Dynamic and Personalized Pricing

What is Dynamic and Personalized Pricing?

The Dynamic Pricing model is the basic model of individually determined prices. Here, price fluctuations are carried out over time on the basis of different variables (demand, capacity utilization or market situations). Think of the often-cited example of airlines tickets increasing in price as the time of departure approaches.

The evolution of Dynamic Pricing is Personalized or Individualized Pricing. This technique allows for price discrimination based on factors such as economies of scale (quantity discounts), performance based differentiation (loyalty programs) or group based differentiation (student discounts). With the improvements in digitization pricing decisions can concentrate on the individual (Targeted Pricing) with the consequence that the customer is offered an individual price tailored to his willingness to pay. The use of personalized prices is, however, marginal in the German market, which is attributable to the strict rules prohibiting the use of personal data (see section B.IV. below).

On the contrary, the use of Dynamic Pricing is widespread. A study from 2017 shows that four out of ten online shops use Dynamic Pricing and that 60% of prices are adjusted once to three times a day. The highest frequency of price adjustments was found for a pizza oven the price of which was updated 20 times a day. The range of price adjustments can be quite substantial: For one of the monitored products the price doubled within one day.

Typically, price adjustments follow certain patterns. Consumer electronics, for example, are cheaper in the early evening, whereas car parts are cheaper in the afternoon. Consumers, however, tend to distrust shop operators that use Dynamic Pricing. A study from 2016 concluded that 60% of consumers perceive Dynamic Pricing as unfair and 50% would even opt to ban Dynamic Pricing entirely.

Legal Framework

As a founding principle of the free market, any trader may set prices at its own discretion. Accordingly, traders may react to changes in the market situation by raising prices or even charging certain customers higher prices. However, also the free market is restricted by certain rules:

I. Misleading Price Indication

  1. The Price Indication Ordinance (Preisangabenverordnung), that comes to mind first, only concerns formal price law e.g. the indication and transparency of the end price that consumers will be charged including all taxes and surcharges. However, the Price Indication Ordinance does not provide any regulations on price formation.
  2. To the contrary, the general prohibition on misleading advertising with regard to the reason of the sale, price advantages or the manner in which the price is calculated pursuant to sec 5(1) no 2 of the German Act Against Unfair Competition does provide certain guidelines on the actual price formation. In particular, the (earlier) German case law of the 80’s and 90’s considered rapid price adjustments or advertising so-called “moonshine prices” an act of unfair competition. The rationale behind this case law was that customers were unsettled about the applicable prices and lured into believing that they had to get the deal done quickly so as not to miss the beneficial opportunity of a low price. This rather strict case law has – to the extent evident – not been applied since and there are good arguments that the modern consumer is aware of price changes and more resistant to tempting offers. Similar risks of inconsistent price indications are posed by the cooperation with price comparison websites. There is case law from the Federal Supreme Court stating that a trader is liable for misleading advertising if it provides a price to a price comparison website and within hours afterwards adjusts the price for the same product in its online shop without reflecting that adjustment on the price comparison website.
  3. Recent suggestions by the legal literature and Consumer Protection Associations aim at introducing labelling requirements for personalized and dynamic prices. These voices argue, based on sec 5a(2) of the Act against Unfair Competition that traders be requested to provide consumers with all information necessary to make an informed purchasing decision, that traders should either label prices as “dynamic” or even indicate the average product price over a certain period of time. The German Federal Government in the current coalition agreement of March 2018 had agreed to introduce such labelling requirements. One year later however, the Government announced in an official statement that there is no need for further labelling requirements since the enacted prohibitions on misleading advertising should suffice.

II. Geo-Blocking-Regulation

Furthermore, the Regulation (EU) 2018/302 of the European Parliament on unjustified geo-blocking of 28 February 2018 serves the purpose of prohibiting Dynamic and Personalized Pricing in EU cross border trade.

The Regulation applies to all traders that offer their products online in the territory of an EU Member State including such traders that do not have their principal place of business in the EU. For example, a trader located in the US will be in violation of the Regulation if it offers its products online in Germany but blocks access to its online shop for customers from France. Opposed to that, the Regulation does not apply to exclusively intra-state trade such as blocking access to the online shop of a tasty local brewery in Düsseldorf for customers from Cologne.

The main goal of the Regulation is to foster the integration of the internal market and allow any EU citizen to purchase goods and services in any other EU Member State as if he was located in that state: The so-called ‘shop-like-a-local-principle’. Any form of blocking or limiting access to the trader’s online shop for reasons of the customer’s nationality or place of residence is prohibited (cf. art 3 of the Regulation). The intention of the Regulation is that the customer should be able to purchase goods under exactly the same conditions including the price as customers who are residents of the Member State that the trader directs his offer to (cf. recital 27).

III. Prohibition of discrimination pursuant to the General Law on Equal Treatment (Allgemeines Gleichbehandlungsgesetz)

Dynamic Pricing and to a much greater degree Personalized Pricing must not violate the provisions of the General Law on Equal Treatment, which will be considered an unfair business practice that is actionable under the Act against Unfair Competition. Sec 19 of the General Law on Equal Treatment prohibits any discrimination based on such criteria as age, sex or religion. Whereas the prohibition of such discrimination must be considered common sense, there is a tendency that women are charged higher prices for example for toiletries, sanitary products or even a trip to the hairdresser’s.

IV. Data Protection Law

The provisions of the GDPR will be relevant if the online shop operator uses personal or pseudonymized data. The use of personal data requires the consent of the customer (art 6(1) lit a GDPR). The same holds true for pseudonymized data as it is unlikely that the economic interest of the trader in the use of the data will outweigh the interest of the data subject in terms of art 6(1) lit f GDPR. The shop operator cannot urge the customer to declare his consent in the use of his personal data since the conclusion of a contract must not dependent on the consent of the data subject pursuant to art 7(4) GDPR. In consequence, the shop operator must not reject the customer if he refuses his consent.

Evidently, hurdles to the use of personal data for Personalized Pricing are rather high which is reflected by empirical research that shows very limited use of Personalized Pricing in the German online market. Apparently, the only criteria sometimes used to differentiate prices based on personal data is the lead generation that takes the user to the online shop. For example, users that access online shops via a price comparison page experienced price reductions of up to 36% compared to customers that accessed the same shop’s URL directly.

V. Antitrust Law

With regard to Antitrust Law, it is not only the prohibition of abuse of a dominant market position pursuant to sec 19(2) no 2 German Antitrust Act that is relevant. In addition since the ECJ’s decision in the „Eturas“ case, it has to be taken into account, that the unconditional implementation of upper discount limits proposed by a third-party software by several online shop operators can amount to an illegal price cartel that the shop operators implicitly entered into (ECJ GRUR Int. 2016, 381 – Eturas).

Conclusion

The legal framework for Dynamic Pricing is – with the exception of the use of personal data – rather lenient. The general rules on the prohibition of misleading advertising request a sufficient degree of price transparency without the need to disclose the method of price calculation.

Against this background, the development of more sophisticated pricings strategies remains unhampered. Still undervalued, however, is the disruptive potential of Algorithmic Pricing that brings together a whole range of pricing variables such as consumer demand, stock level, selling velocity and so forth that calculates optimal prices to increase revenue. Whereas the update intervals for Dynamic Pricing are often pre-set, Algorithmic Pricing allows for real-time price adjustments taking into account a myriad of variables.

Prerequisite of Algorithmic Pricing is, however, that all necessary data is digitized and can be fed into the algorithm. This is the very reason, why Dynamic Pricing started in the airline market, because the airline reservation system was digitized early on and provided data on customer demand and transport capacities readily accessible for computation.