In 2019, a noteworthy incident involving the Apple Card came to light: the company granted a man a credit limit 20 times greater than his wife’s, despite the couple filing joint tax returns and the wife having a higher credit score. When the customer complained, accusing the company of discrimination, the customer service representative deflected blame stating, “I swear we’re not discriminating; it’s just the algorithm.”
This example highlights a growing trend — companies increasingly relying on sophisticated algorithms to make critical decisions, including setting prices. A new study, published in the Journal of the Association for Consumer Research by Nofar Duani, assistant professor of marketing at the USC Marshall School of Business, along with co-authors Alixandra Barasch and Vicki Morwitz from University of Colorado Boulder and Columbia University, respectively, sheds light on how consumers perceive the use of algorithms in pricing, particularly in the context of demographic price discrimination.
The researchers found that when companies engage in the controversial practice of varying prices based on a consumer’s age, gender, race, or socioeconomic status, consumers find it fairer when the decision is made by an algorithm versus a human. This preference is driven by several psychological factors. Consumers feel less personally judged when an algorithm rather than a human considers their demographic information. They also view the decision as more justified and believe that the company’s intentions are less exploitative when carried out by a computer.
However, these perceptions do not extend to all types of pricing tactics. The authors find the preference for algorithmic pricing disappears for temporal price discrimination, a more common and less contentious practice of varying prices over time. Their findings also reveal that the benefits of algorithmic pricing can backfire if used for a prosocial goal, such as offering discounts to disadvantaged groups. In this case, consumers once again prefer pricing decisions made by humans.
The research has important implications for businesses, consumers, and regulators. The growing adoption of algorithmic pricing is typically attributed to its ability to enhance companies’ efficiency and profitability. Yet, this work reveals an additional benefit — it may legitimize certain controversial practices in the eyes of consumers. While this could motivate some companies to highlight the use of algorithms in their pricing, it also serves as a crucial warning.
“If employing algorithms to execute demographic price discrimination is less likely to provoke perceptions of unfairness, it could also lead consumers to be less likely to sound alarm bells regarding behaviors they would normally deem unjust,” said Duani. “In this context, it becomes crucial for regulators to step in, educate consumers, and closely scrutinize the actions of companies.”
The authors encourage further research into consumers’ perceptions of algorithmic pricing as it continues to evolve in scope and complexity. As demonstrated by the Apple Card incident, understanding how consumers view these practices is essential in an era where their notions of what constitutes fair market behavior are constantly challenged.
