The Political Economy of Widespread Algorithmic Retail Price Discrimination
By Sencer Ecer, Ph.D., Senior Vice President at Compass Lexecon in Washington, D.C.
***This article extends the version that was originally delivered to your inbox.
Traditional forms of price discrimination such as those employed by airlines and hotels through temporal pricing, student fares, senior discounts on specific days, coupons, loyalty programs, and quantity-based discounts by suppliers will appear relatively modest in scale and complexity compared to the forthcoming wave of advanced, data-driven price discrimination practices that are poised to transform both retail markets and upstream supply chains. Given the informational asymmetries increasingly favoring sellers enabled by surveillance-based pricing practices and their enhanced capacity to implement algorithmic pricing strategies that closely approximate each buyer’s maximum willingness to pay, and considering that consumers make decisions based on income and the relative (rather than absolute) prices of goods, significant shifts in consumer surplus, wealth distribution, purchasing power, and overall welfare are likely to occur. Although such price discrimination is not technically inflation since it does not stem from generalized price level increases, it may nonetheless contribute to or mimic inflationary effects in consumer perception, particularly when average prices rise in sectors that carry substantial weight in the cost of living, such as housing and healthcare. These developments are poised to generate political and economic repercussions of a magnitude not witnessed in contemporary market economies since the transformative ideological confrontations of the 20th century. Because the law remains largely silent with regard to price‑discrimination practices directed at end‑consumers, the impending surge of such practices may provoke reactive and hasty policy responses—such as price‑controls (e.g., rent control). Such reactionary measures could amplify the political upheaval likely to follow; accordingly, a thorough understanding of the political economy of price discrimination is essential to address both efficiency and distributional concerns that are expected to materialize imminently. Notably, the decision in National Retail Federation v. James (S.D.N.Y., Judge Jed Rakoff, Oct 8 2025) confirmed that New York State’s mandated disclosure requirement, “This Price Was Set By An Algorithm Using Your Personal Data” (or comparable language) is now operative.”
To characterize the forthcoming wave of price discrimination, I adopt a more refined and analytically precise definition than those typically found in contemporary economics textbooks. Existing definitions remain rooted in classical formulations by Pigou (1938) and Machlup (1955), which continue to dominate the discourse. While Anderson and Renault (2008) offer a valuable account of the definitional evolution, progress in reconceptualizing the framework has been comparatively slow.
The definition I propose centers exclusively on the consumer’s income and preferences, directly engaging the normative dimensions critical to the emerging political economy of price discrimination. Under this formulation, price discrimination is defined as the practice of selling an identical good or service to different buyers at different prices—effectively, at the same time and place—where the variation in price is not justified by any discernible differences in the cost of production, distribution, or transaction.
More generally, such forms of price discrimination emerge under market conditions in which neither consumers nor producers would reasonably discern any substantive difference between the goods or services being exchanged, even if they were hypothetically interchanged. In operational terms, for the higher-paying consumer, the absence of a conventional or contextually accepted justification for the price differential such as the urgency of a last-minute airline ticket purchase renders the pricing practice more susceptible to perceptions of inequity or unfairness. It is precisely this perception that underpins the likely political backlash.
In the subsequent analysis, I focus primarily on the case of “perfect” price discrimination, wherein each individual is charged a price equal to their maximum willingness-to-pay (WTP). Nonetheless, the core arguments presented herein apply equally to group-based and market-segmented forms of price discrimination. Firms estimate an individual’s WTP based on their income and preferences, typically employing advanced pricing techniques such as surveillance-driven data collection and algorithmic pricing models.
It is essential to emphasize that price discrimination is feasible only in the presence of market power or other structural imperfections, and where secondary markets or arbitrage mechanisms are absent or ineffective—conditions that would otherwise erode the firm’s capacity to sustain discriminatory pricing strategies. Accordingly, the analysis concentrates on markets where these conditions hold—constituting, in effect, a substantial portion of the modern economy.
To render the issue more concrete: de gustibus non est disputandum—there is no disputing matters of taste—but this maxim becomes increasingly tenuous when applied to macro-level preference structures. A stable and substantial majority of individuals exhibit markedly stronger preferences for the attributes of their residence and neighborhood than for more discretionary goods such as morning coffee, surplus apparel, accommodations during travel, or leisure services at vacation resorts. Consequently, their willingness-to-pay for housing and related amenities tends to be systematically higher relative to their income.
It is therefore unsurprising that the first major case involving algorithmic pricing and alleged price collusion—United States v. RealPage—emerged within the housing sector. In effect, when the objective is to extract greater consumer surplus, whether through collusive conduct or through individualized price discrimination, firms naturally gravitate toward sectors where consumers’ preferences are inelastic and WTP is high.
Beyond housing, other sectors characterized by similarly strong preference intensity include health care, education, transportation, and energy. As consumers increasingly observe heightened expenditures in these domains many of which, notably housing-related services, have remained among the most persistent drivers of the current inflation, they are likely to respond through political and legal channels.
This raises a critical question: will political institutions and legislative bodies serve as the proverbial Dutch boy’s finger in the dike, stemming the rising tide of price discrimination and consumer welfare erosion?
Unfortunately, a growing disconnect is crystallizing between the increasing prevalence of retail‑level price discrimination and the extant legal frameworks governing such practices. It is relatively straightforward to identify unlawful price discrimination when it involves commercial buyers under the Robinson‑Patman Act (“harm to individual competitors or resellers”) or when it violates civil‑rights statutes, or constitutes conduct prohibited under Unfair, Deceptive, or Abusive Acts or Practices (UDAAP) provisions. However, there remains no clear legal prohibition against price discrimination at the retail‑consumer level.
Thus, as pricing practices become increasingly sophisticated in discerning individual preferences and inferring income—especially in the context of online commerce—they are likely to provoke both popular and political backlash, not to mention the ever‑present undercurrent of opposition to visible price discrimination such as congestion pricing (and yes, it effectively comes down to income and preferences). More broadly, the deep difficulty lies in uncovering the political‑economic philosophy underpinning opposition to price discrimination—and addressing it from the perspective of a market economy. In other words: although price discrimination is often characterized as unfair, a coherent normative foundation, which does not presently appear to exist, must be articulated if any effective policy or legal response to this perceived “unfairness” is to emerge—whether via legal doctrine, regulatory intervention, or broader institutional reform. Will it be? My educated guess is: not until the proponents of the market economy lay out theirs.
So, let us begin there.
Price discrimination provides an excellent opportunity to clarify the stance of contemporary economics on the political economy of pricing practices. Since the form of price discrimination I discuss here is confined to income and preferences, the demand side of economic analysis must take center stage; the supply‑side (cost‑based) price discrimination is comparatively straightforward.
The most rigorous framework for analyzing demand originates in neoclassical economics, which remains the dominant paradigm among expert witnesses and policy‑makers—particularly via the consumer‑welfare standard in antitrust. Thanks to its formal structure, neoclassical economics permits a critical and detailed interrogation of its own assumptions while still yielding meaningful conclusions. In this sense, its rigor does not preclude critique; rather, it enables it. Accordingly, I adopt the neoclassical framework as the basis for the analysis that follows.
To ground this analysis within neoclassical economics, it is important to begin with the basic construction of demand. Market demand for a good is understood as the aggregation of individual demands of consumers, each facing a set of choices among available goods and services. Embedded in this framework is a critical assumption underlying the consumer‑welfare standard in antitrust economics: individuals are modelled as self‑contained decision‑makers, capable of identifying and discerning the alternatives before them.
Moreover, these individuals are assumed to derive utility solely from their own consumption of goods and services—they are neither envious of others nor altruistic toward them in the economic sense. This assumption is foundational, especially to issues of pricing. That is, if each agent is concerned only with his or her own consumption bundle, then how much someone else pays or consumes is irrelevant to that agent’s own welfare. In other words, in its canonical analysis, neoclassical economics does not concern itself with interdependent preferences. Importantly, this assumption is not intended to characterize an idealized human being; rather, it serves as a model of the “average” individual, applicable to most routine and common decisions and behaviors. By adopting this simplification, the framework allows for the derivation of falsifiable predictions and the formulation of coherent, policy‑relevant conclusions. This is the methodological rationale and should be recognized as such.
A further core assumption completes the structure: individuals are rational, in the specific sense that their preferences over available choices are internally consistent (i.e., transitive and complete). In practice, this rationality postulate is typically paired with a behavioral preference‑maximizing assumption—that individuals select the most‑preferred alternative available to them. From these fundamentals, individual demand functions can be derived by imposing a budget constraint, reflecting the consumer’s income and the relative price of the good in question relative to the composite price of all other goods. One implication is that it is not just the income or preferences that determine an individual’s demand for a given good—the price of other goods also matters critically, hence the linkages between markets that constitute the skeleton for the “price mechanism.”
Taking one more step: these income levels and relative prices are themselves determined within the system (endogenously). Individuals supply labor and capital to firms under a production technology; firms, in turn, make profit‑maximizing decisions because their shareholders (who are themselves the individuals supplying the factors of production) are rational preference‑maximisers. Since firms are owned by the same individuals who supply factors of production, the model closes in a self‑contained general equilibrium, where both preferences and production technologies jointly determine market outcomes (recall the circular‑flow diagram in macroeconomics textbooks—a didactic precursor to general equilibrium analysis).
Now, we can proceed with the scenario of increased price discrimination and discuss its political economy more rigorously. With prevalent price discrimination, most existing consumers will start paying higher prices for those goods and services that they highly prefer and to which they can allocate sufficiently high income. Some existing consumers will no longer choose to buy. Some new consumers will be able to buy those same goods for the first time because the prices for them will be lower, owing to their lower preference for the product and their lower income. Up until this point, there seem to be no troubling social welfare issues, because the market expands, and exchanges (or their absence) remain voluntary. In fact, this is precisely the reason why laws on price discrimination are not necessarily prohibitive—at least at the retail level. More generally, the situation mirrors the familiar First Fundamental Welfare Theorem in economics (the formalization of Adam Smith’s “invisible hand”), which essentially holds that the more markets the better (within social norms) as long as prices are formed competitively (or nearly so) via the interaction of supply and demand. So far, the picture is more or less clear because we are dealing with one market and ignoring the inter‑market effects of the altered income allocation. The next stage, therefore, is to address such general‑equilibrium concerns.
Successful price discrimination will inevitably increase production and extract more income in markets for goods that have priority preference (“priority markets”)—such as housing, including rents—over eating out or other discretionary consumer goods. Individual incomes and wealth will start shifting away from other goods and services, thereby putting downward price pressure on those markets. Expansion in priority markets will prompt a reallocation of inputs and resources toward them. Individuals will begin to feel utility decline due to potentially decreased consumption and even loss of the benefits of variety in consumption (when they reduce or cease consumption of other goods) which they might otherwise have enjoyed (due to convex preferences). Furthermore, income distribution will deteriorate and begin tilting toward shareholders and employees in the priority industries. This process produces several dynamics between consumers in priority and discretionary markets vis‑à‑vis incomes derived from wages and profits in both types of markets. The clearest transfer is that existing consumers in discretionary markets will reduce their consumption and transfer the remaining wage and profit income to the producers (shareholders) in priority markets. The average consumer surplus obtained from non‑priority items (such as morning coffee, streaming services, new clothing, leisure travel—“small markets”) diminishes. Concentration in “essential” goods—which exists primarily due to structural, regulatory and economic entry barriers—will be reinforced. This is particularly true in sectors such as housing, healthcare, utilities and core food‑supply.
Consumer discontent resulting from diminished variety and a deterioration of income distribution (benefitting primarily shareholders and employees in the priority sectors) will manifest in voting preferences, which in turn will shape legislative priorities. More urgently, the executive branch—faced with panic—will quite likely begin imposing, at a minimum, price‑controls, which will never enhance allocative efficiency but may provide some short‑term relief for distributional concerns.
Therefore, the action plan to remedy this immense challenge must be multifaceted: economic scholars should examine the welfare effects of price discrimination taking income into account in a general‑equilibrium (rather than merely partial‑equilibrium) setting (there is little literature on this). Legal scholars must elucidate the coherence of conclusions drawn from the economics literature in terms of legal philosophy. Legislative bodies should expedite the enactment of laws informed by the findings of economic and legal scholars—not merely the whims of public sentiment. And the executive branch should refrain from hasty price‑control interventions and instead pursue efficiency‑neutral distributional measures.
