The Internet and related technologies have created opportunities for enhanced pricing strategies. The consequences of these pricing strategies have important managerial and public policy implications. Here, we identify five technology-enhanced pricing strategies that have come to prominence. Each strategy is introduced by one or two (short) case studies that are used as examples to illustrate key public policy and legal issues. We outline the benefits and potential problems of each strategy with respect to social welfare and competition.
Information technology and the Internet have the potential to bring about fundamental changes in pricing strategies (Bakos and Brynjolfsson, 2000 and Soman and Gourville, 2001). The availability of massive databases and real-time computational ability and the emergence of computer system networks have opened up a vast array of pricing possibilities. These possibilities have been brought about through increased information, improved communication and reach, and reduced transaction costs. We label them as “information technology–enhanced pricing strategies” (ITEPS). Increased search capabilities, for example, have led to the growth of price agents and related technologies; and a larger database of information has led to greater opportunities for price segmentation. Reduction in transaction and distribution costs has resulted in enhancement of price-bundling strategies. Increased reach and better demand forecasting abilities have led to strategies such as revenue management.
Despite the beneficial effects of ITEPS, concerns about the potential drawbacks are on the rise. That is, notwithstanding the indisputable favorable consequences of these improved approaches, potential problems such as consumer perceptions of unfairness (Bolton et al., 2003) or consumer backlash may prove to be major hindrances for firms trying to use the emerging pricing opportunities to enhance their profitability. Specific examples of firms that had to deal with such problems include Coke, Amazon.com, and Microsoft. Coke, for example, experimented with smart vending machines that could increase the price of a bottle of Coke on hot days and vice versa, but had to terminate it due to consumer resistance (Streitfeld, 2000). Likewise, Amazon.com's Jeff Bezos appeared on a TV show justifying his random price-testing scheme for CDs, but customers perceived this as unfair (Melillo, 2000). Lastly, Fisher (2000) accused Microsoft of predatory pricing for providing Internet Explorer to consumers free of charge. These examples illustrate that firms using ITEPS need to recognize the potential problem areas not just as they relate to consumer perceptions of fairness but also to legal issues, for example, allegations of predatory pricing, and monopolization.
ITEPS thus resemble a two-sided coin with both positive and negative faces. A key strategic question, however, is not whether to deploy ITEPS. Firms have no choice if they want to stay competitive; however, the question is how ITEPS should be deployed. Managers using these strategies need to be careful when dealing with “gray” areas because the launch of the Internet is fairly recent and these advancements have no point of reference in previous price-related legislation and there is no precedent against which to compare them. Therefore, the objectives of this research are twofold: (1) To identify ethical, legal, and public policy issues resulting from pricing strategies in the context of internet technology and (2) to provide managerial guidance for potential problem areas associated with these pricing strategies.
Our research makes several contributions to the extant literature. First, we use real-life case studies to gain insights into each of the technology-enhanced pricing strategies and to illustrate potential problem areas. Second, we discuss the relevant and prospective laws and regulations for dealing with these potential problems or “gray” areas. Third, we extend previous research on customer perceptions of pricing fairness (cf. Bolton et al., 2003 and Kahneman et al., 1986) in the specific context of ITEPS. Specifically, we discuss theories of justice to extend the earlier research that primarily emphasizes the principle of dual entitlement. Fourth, we discuss implications for managers and public policy makers (see Table 1).
