# AI price discrimination

Because the preferential policies are too complicated, the annual double 11 has caused many netizens to squander “there is no Olympics to buy.” Why do consumers want to do math problems? This set of routes is called “price discrimination” in economic principles.

Price discrimination is everywhere in our daily consumption: an Apple mobile phone is more expensive than foreign prices from 600 yuan to 1,000 yuan; the same Starbucks coffee, Beijing is 27 yuan per cup, Mumbai only 14 yuan; Nike sneakers The price of China is 50% higher than that of the United States; the domestic price of Lenovo computers is 20%-50% higher than that of foreign countries.

Consumers tend to pay higher prices because of better products, and the question now is: the same product, why do I have to spend more? How do businesses make consumers willing to accept it? Here, we may wish to take a look at the concept of “price discrimination.”

Price discrimination in economics

Price discrimination is essentially a price difference. Simply put, it is to sell the exact same product or provide the exact same service, but charge different consumers for different prices, or it can charge different prices for different purchases of the same consumer.

Why is there price discrimination? First of all, there is information cost between customers, and they do not know exactly how much other customers are willing to pay for the same goods. Secondly, different customers have different elasticity of demand, that is, different customers are willing to pay different prices for the same goods. .

What is consumer surplus? The cost of a commodity is 10 yuan, you are willing to pay 50 yuan to buy, the result is 30 yuan, then the consumer surplus on this commodity is “50-30 = 20 yuan”, that is, willing to trade the price and The difference between the actual transaction prices is the consumer surplus. For another example, someone is willing to pay a maximum of 35 yuan, but the actual 30 yuan to complete the transaction, then his consumer surplus is 5 yuan.

Price discrimination can be divided into three levels

First-class price discrimination: also known as full price discrimination, it is the merchant’s price for each consumer is just in the consumer’s willingness to pay, to minimize the consumer surplus, the merchant to maximize the profit.

Secondary price discrimination: based on consumer price discrimination on the quantity of products purchased, such as the common second half price.

Three-level price discrimination: price discrimination against different consumer groups, such as half price of student tickets, free of charge for children in restaurants, discounts for military family members, etc. Common coupon distribution also falls into this category. Such price discrimination and primary price discrimination The difference is that at this time, the merchant can not completely grasp the consumer group, and thus the coupons distributed are not very clear audience, which is equivalent to completely separating the consumer’s group from the consumers themselves.

The purpose of the price discrimination pricing method is to eat the consumer surplus as much as possible, so that each consumer group or even the individual can pay the most money and maximize the profit of the enterprise. The core of the price discrimination pricing method is how to distinguish the various potential customers with the ability to pay.

Pros and cons of price discrimination

Many consumers may think that “the same price is different” is unfair, but in the non-monopoly industry, price discrimination is a business strategy of the enterprise. Especially in the Internet era, after big data, algorithms, and AI are widely applied, price discrimination is more favored by merchants.

Price discrimination and price anchors seem to be confusing, but completely different. From the perspective of business purposes, the price anchor is to make it easier for consumers to accept a certain price of the product, and deliberately set the contrast, the target is directed at a specific price. Other high or low price is only a supporting role, the focus is on how to accept customers; and price discrimination, the different versions of the design are designed to allow consumers to choose expensive according to different needs, do not choose cheap, as far as possible Higher price.

From an economic point of view, price discrimination is not a simple merchant’s extraction of consumer value surplus. Under the same demand, price discrimination is not a bad thing for low-income groups and price-sensitive groups. Merchants should reasonably and correctly guide price discrimination as an economic market law.

When price discrimination meets big data

In the era of Internet consumption, merchants can more easily study consumer behavior than ever before. Based on big data model analysis, they can further differentiate consumers, thus forming a segmentation sales plan for different consumer groups and achieving sales. The increase in total revenue.

With the rapid development of related technologies such as big data, primary price discrimination is slowly becoming more likely to be realized. Consumers’ product preferences, browsing trajectories, purchase history and other information can be continuously collected and compiled, based on big data-based model analysis, more accurately distinguishing consumers’ economic status, willingness to pay, etc., enabling merchants to be specific consumers. Push specific product information and pricing. The Canadian Broadcasting Corporation (CBC) “Market” program group did the experiment, and several testers logged into the same website at the same time to book the same hotel, and the price that everyone saw was different. This result depends on where you are, what equipment you use, and who the website thinks you are.

Tmall, JD and Amazon have hired many economists to develop their own commodity pricing algorithms. These economists have developed various new pricing strategies with the help of big data and online experiments.

Let merchant prices change at any time. The peak time of online shopping is the working day of the working day – that is, people always love to shop online in the office, and they may concentrate on watching TV dramas when they go home. A good way for that online store is to slightly increase the price of the goods in the morning and slightly lower the price at night. In fact, not only online stores do this, but even supermarkets in physical stores will change prices several times a day, but the corresponding time points are different.

Let the price vary from person to person. If the store knows your age, gender, home address, and even income, then you can roughly calculate your price sensitivity and give everyone a different bid. Researchers have tested two Internet users with two computers, one pretending to be a wealthy person, specializing in some of the tall luxury websites; a pretending thrifty person who specializes in browsing low-end goods. After browsing for a while, two computers logged into the same shopping site to buy headphones. As a result, the price recommended by the website to the “rich” was four times that of the “frugal”.

Create a low price for consumers. Merchants can consciously give low prices to the products you care about, even if you earn less or not, first attract you, but give you a high price for those products that you are not sensitive to. Nowadays, various e-commerce events, such as 618 and Double 11, have a wide variety of e-commerce festivals. Only a small number of limited-time purchases are used to create a “low price” to attract users, and users are often difficult to snap up. For example, the top 100 yuan of the first 100 yuan, 0.1 yuan or 1 fold.

Affected by Internet technology, especially big data technology, the ideal price of “thousands of thousands of people” is no longer out of reach. Price discrimination is changing many traditional marketing models and creating new marketing models. In the future, due to the continuous improvement of the learning ability of artificial intelligence and the continuous enrichment of consumer behavior big data, the pricing strategies of products and services will be more diversified and dynamic, and the “price discrimination” in the consumption process will become the norm. Pricing is no longer based on the supply principle of “cost + profit”, but based on the highest price difference that consumers are willing to pay. That is to say, the future pricing will be led from the “supply side” to the “demand side”.

Industry case

Do you really need the Olympics for playing “Double 11”? The so-called low-price promotion of the double eleven, the economic principle behind it, is a typical price discrimination strategy, which brings consumers with higher price sensitivity through low-price discounts to realize the consumer surplus to the rest of the business. The process of conversion. Our daily consumption can be divided into two types: simple and non-essential. The e-commerce companies who “excavated the math problems” expanded the non-essential items into “have always wanted to buy but a little bit of pain”, “buy it may be used” and “although it may not be useful, but it is not cheap to buy me. “…and use the “additional rules, grab red envelopes, count, transfer deposits, stay up all night, express delivery, half-months not received” and other extra costs, which are sensitive to price, but don’t care about time. Consumers who spend money are screened out, allowing them to enter the market in this consumer carnival, and lock the profits that may be lost. By the end of the double eleven, the goods will be restored to the original price, and then the order is for consumers who are not sensitive to price or urgently need essentials.

The e-commerce platform differentiates consumers through non-direct discounts such as red envelopes. Under the time cost leverage, consumers will pay different prices for the same product according to their own time value differences. As a result, the profit earned by the merchant will increase effectively compared to the direct discount. That is to say, time cost and money cost, users need to measure themselves – it is cheaper and it takes more time. Therefore, to play the double 11, you must have time first, as to whether the IQ is online, then look at personal creation.

In fact, online game companies know the most about price discrimination. In general, the manufacturer will adopt the “paid download + process free” mode or the “free download + in-app purchase” mode in the game. However, current game makers are increasingly keen on the in-app purchase model. In-app purchase, as the name implies, is charged internally. Many games are free, but games usually require players to spend money on equipment or props. This mechanism is called in-app purchase and is often used in mobile games. According to data provided by the Finnish app store analysis agency Distimo, in the United States, 76% of iOS app stores are sourced from in-stock rather than paid downloads. In Asia, this ratio is over 90%. The reason is because the in-app purchase model is more likely to prompt users to generate payment behavior.

The core of the game company’s design is to set different probabilities for different equipment. This probability distribution is related to the player’s investment level. For conventional equipment, the probability that free players are usually faced will be low, and paying players will have 100% chance of obtaining these equipment, because usually the game company will set a grade in the game and get 100% of the equipment. But if this is the case, free players will become more and more boring, and the strength of paying players will grow too fast. Therefore, the game company has come up with a trick, that is, the probability distribution of some equipment is beneficial to free players, that is, players who invest very little often have the opportunity to get some kind of good equipment, which is undoubtedly equivalent to the joy of winning. It is also because of this kind of happiness that a large number of ordinary players will stick to some of the games they like, which is exactly the trap of the game company. For example, the game company will be able to recharge 10 yuan or 50 yuan for ordinary players to get rich feedback activities, do you still charge? In addition, for some particularly good items, the game company will adjust its available probability according to the level of investment. In order to get this tempting prop, the player has to invest more money. In fact, the game company actually adopts different price strategies for different consumer groups, which is also a kind of price discrimination, which greatly improves the marginal profit of the game company. If you ask why the player does not arbitrage? The game company is not stupid, and usually prohibits the transfer and gift of the equipment (the equipment in the same server), which virtually eliminates the possibility of arbitrage.

Why are the ticket prices so different for the same flight?

The pricing of services in China’s aviation and hotels has experienced a process from single pricing to “price discrimination”. Passengers on the plane, if they ask for a circle around the front and rear, they will find that the fares of each other are different, and the passengers do not feel that there is any unfairness. The airline’s pricing system is based on the so-called “three-level price discrimination” principle of economics, that is, the user is decomposed into a number of market segments with different payment capabilities, and different prices are set for each market segment. In theory, airlines break down passengers into two broad categories: official travel and self-funded activities. The former is much less sensitive to price than the latter, so if the airline can effectively distinguish between the two types of passengers, the same class can be sold to the former at a high price and sold to the latter at a low price.

However, in reality, it is very difficult to make an effective distinction between passengers. Therefore, after long-term repeated research and analysis, airlines chose “time convenience” as an important indicator to distinguish between the two markets. That is, time convenience is added to the seat as the basis for price discrimination. On the one hand, passengers on official travel are more concerned with the convenience of time, and on the other hand, they do not care much about the price. Therefore, “time convenience” has become the standard for dividing passengers’ spending power. Airlines divide time convenience into many levels, including the choice of ticketing time, the choice of flight, the choice of transit point, and the choice of the number of changes, etc. Each degree of freedom can be a paid service. Such a pricing model greatly increases the freedom of price discrimination, effectively increases the income and profits of airlines, and at the same time allows more self-funded people who expect to travel at a lower price to enjoy the fast service of aviation.

Airlines and luxury hotels are very sophisticated in terms of dynamic pricing. For example, there are some apps that collect empty rooms that have not been booked in the evenings to a platform and sell them to passengers at a low price. The reason why the hotel is willing to do this is because the hotel has been unable to sell the room anyway. If it is vacant for one night, it will inevitably have to pay a fixed cost. It is better to sell it at a cheaper price.

Why is the “net car price” different every time?

As a typical representative of the sharing economy, the network car has become an important way of travel for young people, and it also brings a new way of pricing: the same distance, the same price, the same time. This dynamic pricing mechanism is a common practice of mature business, and its economics is based on the so-called “price discrimination.” It can be said that before the emergence of Uber and special vehicles in the taxi market, price discrimination has already existed. For example, the rental price of car rental in China is dynamically priced according to the season and holidays.

Uber is not a taxi company, nor does it own a taxi. It is just a platform for connecting people and drivers. In order to encourage drivers who access the Uber platform to multiply and adjust supply and demand conflicts during peak hours, Uber uses a dynamic pricing mechanism. Behind this set of pricing mechanisms is a complex algorithm. In short, if the demand for a car in a certain location is too large, Uber will raise the price, which will attract more Uber to this location to meet the needs of passengers. Once the driver is more, the price will fall back to normal levels. According to media reports, Uber’s pricing strategy will even be subdivided into the rich to the rich, the rich to the poor, and the prices are not the same.

Net car is different from many traditional industries. The vast majority of companies that use dynamic pricing are in stock, characterized by “limited, over time” – the number of seats on a flight, the number of rooms in a hotel, and the number of seats in a stadium or theater are fixed. Uber doesn’t own any car, nor can it force any driver service—that is, Uber’s “inventory” is more or less. The most demanding moment for people to ride a car is often a time when the driver experience is not very pleasant, or even a high risk factor, such as morning and evening peaks, as well as heavy rain and typhoon seasons. Under these circumstances, if there is no incentive mechanism, the number of drivers (supply) of online services will naturally decrease. Therefore, the difference between Uber pricing and other industry practices is not that he limits demand, but that he mobilizes supply. It can be said that traditional dynamic pricing is to change demand to adapt to supply. People who used to want to take a taxi and can afford to pay but have no car to play can now call the car smoothly.

Price discrimination is divided into three levels

Primary price discrimination

Also known as full price discrimination, each unit of product has a different price, that is, assuming that the monopolist knows the maximum amount of money each consumer has to pay for any quantity of products, and determines the price, the price is just right. It is equal to the demand price of the product, thus obtaining the total consumption surplus of each consumer. Since it is often impossible for a company to know the retention price of each customer, it is impossible to implement full primary price discrimination in practice.

Secondary price discrimination

Price discrimination based on the consumer’s purchase quantity of the product, such as the common second cup half price.

Tertiary price discrimination

Price discrimination against different consumer groups, such as half price of student tickets, free children in restaurants, discounts for military family members, etc., common coupon distribution also falls into this category. The difference between such price discrimination and primary price discrimination is that At the time, the merchants cannot fully grasp the consumer group, and thus the coupons distributed are not very clear audiences, which is equivalent to completely separating the consumer group from the consumers themselves.