Using AI and data-driven tools, companies can change the price of a good or service based on who is buying, when they’re shopping, and myriad other factors. This power raises a question: Should ethics and societal values factor into these prices—and how?
More than ever, companies are able to tailor prices across people, places, and time. They do this to maximize profit, and sometimes simply to survive. We’re in a new era of supercharged price discrimination, made possible by two major scientific and technological trends. First, AI algorithms — often trained on highly detailed behavioral data — enable organizations to infer what people are willing to pay with unprecedented precision. Second, recent developments in behavioral science — often invoked with the tagline “nudge” — provide organizations greater ability to influence their customers’ behaviors.
Not long ago, such tactics might have been taken in stride. But no longer. Today’s overlapping crises and changing attitudes highlight a truth that’s often been hidden in plain sight: Such supercharged pricing strategies can cause real harm to individuals, organizations, and societies.When companies deploy such strategies without considering their potential societal impacts, they risk harming people, inviting customer outcry and public outrage, and even reduced prospects for long-term survival.
Given all of this, organizations must consider how to use their supercharged pricing capabilities in ways that reflect important societal values and avoid causing harm and amplifying inequities. Going further, farsighted organizations would do well to seek profitable data-driven pricing strategies that not only avoid harm but also help advance societal wellbeing.
To do this, companies need to embed societal considerations and ethical deliberations in their pricing calculus. The fields of medicine, data science, and AI have undergone similar evolutions, embracing the core ethical concepts of avoiding harm, promoting wellbeing and fairness, and not manipulating people’s behaviors and decisions. In a similar spirit, we offer a framework comprising three easy-to-ask, easy-to-answer, and easy-to-apply questions that together reduce the chances that your pricing strategy will have negative social impacts. Think of each of these three questions as layers of a “filter” that can reduce potential harms to your customers, your company, and society.
Three Questions Companies Should Ask
What am I selling — and can these prices impede access to essential products?
Think about your products and services. Are they essentials, such as food, shelter, medicine, transportation, and internet access? During the pandemic, high prices blocked access to personal safety equipment like N95 masks and hand sanitizer, as well as to must-have products such as toilet paper. In each case, not being able to get these items exposed people to risk or harm.
Of course this question remains relevant beyond times of crisis. High pricing by pharma companies has historically blocked access to drugs for chronically ill patients — harming people they could help and making these companies targets of social outrage. Similarly, AI algorithms enable surge pricing for taxi rides. Surge pricing can be a useful tool – for example it can both increase the availability of transportation and enable drivers to earn more. But context is important. For example, significant price increases during emergencies such as severe snowstorms or hurricanes can prevent vulnerable consumers from moving to safety.
Consider the recent cold wave in Texas, where people suffered ruinous spikes in their utility bills due to a pricing scheme and algorithm that didn’t anticipate the harms that could result from a single-minded focus on economic efficiency. As one customer lamented, “It’s a utility — it’s something that you need to live. I don’t feel like I’ve used $6,700 of electricity in the last decade. That’s not a cost that any reasonable person would have to pay for five days of intermittent electric service being used at the bare minimum.” This is a sobering illustration of the social consequences of pricing that is narrowly framed in a way that crowds out such ethical considerations.
When your offerings become necessities, beware: Higher prices can block access to essential needs, magnifying the possibility of societal harms. The more essential the need and the larger the price increase, the greater the potential harm.
Who am I selling to — and can these prices harm vulnerable populations?
Are some of your customers members of vulnerable populations? Are you selling to the elderly, to customers with chronic medical conditions, or to customers living on limited incomes? Are you selling to customers in social groups that have traditionally been discriminated against? Analytics, big data, and AI technologies supercharge companies’ ability to address these questions in granular detail.
Price discrimination that reinforces societal discrimination is unacceptable. Insurance companies have long confronted this issue: It’s a business necessity to set rates using ever more sophisticated applications of actuarial science and AI, but balancing actuarial fairness with societal fairness requires ethical deliberation that can’t be reduced to a formula. For example, some insurers have incorporated such information as policyholder profession into their pricing algorithms, leading to lower insurance rates for policyholders in elite professions and higher rates for policyholders in less well-paid professions. This in turn has led to negative media coverage, public outrage, lawsuits, legislative investigations, and government regulatory changes — putting the brands, reputations and trust in these companies at risk.
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