Fairness, Welfare, and Equity in Personalized Pricing

Nathan Kallus · Angela Zhou

32 citations0/0 files storedACM Conference on Fairness, Accountability, and Transparency (FAccT)

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Consumer Market Behavior and Pricing Supply Chain and Inventory Management Digital Platforms and Economics

Abstract

We study the interplay of fairness, welfare, and equity considerations in personalized pricing based on customer features. Sellers are increasingly able to conduct price personalization based on predictive modeling of demand conditional on covariates: setting customized interest rates, targeted discounts of consumer goods, and personalized subsidies of scarce resources with positive externalities like vaccines and bed nets. These different application areas may lead to different concerns around fairness, welfare, and equity on different objectives: price burdens on consumers, price envy, firm revenue, access to a good, equal access, and distributional consequences when the good in question further impacts downstream outcomes of interest. We conduct a comprehensive literature review in order to disentangle these different normative considerations and propose a taxonomy of different objectives with mathematical definitions. We focus on observational metrics that do not assume access to an underlying valuation distribution which is either unobserved due to binary feedback or ill-defined due to overriding behavioral concerns regarding interpreting revealed preferences. In the setting of personalized pricing for the provision of goods with positive benefits, we discuss how price optimization may provide unambiguous benefit by achieving a "triple bottom line": personalized pricing enables expanding access, which in turn may lead to gains in welfare due to heterogeneous utility, and improve revenue or budget utilization. We empirically demonstrate the potential benefits of personalized pricing in two settings: pricing subsidies for an elective vaccine, and the effects of personalized interest rates on downstream outcomes in microcredit.

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References

2014Financial Literacy, Financial Education, and Downstream Financial Behaviors 2021Predictably Unequal? The Effects of Machine Learning on Credit Markets 2000Price Discrimination and Social Welfare 2006Dynamic Pricing and Consumer Fairness Perceptions 2014Short-Run Subsidies and Long-Run Adoption of New Health Products: Evidence From a Field Experiment 2015The Limits of Price Discrimination 2008Credit Elasticities in Less-Developed Economies: Implications for Microfinance 2010Monopoly Price Discrimination and Demand Curvature

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2023Measuring Fairness Under Unawareness of Sensitive Attributes: A Quantification-Based Approach 2022Algorithmic decision-making in financial services: economic and normative outcomes in consumer credit 2021Dynamic Pricing with Fairness Constraints 2022Regulatory Instruments for Fair Personalized Pricing 2024Real-time personalized tolling for managed lanes

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