Paper Abstract
98. Haggai Porat, Bargaining with Algorithms: An Experiment on Algorithmic Price Discrimination and Consumer and Data Protection Laws, 06/2024.
Abstract: Using algorithms to personalize prices is no longer a fringe phenomenon but, rather, the predominant business practice in many online markets, where tracking consumers’ every click is the industry standard. Seemingly unrelated, for decades, consumer protection laws have been grounded on the premise that consumers lack meaningful power to bargain over contract terms. This paper suggests that the increasing use of algorithms to set personalized prices based on consumers’ behavior opens a path for consumers to “bargain” with algorithms over prices and reclaim market power and for the law to regulate pricing algorithms in light of this interplay between consumers and sellers. To support this, the paper presents the results of a novel pre- registered, incentive-compatible randomized experiment in an online lab setting that tested whether and how consumers bargain with algorithms over price when given the opportunity, by offering participants, in multiple rounds, a $10 gift card for purchase at a price set by an algorithm based on participants’ purchase decisions in preceding rounds. The study further explored the potential for regulating algorithmic pricing with tools from consumer and data protection laws commonly deployed in online consumer markets: a disclosure mandate, the right to prevent data collection ex ante (“cookies laws”), and the right to prevent data retention ex post (“erasure laws” or the “right to be forgotten”). We found clear evidence that participants strategically avoided purchases they would have otherwise made to induce a price decrease in subsequent rounds as they experienced and learned from the algorithmic price changes, albeit not to the rationally- dictated extent. We found that this strategic behavior increased in magnitude and statistical significance in the presence of disclosure, as well as clear evidence that participants offered data protection rights used them strategically: preventing retention or collection of their data in rounds in which they purchased the gift card, so as to prevent a subsequent price increase, and allowing it in rounds in which they declined to purchase, so as to signal a low WTP and benefit from a price decrease in the next round.