Even as the White House is reportedly considering an executive order that would preempt state laws related to artificial intelligence through lawsuits and/or withholding federal funding, according to a draft reviewed by Reuters, 19 U.S. states are now pursuing bills that would ban tech-driven pricing practices, also known as dynamic pricing, in an attempt to help protect consumers from high costs.
If passed, these laws would further the work of former FTC chair, Lina Khan, among others, and prohibit companies from using personal information to increase prices to a rate that a specific customer is perceived as being willing to pay based on a combination of algorithms, AI-powered tools, and other third-party software.
The Food Institute recently spoke with multiple experts to get their take on the matter.
When Dynamic Pricing Crosses the Line
“When consumers pay more for goods based on arbitrary criteria, it has crossed the line” said Greg Zakowicz, e-commerce and retail advisor at Omnisend. “For example, the room rate for a hotel room in a city has a cost. That cost should not change based on where the person booking the room lives. That has no relevance to the room and the destination city itself. It’s greed.”
“The same applies to any product,” Zakowicz told FI.
“Why should someone pay more for a takeout order at a restaurant because of the neighborhood they live in or the type of car they drive? It’s unfair. Ironically, we see this type of detail with insurance premiums, and regulators don’t seem to care,” he added.
Yuni Baker-Saito, CEO of Chicory, a contextual advertising platform for CPG and grocery advertisers, drew a distinction between necessary and unnecessary goods, highlighting the fact that, while some types of services are useful but ultimately optional, others are not.
“Dynamic pricing strategies become an issue when there is a lack of competition and the goods in question are necessary goods. Air travel or rideshare apps can pull this off because consumers have the option to not buy the good at all. People need to eat.”
“Having dynamic pricing that determines whether you can afford to feed your family or not crosses the line,” Baker-Saito said.
Even in categories where it’s more accepted, dynamic pricing can still backfire, experts note.
“During severe snowstorms in New York, for example, Uber faced heavy backlash and negative press when surge pricing spiked dramatically” Baker-Saito noted. “If consumers react that strongly to surge pricing in a discretionary category, imagine how they’d feel if the same thing happened with essentials.”
So, how has AI transformed the tech-driven pricing landscape?
The Impact of Artificial Intelligence
“Theoretically, AI has made personalized pricing more possible, but it’s not without its challenges,” added Baker-Saito.
“First, data is imperfect. When we think about targeting consumers through advertising, much of that data is modeled. A person’s profile may be accurate ‘enough’ for ad targeting, but to understand a person’s exact price elasticity is a much more sophisticated enterprise. For sellers of goods, this could lead to decreased sales because they’ve set the prices too high,” the expert added.
Regarding the direct impact of AI on this landscape, Baker-Saito predicts that it will likely play out most significantly in agentic commerce, or by purchasing directly through LLMs.
“These LLMs have a treasure trove of data on users. By understanding the most intimate parts of a user’s life – finances, etc. – LLMs can hyper-target consumers as they go through the purchase funnel. This dynamic is exacerbated especially when consumers are not given choices but a single recommendation for purchase,” Baker-Saito added.
A Dynamic Road Ahead
Where will tech-driven pricing practices will go from here? Baker-Saito feels that, while retailers will likely continue to experiment with dynamic pricing strategies where they can, they’ll likely encounter two major hurdles: consumer backlash and competition.
“At our core, consumers are people with thoughts and emotions,” Baker-Saito said. “Even if I’d happily pay four times as much for my favorite chocolate bar at the time of purchase, what if I learn that someone else paid a lot less? To say I’d be angry is an understatement. At that point, I’ve also lost trust in the retailer or the brand.”
Baker-Saito highlighted how critical brand loyalty has become in terms of long-term growth – and how sensitive of a topic that grocery prices have become lately:
“The number one complaint about the economy is the price of groceries. When brands and retailers start to experiment with dynamic pricing strategies in grocery, consumers will find the experience to be frustrating.”
However, he noted that consumers still have more purchase power than they realize:
“If AI-driven pricing crosses the line, they’ll push back by switching to private label, going elsewhere, or shopping in-store. And once that behavior shows up in the P&L, brands and retailers won’t hesitate to walk away from personalized pricing.”
Food for Thought Leadership
This Episode is Sponsored by: Performance Foodservice
How important is it as a food distributor to build a brand for foodservice – especially since consumers may never see or recognize it? Mike Seidel, vice president of procurement at Performance Foodservice Corporate, shares how the company views the development of its existing foodservice brands, including Roma and Contigo, and how they helped in the creation of its most recent Mediterranean concept Zebec.
