer rather than those attributes directly stated by the consumer, and in their experiment, purchase intent fell by about a quarter when consumers were told an offer was based on browsing data from another site. A mandatory disclosure that a discount reflects “estimated willingness to pay” is the kind of inference that around one in four consumers would reject to their own detriment.
Based on the literature, it is reasonable to expect that a sizable share of shoppers will opt out of discounts that benefit them if they see a conspicuous notice about the discount they received being based on personal data or shopping habits. In practice, this could mean a large share of spooked consumers reject a loyalty card, an app, or a membership; or just shop at retailers using such programs less often and turn to retailers offering a single price, even if it is somewhat higher. Every one of those shoppers is losing a discount and paying a higher price as a result, including price-sensitive shoppers for whom those discounts matter most. By spooking consumers about a practice that benefits them, consumers would change their behavior in ways that would hurt them.
Given that the FTC’s statement anchors the agency’s priorities in “issues that affect the cost of living for American families,” it would be counterproductive for the FTC to impose a mandatory disclosure regime that pushes the marginal shopper away from personalized discounts and toward a higher uniform price with privacy scaremongering.
Consumer Disclosure Fatigue Is a Serious Problem
California famously requires cancer warnings on all kinds of products and places, including parking garages, coffee, and the entrance to Disneyland. As a result, the public is habituated to low-salience warnings and reads none of them, including the smaller subset that matter.
Disclosure is never free to the consumer, even when it costs the firm nothing. Consumers have a limited attention budget for notices, and each new mandated notice draws it down. Ben-Shahar and Schneider describe this as the accumulation problem: a single disclosure may be manageable, but consumers face so many that they cannot attend to more than a few even if they want to. Europe’s website cookie banners are the canonical example. After the GDPR took effect, more than 60 percent of popular European websites displayed consent notices, and researchers documented rapid user fatigue and the rise of browser tools built to suppress the banners entirely. Bohme and Kopsell’s field experiment on 80,000 users found that people were so habituated to interception dialogs that they blindly accepted terms the more a dialog resembled boilerplate.
Some notices are worth the attention they consume. A notice that a price was raised because of a consumer’s location or an inferred medical condition is information the consumer can act on, and every troubling scenario the Commission lists in its statement fits that description. But if every loyalty coupon and app-only markdown arrives wrapped in a data-use warning, the notices that matter are buried among the ones that do not, and consumers learn to click through all of them. Training consumers to ignore disclosures is itself a consumer harm, and it is one the Commission would be creating.
Don’t Apply Warning Labels to Beneficial Practices, Only Harmful Practices
Mandating uniform warning labels on all personalized pricing not only spooks consumers from taking advantage of beneficial discounts and consumes their limited attention, but also discourages retailers from differentiating themselves by offering more discounts. After all, if every retailer using personalized pricing has to display the same sort of warning label, the consumer is going to assume the worst regardless of actual business practices. It would be far more reasonable to limit disclosures as a targeted remedy to retailers that have been found to use personalized pricing to harm consumers by giving most consumers higher prices or raising prices paid by more price-sensitive consumers.
If personalized pricing disclosures are a targeted remedy, consumers will know that they actually signify something important, and retailers will be incentivized to ensure their personalized pricing practices benefit a majority of consumers, especially lower-income and price sensitive consumers. Such disclosures should only be required as the product of enforcement actions that analyze impacts on consumers, to ensure that consumers are only spooked in the rare cases where spooking consumers boosts consumer welfare.
