Big data helps monopolies, not you
by David Zetland (originally published at One handed economist)
Big data helps monopolies, not you
Economists say competition in markets rages from “perfect” (no company can charge a price over cost without losing 100% of its customers to another company) to “monopoly” (one company sets prices to maximize profits).
Two caveats are important. First, the monopolist doesn’t charge as much as possible but whatever maximizes profits. There might be a lot of trading going on, but also a lot of missing trades. Second, businesses seek monopoly power in different ways, from having a unique product with zero substitutes (pretty rare) to being open for business at a certain time and place (pretty common). Businesses often try to create monopoly power by making it hard to compare products with competitors or across boundaries. That’s why they sell the same razor in pink for women and blue for men, change model numbers for the same product in different markets, change package sizes, and so on.
Thus, businesses make it harder to see similarities and differences because confusion for you means larger profits for them.
Flipping this idea over, businesses want to identify similarities and differences among customers to make it easier to charge different prices to different customers. Their goal is not to charge as much as the market will bear but as much as you will bear.
Thus, businesses “price discriminate” (PD) in a quest to get $4 from you and $6 from me for the same product. There are three types of PD, arranged from easiest to hardest to implement:
- “Third degree PD means charging a different price to different consumer groups,” e.g., young vs old or lunch vs dinner.
- “Second-degree PD means pricing according to quantity demanded, e.g., larger quantities are available at a lower unit price.”
- “First degree PD means (FDPD) charging the maximum price each consumer is willing to pay.”
There are many examples of second and third degree PD, but FDPD is harder to pursue. In the past, we got close to FDPD with auctions in which the highest bidder won the good, but auctions take time and still leave money on the table (the winner only needs to outbid the second place bidder).
Now the technology exists to allow routine and widespread FDPD. That technology has arrived with “big data,” and it’s not your friend.
- Our social media habits reveal our likes, choices, and friends
- Our social graph links us to friends and relatives, allowing data to be cross-checked and refined with weak or strong links to the people around us.
- Our loyalty cards, credit cards, and credit scores can be used to understand our ability- and willingness-to-pay
- Our phones track everywhere we go.
- Personal fitness devices record our heart-rates, stepping speed, etc.
- Data brokers can cheaply buy and combine many datasets and use machine learning (AIs) to create our “digital twins.” Twins may not be too accurate when they are born (here’s one effort), but your actions are constantly being compared to your twin’s predicted action. With time, your twin will will know you better than you do.
Taken together, Big Data means that you will be paying more and getting less for many goods and services. At its most-dystopian extreme, Big Data will direct you to friends, work and romance based on business profit-maximization instead of your own ideals of happiness.
My one-handed conclusion is that big data is more of a curse than a blessing for the average human.
NB: I’ve blogged for years on the weaknesses and threats of social media, but this post also draws on my 25 years of experience in working with data and the many ways we abuse data.
Completely agree with this post, especially this:
“Their goal is not to charge as much as the market will bear but as much as you will bear.”
My internet service provider (ISP) took a run at me last March. Raised the price per month by $10. My original service was listed as a life time rate. I guess my lifetime expired. When I bitterly complained they offered a promotional discount of exactly $10.
Then in October they raised the price by $5. When I bitterly complained, I got nowhere.
So I calculated my cost per Megabits-per-seconds (Mbs) and called them back and pointed out how expensive their service was compared to another company. They offered to double my bit rate and take $4 off the original bill. They were still not close to where they needed to be.
So I think that before very long I will be changing ISPs. It will be aggravating since I will have to change my email address and inform everyone who uses the old one.
My current ISP made a mistake when they raised an already high bill. I had been blissfully ignorant of the decline in the price per Mbs.
I could call and ask them to cancel my service to see how low they will go but I don’t think that I will do that. There is too much separation between them and the much better ISP. So I would only be delaying the inevitable.
And these gamesters need to learn that sometimes they are already doing as well as they can expect. That means their formula will have to include more variables. That puts a smile on my face.
Have the same problem with Comcast who keep upping their cable while the internet is stable. Jumped it up $10 and we have a level up from the minimum with no special channels (HBO, etc.). We are going to go with the fire stick for TV and drop the shows offered by Comcast. Every time we call, they say we have the cheapest plan. Doubtful. Time to leave.
I have been writing on healthcare for 10 or so years now. What I am going to put up now is called “You can not negotiate blindfolded. Internationally, governments are demanding more transparency in the pricing of drugs from one country to another. This is being led by the World Health Organization. Most recently, they published a study on 100 cancer drugs and how they have come to market. What they have found is the median time for resolving risk adjusted R & D costs varies from 2 – 5 years dependent upon the amount of cost. That they have set aside pricing as the goal is far better to tackle than pricing as you can determine a fair return. There is more to this; but, I will stop at this for now. Here is an example of the issue.
Increasing the number of children who are covered by the pneumococcal vaccine, PCV13. It is a critical vaccine for protecting babies and children from pneumonia, the leading cause of death in children. It is produced by Pfizer. The vaccine is a really important tool, especially for vulnerable children – the sorts of children for whom MSF provides medical care in refugee camps and informal settlements, who are at high risk of becoming ill.
Yet outside of the discount price that Pfizer offers to countries covered by Gavi, the Vaccine Alliance, all other countries and humanitarian organisations, such as MSF, must individually negotiate the price of this vaccine with Pfizer. And prices are often unaffordably high. When we dug into the available pricing data [for PCV13] in 2015, we found that countries in North Africa were paying more for this vaccine than the government of France. Tunisia was paying $67.30, Morocco was paying $63.70, while in France the vaccine was $58.40, as we noted in an article published in 2016 in The Atlantic. This makes no sense and doesn’t seem fair, yet such practices are enabled by the lack of transparency. Those negotiating in the dark have no power, and the companies exploit this to maximize their profits at the expense of access.
Divide and conquer or keep isolated and conquer.
“Every time we call, they say we have the cheapest plan. Doubtful. Time to leave.”
I recommend dividing your current internet price by the speed in Megabits[Mbs]. (Multiply MegaBytes [MBs] by 8 to get Mbs)
That gave me some insight into how far apart in price the two ISPs actually where. The gap is so large between my current ISP and the other one that even if they start to raise prices it would take years before I would have to contemplate another change.
This also gives us some insight into whether there really is competition in the ISP markets.
“You can not negotiate blindfolded”
Totally agree with your prospective headline. Information is power.
With better information about prices, it would become more obvious that the FDA has set up rules about re patenting that are endangering the lives of consumers who can not afford the required medication.
If the drug company wants to substitute some inert ingredient and raise prices then the FDA should force them to give up their patent rights to the old formulation.
How many asthmatics have died in the name of closing the ozone hole? How much damage did those CFC inhalers really do with two very short doses each day!
The FDA should never have had the power to put the lives of asthmatics in danger in the name of saving the ozone layer.
On the latter and if you have been keeping track on what I have been writing, I am laying the ground work slowly and surely as the evidence is presented and I discover it. The last report I discovered from this year gave me enough statistical information on how quickly risk adjusted R & D is recovered. It certainly is not the length of a patent. More coming. I am just overwhelmed by all the information I am gathering. In due time . . .
I agree that its not the length of the first patent.
It is how drug companies game the patenting system for drugs. They tweak a drug and then get a patent on that new drug or delivery system. And the FDA allows them to take the older version off the market but keep control of both patents. And the tweak may have been nothing more than a dose counter.
Or the FDA forbids the drug companies to continue making CFC inhalers. All the patents for the CFC inhalers expired years and years ago. But the FDA gave the drug companies another bite of the apple. All the drug companies did was to replace an inert propellent.
The generic drug makers are forced to replicate the patented drug. Should they be forced to use the new patented dose counter?
Or the drug companies come up with a new drug but it is no better than the older drug which has lost its patent. But their new drug is patented. If a new drug is somewhat better but is so expensive that many people can not afford it then is it really any better?
At their best, the FDA is a mixed blessing.
Some of the newer drugs may only lengthen life for a couple of months as compared to older drugs. It is insignificant in value nd yet they charge substantially more. Briefly, the ICER reviewed 77 drugs which had price increases of greater than twice Medical CPI over a two year period December 2016 to December 2018. I will not say more than that as the stat is significant in itself.
@JimH — check out this podcast on overcharging for speed, the result of a LOT of research time by WSJ journalists: https://www.wsj.com/podcasts/the-journal/why-faster-internet-isnt-worth-it/a58014d5-3a4a-4652-bfec-5739872324b2
@All — pricing information is indeed critical to competition, which is why amazon/google messing around with prices is terrible for consumers
Related: Fake businesses on google maps:
Been reading your posts and found them interesting. Dan mentioned you to me also. If you need anything, just reach out to . I am usually around.