The American Prospect #338: How Pricing Really Works

How Pricing Really Works

The many innovations corporations have devised to get you to pay more

How ReallyPricingWorks

4 The Age of Recoupment

How power, technology, and opportunity have come together to gouge consumers By David Dayen and Lindsay Owens

8 One Person One Price

Digital surveillance and customer isolation are individualizing the prices we pay. By David Dayen

16 Three Algorithms in a Room

A growing number of industries are using software to fix prices. Law enforcers are beginning to fight back. By Luke Goldstein

22 Loaded Up With Junk

Extra profits are the only explanation for many fees businesses charge. By Hassan Ali Kanu

28 The Urge to Surge

Businesses are hiking prices to take advantage of consumers. They learned it from Uber. By Sarah Jaffe

34 The One-Click Economy

Digital subscriptions are here to stay. What should we do about that? By Joanna Marsh

40 What We Owe

The big banks behind the rising cost of credit By Kalena Thomhave

46 War in the Aisles

Monopolies across the grocery supply chain squeeze consumers and small-business owners alike. Big Data will only entrench those dynamics further. By Jarod Facundo

52 Fantasyland General

Hospital pricing is impenetrable to consumers and regulators alike. The result: increased costs and profits, and wasteful reliance on armies of middlemen. By Robert Kuttner

58 Taming the Pricing Beast

The government has a variety of strategies to protect the public from price-gouging and information advantages over the consumer. By Bilal Baydoun

64 Parting Shot: Interview with Lina Khan

Cover and Illustrations by Jan Buchczik

Visit prospect.org/ontheweb to read the following stories:

Corporate America and conservative activists agree: We live in the United States of Texas, Louisiana & Mississippi.

These states have increasingly played host to major federal lawsuits implicating national policy, primarily in the Northern District of Texas, where certain divisions have just one or two judges, appointed by Republican presidents.

— Hassan Ali Kanu, on the Fifth Circuit problem

Chuck Schumer is behind a convoluted scheme to help the crypto industry avoid regulation of stablecoins, crypto tokens that are pegged to a reliable currency, like the U.S. dollar or a commodity like gold, and are used for payments, often the purchase of digital assets. Schumer is poised to tie that bill to unrelated legislation that allows cannabis businesses to get bank accounts. Yes, you read that right.

Robert Kuttner, on the majority leader’s support for crypto

Lawyer Jared Pettinato argues that Section 2 of the 14th Amendment, ratified in 1868, requires the number of representatives be reallotted from states that burden the franchise, say with ID laws or other restrictions, whether or not they impact only minority voters.— Michael Meltsner, on a challenge to voting restrictions

The deep antipathy of the Confederacy to any form of worker power—which in the antebellum South meant Black power—has persisted to the current day.

— Harold Meyerson, on the UAW’s Chattanooga victory

“John is very knowledgeable almost to a fault, as it gets in the way at times when issues arise.”

Maureen Tkacik, quoting deceased Boeing whistleblower and quality manager John Barnett’s performance review, in her ongoing coverage of the Boeing debacle

But the electoral fallout cannot be contained. Neither party has such an advantage in the House that even one seat can be sacrificed in November. Democrats saddled with an indicted congressman in TX-28 can easily be the margin of victory.— David Dayen, writing on Henry Cuellar’s undeserved support among House leadership

The Federal Trade Commission uncovered another underlying cause [for exploding gas prices]: an orchestrated plot between OPEC and American fracking tycoon Scott Sheffield to exploit the inflationary period to push prices even higher.— Luke Goldstein, writing on Pioneer Natural Resources’ CEO, and his subsequent banning from the board of ExxonMobil

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The Age of Recoupment

How power, technology, and opportunity have come together to gouge consumers

By David Dayen and

Lindsay Owens

The Federal Reserve chair’s semiannual monetary report to the Senate Banking Committee is not typically of great interest to the average American. Committee members usually lob a predictable set of questions: when the Fed will raise or lower interest rates, whether they expect the economy to grow or slow, and maybe whether the central bank is fulfilling its supervisory duties in overseeing large banks. But Jerome Powell got a bit of a surprise this year when Sen. Sherrod Brown (D-OH), the Banking Committee chair, launched into his opening statement.

“The biggest corporations are always finding new ways to charge people more to increase their profits,” Brown said. “Fast-food restaurants and big stores are experimenting with electronic price tags, so they can change prices constantly, making it easier to sneak prices up little by little.” He called for legislative measures “to take on corporate price-gouging,” which, he argued, had “nothing to do with higher interest rates.”

Later, Brown confronted Powell directly over the increasing use of algorithms that analyze price information acquired across a whole market. If a business knows what

its competitor charges, it can adjust prices upward in real time, maximizing what it can earn. “Are you concerned that the wide adoption of these price-gouging strategies, these pricing schemes if you will, will contribute to inflation?” Brown asked.

Powell stammered through a response, keying in on Brown’s use of the term “dynamic pricing,” only one of the pricing strategies cited during the hearing. Dynamic pricing means that prices rise and fall based on how many people want the product at a given time. “I think it works both ways,”

Powell said, offering an Econ 101 theory of dynamic pricing: If there’s nobody in the store, prices would go down, and if the store is packed with customers, prices would go up. Smart shoppers would adjust, and it would all even out in the end, as long as customers were “informed,” Powell said.

“You think that this kind of surge pricing might lower prices overall?” Brown replied incredulously. “These are sophisticated economists working for these big companies. They’re not going to do things to lower their profits.”

This did not seem like an argument Powell wanted to have. “I think the price mechanism is incredibly important in our economy,” he said. “I think we need to give

companies the freedom to do that, as long as they’re not fixing prices or failing to disclose the nature of the price changes to the public.”

Jay Powell is correct; the setting of prices is one of the most critical functions in a capitalist economy. Introductory economics textbooks are filled with explanations of this process, where price is precisely plotted on a curve that takes into account supply and demand. But something is missing from Powell’s faith in what he sees as an excessively mathematical process. It ignores a central variable influencing how the economy works right now: power.

Today, everywhere consumers turn, whether they are shopping for groceries at the local Kroger or for plane tickets online, they are being gouged. Landlords are quietly utilizing new software to band together and raise rents. Uber has been accused of raising the price of rides when a customer’s phone battery is drained. Ticketmaster layers on additional fees as you move through the process of securing seats to your favorite artist’s upcoming show. Amazon’s secret pricing algorithm, code-named “Project Nessie,” was designed to identify products where it could raise prices, on the expectation that

Recoupment

competitors would follow suit. Companies are forcing you into monthly subscriptions for a tube of toothpaste. Banks have crept up the price of credit, so customers who cannot afford price-gouging in their everyday transactions get a second round of pricegouging when they put purchases on credit. Expedia is using demographic and purchase history data to set hotel pricing for an audience of one: you.

For those who look at this and see the normal process of for-profit companies wanting to push their earnings to the absolute peak, the numbers suggest otherwise. In the 40 years from 1979 to 2019, nonfinancial corporate profits cumulatively drove about 11.4 percent of price growth. From April to September of last year, that number was 53 percent. And in the final quarter of 2023, the Bureau of Economic Analysis showed corporate profits at a new all-time historic high, rising by $136.5 billion, compared to $90.8 billion in the previous quarter. Indeed, corporate profits surged during the pandemic years, and remain affixed at that new, higher level, all the way to the present day.

So something has changed in our economy. Companies are laser-focused on wringing as much out of Americans as possible, unleashing new schemes and building information advantages to either confuse, outsmart, or simply gouge the consumer.

The question is, why now?

For decades, the most ruthless form of American capitalism centered on cost-cutting. Beginning in the late 1970s, institutional investors—not just the hedge funds and private equity firms often caricatured as standard-issue predators but the majority of traders and analysts on Wall Street— started demanding that companies cut costs to boost profits for shareholders. Whereas mass layoffs before this period were seen as unthinkable, the result of a corporation letting down the community, the Reagan era practically promoted a race to the bottom: One out of every four employees at General Electric was laid off between 1980 and 1985. Unions were busted. Jobs and manufacturing were shipped overseas. Supply chains were outsourced. Zero-based budgeting studied every sheaf of paper, every thumbtack, and slashed budgets annually. This was seen as an unavoidable strategy to become “competitive” in corporate America.

Even after the Great Recession, companies didn’t try to make up for lower overall

demand by raising prices, instead viciously suppressing wages. Between 2009 and 2012, labor costs fell, and corporations maintained their margins by reducing workers’ share of the profits.

The results can be seen in ruined industrial ghost towns across the Midwest, and businesses strip-mined by leveraged buyouts. But there is a tipping point to all this cost-cutting. There’s only so much fat to cut before you hit bone. The strategy eventually had diminishing returns, and without a new strategy, profits would hit a plateau. That wouldn’t cut it on Wall Street.

Enter the age of recoupment. Instead of cutting costs, the new mantra is raising prices.

Price hikes are old as dirt. But today’s companies have reinvented them. They’re using a dizzying array of sophisticated and deceitful tricks to do something pretty darn simple: rip you off.

The new tricks have fancy new names. Charging you more for less is a corporate practice known as “shrinkflation.” Revealing part of the total price up front, only to tack on all manner of ridiculous-sounding fees and service charges: Industry insiders call that one “drip pricing.” Stealing your online shopping data to predict the maximum price you would be willing to pay for your next e-commerce purchase: That’s personalized pricing. Using software to coordinate pricing with other companies to make sure they don’t undercut each other: That’s algorithmic price-fixing (or plain old-fashioned collusion). And charging you more for an item when supply is limited: That’s Jay Powell’s favorite, dynamic pricing.

Three critical factors have come together to make recoupment work. None of them are necessarily new, but they have become more finely honed, more ubiquitous, and importantly more interconnected, achieving what you might call a perfect storm for pricing.

First, companies got bigger. Over the past few decades, about three-quarters of domestic industries became more concentrated. In many markets, there simply is no competition; even where an illusion of competition is perceived, companies have become adept at robbing their customers of choices. This grants the remaining corporate giants the freedom to hike prices without fear of being undercut by the competition. If the consumer has nowhere else to go, they’ll pay whatever price is available. Second, pricing went high-tech. It used to be a process where companies made some

Corporate profits surged during the pandemic years, and remain affixed at that new, higher level.

rudimentary queries about their competitors and balanced what made them a profit with what could attract customers. It’s now a highly engineered science. Technological innovations such as cloud computing, artificial intelligence, and surveillance targeting have enabled companies to collect reams of personal information on consumers. Your identity graph tells a company when you’re most likely to purchase something, where that product is in proximity to you, and how much you can afford. Website designers can construct techniques to compel you to buy products, even making it seem like you’re getting a deal when you’re actually getting ripped off. Technology, in short, has hypercharged the time-honored tactics of gouging, hidden fees, and price-fixing. Finally, market power and technological advances came together in the shadow of the pandemic, when logistics delays, broken supply chains, manpower shortages, and later geopolitical tensions created scarcity throughout the economy. The first extended bout of inflation since the early 1980s created the quintessential laboratory for companies to try out pricing strategies they’ve dreamed of implementing for decades. Any concerns CEOs may have had over damaging reputations and losing market share by executing their most egregious experiments evaporated. As a bonus, more people were shopping online than ever before, providing more data and more opportunity to tie prices to a customer’s personal habits. With prices rising everywhere they turned, nobody could discern which were justified by companies’ own rising costs, and which were truly excessive. Highly engineered “dark patterns,” where people are tricked into signing up or paying more, were chalked up to the way things are now, rather than something more insidious. If a price surges, if a fee is tacked onto the bill,

Federal Reserve chair Jerome Powell’s capacity to stem inflation is more limited in the face of novel pricing strategies.

the culprit is the economy, not the company shoving their hands into your wallet. CEOs hardly contain their delight on calls with investors. From the CFO of the international conglomerate 3M patting their team on the back for doing a “marvelous job in driving price,” to the CFO of the largest beer importer in the United States, Constellation Brands, who promised investors the company would “make sure we’re not leaving any pricing on the table” and “take as much as we can,” to the tech CEO who copped to “praying for inflation” and doing his “inflation dance,” these corporate executives were clear on one thing: Inflation was very good for business.

This perfect storm ushered in a new regime where prices are becoming increasingly unmoored from the fundamentals, like the cost of labor or materials. In its place, a new corporate credo on pricing has emerged: The best price is the one consumers are willing to pay. A fair price for everyone is increasingly becoming a thing of the past.

What does this mean for central-bank policymakers, who limit their studies of prices to how much they are rising, not the ways in which the increases are happening or the reasons why? What if prices in the economy, as Sherrod Brown suggested, have a little bit less to do with supply and demand, and a little bit more to do with corporate schemes aimed at parting consumers from their money? What if the Fed’s capacity to stem inflation is simply more limited now? What if inflation is increasingly a problem of data privacy and technological

surveillance, not aggregate demand? What if the almighty power of America’s vaunted central bank is no match for the pricing power of corporate America?

Powell may not be able to tame the last mile of inflation, but we’ve faced these problems before, and there are a host of laws duly passed by Congress, designed to prevent price-fixing, collusion, and unfair or deceptive practices. Implementation and enforcement of these laws reside not with the Fed, but in agencies across the executive branch. Government needs to be active enough to spot these strategies—even if they appear in new forms—and crack down on the companies that institute them.

Fortunately, the Biden administration is rising to this occasion in many respects. Law enforcers have brought lawsuits against algorithmic price-fixing. Regulators are working to ban junk fees, increase price transparency, and outlaw certain types of price increases seen as unfair. They’re also trying to tear down the monopolies in our economy, companies with the confidence and the power to price-gouge relentlessly.

But there’s so much more to be done. We are not at the end but the beginning of a cycle of recoupment. Computing power will be able to much more finely discern your personalized price in the future. Experiences that have habitually been associated with pricegouging—buying a car, for example, or going to a hospital where the prices are completely unknown—are adding more tricks and traps with each passing day. The grocery store, one of the more unavoidable transaction points in American life, is where so many of

these pricing schemes come together, and not surprisingly where some of the biggest cost increases have been seen. Without a wholeof-government strategy, companies will seek out unregulated corners and deploy the full weight of their superiority over consumers to take advantage of them.

In this special issue of the Prospect , you will learn about these emerging pricing strategies, and discover examples of them in everyday life. You will see the role that pricing power plays in our economy, and the technologies that no longer make it necessary for CEO s to gather in a room together to collude. You will see how price shifts have accelerated faster than consumers can adjust, and how inexplicable fees nickel-and-dime people to the tune of billions of dollars. You will see how it’s harder to figure out these days what you’re even paying for, or whether the price you pay for something is the same as everyone else. And you will hear from public servants at the state and federal level who are trying to crack down on this high-tech form of a thousand tiny thefts per day.

In this election year, we have seen how inflation can break the bonds of trust between people and their government. It has been at the top level of voter concerns for two election cycles, and across the world, incumbents have been hobbled by rising prices. Over the years, countries have outsourced too much inflation-fighting capacity to their central banks, leaving them weakened when prices soar.

You may think that a couple extra bucks in credit card interest, or a “convenience fee” on your hotel bill, or the price of a soda that’s a little bit more today than yesterday is too trivial for public policy, and too difficult to combat. You may even think it violates some sacred barrier between government and private enterprise. But the public expects elected officials to look out for them, to make sure they aren’t being treated unfairly. The outcome in 2024 will be determined at least in part by whether Joe Biden can convince the country that he’s on the side of the people against the powerful. In that sense, the stakes for understanding and reacting to the age of recoupment are nothing less than the future of the country. n

Lindsay Owens is the executive director of Groundwork Collaborative and the author of the forthcoming book Gouged: The End of a Fair Price.

One Person One Price

Digital surveillance and customer isolation are individualizing the prices we pay.

By David Dayen

Six years ago, I was at a conference at the University of Chicago, the intellectual heart of corporate-friendly capitalism, when my eyes found the cover of the Chicago Booth Review, the business school’s flagship publication. “Are You Ready for Personalized Pricing?” the headline asked. I wasn’t, so I started reading.

The story looked at how online shopping, persistent data collection, and machinelearning algorithms could combine to generate the stuff of economist dreams: individual prices for each customer. It even recounted an experiment in 2015, where

online employment website ZipRecruiter essentially outsourced its pricing strategy to two U of Chicago economists, Sanjog Misra and Jean-Pierre Dubé.

ZipRecruiter had previously charged businesses one fixed monthly price for its jobscreening services. Misra and Dubé took the information ZipRecruiter asked prospective clients on an introductory registration screen about their location, industry, and employee benefits. In the initial part of the experiment, ZipRecruiter assigned a random price to each business. The researchers could then see which attributes correlated with a willingness to pay higher prices. “There

were enough things that people involved had disclosed at the registration stage that were associated with their price sensitivities that we could build a pricing algorithm around it,” Dubé told me in an interview.

Sure enough, when ZipRecruiter deployed the algorithm, to deliver tailored prices based on the questions customers answered, profits went up 84 percent over the old system. Misra became an adviser to ZipRecruiter. The algorithm isn’t used today, but remnants of the pricing strategy remain: ZipRecruiter’s FAQ page promises to “customize” what it charges based on particular attributes.

HOW PRICING REALLY WORKS

Businesses have always wanted to maximize what they can induce people to pay, trying to walk right up to the limit before a customer says no. But everyone has a different pain point, and companies were deterred from purely individualizing what they charge, because of publicly posted prices and consumer anger over the unfairness of being charged differently for the same product.

Today, the fine-graining of data and the isolation of consumers has changed the game. The old idiom is that every man has his price. But that’s literally true now, much more than you know, and it’s certainly the plan for the future.

“The idea of being able to charge every individual person based on their individual willingness to pay has for the most part been a thought experiment,” said Lina Khan, chairwoman of the Federal Trade Commission. “And now … through the enormous amount of behavioral and individualized data that these data brokers and other firms have been collecting, we’re now in an environment that technologically it actually is much more possible to be serving every individual person an individual price based on everything they know about you.”

Economists soft-pedal this emerging trend by calling it “personalized” pricing, which reflects their view that tying price to individual characteristics adds value for consumers. But Zephyr Teachout, who helped write anti-price-gouging rules in the New York attorney general’s office, has a different name for it: surveillance pricing.

“I think public pricing is foundational to economic liberty,” said Teachout, now a law professor at Fordham University. “Now we need to lock it down with rules.”

“

How much?” is a question shoppers ask at yard sales and flea markets across the country. Vendors size them up and try to find the sweet spot: a price both sides will accept, one that tips customers to saying yes while making the transaction profitable. In the 1800s, this was the process behind virtually every retail sale. Without fixed prices, sales clerks would haggle with shoppers, aiming for that sweet spot. Some would get a discount; others would overpay.

John Wanamaker opened his flagship department store in an abandoned railroad depot in Philadelphia in 1876 with a novel idea: affixing a price tag to each item. It was a big step in a nation that was fed up with differential pricing. One of the reasons railroad

monopolies inspired such Progressive Era fury had to do with the rates they charged for transport and storage of crops. Large shippers got volume discounts, and yeoman farmers were stuck paying more, which they condemned as price discrimination.

The populist Granger Movement farmers established led to the “just and reasonable” rate regulation in the Interstate Commerce Act of 1887, which prohibited any special rates, rebates, or preferential treatment for any shipper, product, or destination. “When you read Ida Tarbell, she says on the railroads everyone is talking about price discrimination … allowing companies to pick a different private price for each person,” Teachout said.

But public prices didn’t extinguish the dream for private ones, and businesses innovated. Some industries set expectations for differential prices, like airlines after deregulation. Airfares primarily hinged on the supply of available tickets, but midweek trips—likely for business on the company’s dime—cost more. Negotiations at car dealerships followed the flea market model, where salespeople could pick up clues from customers, like how someone’s residence could provide an approximation of household income.

Eventually, companies longed for real information to inform prices. Catalina Marketing used a shopper’s basket of purchases to generate real-time coupons attached to the checkout receipt. Catalina would later combine knowledge from purchases with information gathered from the credit card used to pay. Then, loyalty cards gave retailers a graph of a customer’s full shopping history, along with crude demographic characteristics like addresses and phone numbers. That allowed grocery stores to make even smarter offers.

The results were surprisingly robust. A 1996 paper by three economists and statisticians found that “rather short purchase histories can produce a net gain in revenue from target couponing which is 2.5 times the gain from blanket couponing,” the authors wrote. Even a single purchase history improved revenue on coupons by 50 percent, according to the study.

Business school academics who study personalized pricing have seemed ebullient about its possibilities. And there are many academics to choose from. There are courses taught at MIT on using data to “improve” pricing, complete with a moviestyle trailer; Harvard has an entire depart-

The old idiom is that every man has his price. That’s literally true now.

ment called the Pricing Lab, which analyzes data and conducts experiments, like the Billion Prices Project.

Their theory is that an individualized price is better for the consumer. The ZipRecruiter experiment found that 60 percent of businesses in the sample paid less with personalized prices. But making things cheaper isn’t really what economists mean by “better for the consumer.”

“Using personalized pricing,” Dubé explained, “while it’s true some people are going to pay higher prices, I could vastly increase the set of people who are actually going to be able to buy.” In other words, someone who really wants that snazzy handbag will be charged $300, and someone who wants it less will get it offered to them for $200 or even $150. In the end, more people get a handbag.

This is about the willingness to pay, not the ability to pay. If you really want or need something, and the seller knows it, with personalized pricing you will pay more. Some might call exploiting the human impulse of desire unfair; Dubé and other economists call it an efficient allocation of resources.

“Theory is a playground for the mind but not reflective of public-policy preferences,” said Lee Hepner, legal counsel with the American Economic Liberties Project. He thinks that economists often deflect from the true purpose of this type of pricing. “The literature even acknowledges that personalized pricing is a transfer of wealth from consumer to the seller. Writ large, the goal and endgame is to maximize revenue.”

There have been two binding constraints for true personalization: the quality and quantity of data collected, and the mechanism for giving individual prices to people who shop where price tags are publicly displayed. Step by step, these

constraints are being defeated, and a new frontier on pricing is becoming available. E-commerce really served both ends. Instead of being out in the world, people shop from home, unaware of any uniform

price. And data that can be grabbed over the internet dwarfs what’s available on a loyalty card. It includes your IP address, the devices you use, your phone number, email, pinpoint demographics, and a comprehensive graph of

everything you’ve ever done on the internet, from purchases to searches to websites visited to emails to social media posts and much, much more. And if the retailer doesn’t get all that information, they could always buy it.

The biggest online retailer and hoarder of purchasing data immediately tried to exploit this circumstance. In 2000, Amazon varied its prices randomly for top DVDs and MP3 players, as a blind experiment to see what price points worked. But users compared notes in chat rooms and figured it out. One shopper deleted browser cookies and got served lower prices. Jeff Bezos had to apologize and Amazon actually sent out thousands of refunds. The company claims to this day that they never differentiate prices.

Other companies have been caught. In 2012, travel site Orbitz steered Mac users to pricier hotels, after learning that they tended to spend $20 to $30 more per night. The Wall Street Journal found out and Orbitz stopped. The Princeton Review was charging more for SAT prep to ZIP codes that contained a high percentage of Asians; the company stopped asking for ZIP codes. (It now appears to get the information it needs for differential pricing from a user’s IP address.)

But it’s a big internet, with billions of prices. The same year as the Orbitz article, the Journal also found the same Swingline stapler charged somewhat differently on Staples.com on two computers just a few miles apart. Forbes found similar results in 2014. The largest restaurant franchise operator in America, Flynn Restaurant Group, employs data scientists to develop pricing models that correspond to individual locations.

Perhaps the main reason to suspect that there are thousands of examples of surveillance pricing that haven’t been caught is the explosion of so-called “pricing consultants,” who nudge everyone who sells a widget online to sign up for AI-powered services to extract data, analyze it for insights, and deploy prices that are contoured to particular customers.

Ninetailed helpfully explains “why you should use personalized pricing,” arguing that “it can help you build rapport with your customers” by giving them a customized experience. Catala Consulting focuses on hotels, also praising personalization’s ability to build loyalty and increase profitability. And yes, uber-consultant McKinsey is circling around this concept too, probably winning an euphemism award by calling price discrimination “digital pricing transformations.”

John Wanamaker’s flagship store in Philadelphia was home to the nation’s first price tags; before then, store clerks would haggle with shoppers.

slide presentation from mobile app maker Plexure shows the data used to personalize offers to users, including their “pay day.”

The most detailed of these I found comes from a business-to-business consultant called Cortado Group, which calls personalized pricing “a cornerstone of modern business strategy.” It offered a “compelling real-world example” of an unnamed “e-commerce powerhouse” that used browsing and purchasing history and even the amount of time spent on product pages to “craft pricing models” that “rewrite the growth curve.” Cortado says that offers from the e-commerce company were “tailored for customers with a history of consistent purchases,” and that prices for occasional shoppers were “adjusted” to boost sales. There is a hint of caution: “Striking the right balance between personalization and customer privacy is an ongoing challenge.”

I asked Cortado who this e-commerce powerhouse was. They never got back to me.

Overblown hype is endemic to digital marketing, of course. But there can’t be this many consultants going on about surveillance pricing if none of it was happen-

ing. And while the standard justification of increasing access and value works in a lab, in the real world it plays out in ways that would probably offend people, if they knew what was happening.

In the story about Staples offering different prices for estimated geolocations, the Journal wrote: “Areas that tended to see the discounted prices had a higher average income than areas that tended to see higher prices.” In the consumer loan context, reduced ability to pay—a lower creditworthiness—is correlated with higher prices. A study of broadband internet offers to 1.1 million residential addresses showed the worst deals given to the poorest people.

In America, it’s always been expensive to be poor. The classic study of the subject, The Poor Pay More, published by the sociologist David Caplovitz in 1963, recounted how sellers took advantage of the limited knowledge, limited options, and limited time of lowerincome consumers to price-gouge on every-

thing. What’s new is that personalized price algorithms now reduce this process to a science, not just for the poor but for everyone.

Dubé, the University of Chicago economist, suggested to me that advances in privacy laws, particularly from the General Data Protection Regulation in Europe and copycat legislation in a dozen countries, make it harder to collect enough data to truly personalize price. He did concede that the algorithms have gotten better, but he insisted that Google’s elimination of cookies and Apple’s Ask App Not to Track standard for the iPhone make persistent tracking less available.

Jeff Chester begs to differ. “The system is in place to deliver personalized pricing,” said Chester, who runs the Center for Digital Democracy.

The digital surveillance we know about comes from platform companies like Meta, Google, and Amazon, which have built

colossal advertising business lines out of social media, search, and e-commerce. But what’s emerging is even more invasive, and more primed to find customers in unusual places, where they will have no idea what the common price might be.

You might be aware that fast-food companies like McDonald’s have begun pushing customers to their app. Deals on the app are extremely good, at least for now: $1 breakfast sandwiches, 20 percent off any purchase above $5. That’s because McDonald’s, whose CEO has talked on earnings calls recently about a “street-fighting mentality” in winning customers, wants to burrow into phones, where they can access more personal data and get people hooked on an app where specific prices can be customized to the user.

What McDonald’s is doing is almost a throwback, kind of a high-tech loyalty card for the digital age. Worldwide, 150 million active members are now on the McDonald’s app, which is run by a company called Plexure that specializes in “personalized mobile engagement.” McDonald’s has a nearly 10 percent stake in Plexure, which also works with IKEA, 7-Eleven, White Castle, and more.

A Plexure slide presentation viewed by the Prospect stresses the power of customized engagement. It starts with using a cheap offer to entice users to purchase though the mobile app. After that, various factors go into the process of “deep personalization”: Time of day, food preferences, ordering habits, financial behaviors, location, weather, social interactions, and “relevance to key moments i.e. pay day.”

It doesn’t take much brainpower to devise

ways to exploit this data. If the app knows you get paid every other Friday, it can make your meal deal $4.59 instead of $3.99 when you have more money in your pocket. If it knows you usually grab an Egg McMuffin before class on Wednesday, or that you always only have an hour to eat dinner between your first and second job, it can increase the price on that promotion. If it knows it’s cold out, it can raise the price of hot coffee; on a scorcher, it can up the price of a McFlurry. And the app gets smarter as you agree to or turn down those offers in real time.

It doesn’t sound like much, but with 300 million customer interactions across its range of apps every day, Plexure can magnify tiny price shifts into real money. The company promises that using its app strategy will increase frequency of orders by 30 percent and the size of orders by 35 percent. Domino’s just attributed its strong firstquarter earnings, with income increasing by 20 percent over last year, to its loyalty program. Grocery stores like Walmart and Kroger have also gotten into this, leveraging purchasing history with digital targeting. And improving artificial intelligence can just make this all move faster.

Like everything else on the internet, the goal is to addict the user. Plexure and other digital marketers talk openly about the “dopamine rush” that getting a targeted deal can release. And the reason those deals are so smart about their subjects has to do not only with Plexure’s tracking of data from within the app, but the agglomeration of that with everything else in your digital, and even non-digital, life.

McDonald’s uses an “identity graph” provided by a company called LiveRamp, which combines multiple levels of data associated with an individual. That includes email, social media, and browser activity; behavior on streaming video sites or other smart devices; your subscriptions and app downloads; and histories from travel, retail, financial, auto, and even medical partners.

Dubé conceded that digital retail advertising is “exploding,” but he sees it as nothing more than a bargain between retailers and consumers. “[The retailer] says, I’m going to pay you. How am I going to pay you, I’m going to give you discounts,” he told me. “But in exchange for those discounts, I’m allowed to track you.” He considers it “a fair and equitable form of consent.”

But to Chester, the point is that companies are setting up the architecture to use rampant spying to set prices. The framework gets around data privacy protections because so much of it is “first-party” data collected directly by companies, which as Dubé argues, provides the consent needed for online promotions.

“They want [customers] to say, ‘Of course I want the discount and loyalty points.’ So you’re consenting,” Chester explained. “And not only do they have geolocation and other information. But because they have consent, they’re able to leverage that data … They want your permission to freely continue to target you.”

Your phone apps are not public storefronts. Nobody else sees the offers you’re getting. The coupons may not be the same as someone else’s, and may change depending on your behaviors and habits. That’s how businesses can personalize price.

Another method is through a smart TV, a prospect that has taken streaming companies, television manufacturers, and advertisers by storm.

In January at the Consumer Electronics Show in Las Vegas, Disney announced the “future of entertainment and advertising” with a variety of new technologies, including one that reads scenes in Disney’s vast online library and allows companies to match the mood with ads. One of the most powerful features, Gateway Shop, “allows consumers to access personalized offers for purchase from a retailer without leaving the viewing environment.” In other words, viewers will be able to see an individualized offer for a product they just saw in a program, and can send it to their computer or phone for seamless purchase.

Amazon has a similar concept: “dynamic ad insertion.” At specific markers in a streaming broadcast, Amazon Web Services can place personalized ads tailored to a household, with special offers. With this in place, you could get served an ad with a different Worldwide, 150 million active members are now on the McDonald’s app, which stresses the power of customized engagement.

It’s hard to put into words how powerful this can be: an app with predictive capabilities that far exceed your own brain. “Individualized pricing is certainly one expression of surveillance capitalism’s information asymmetries,” said Shoshana Zuboff, author of the 2019 book The Age of Surveillance Capitalism . “You can easily see that the companies have a nearly infinite inferential opportunity to know and predict their customers.”

HOW

flavor of soda than the house down the street, one predicted to be more to your liking.

Most streaming media and tech companies have bought into these experiments. Walmart and NBCUniversal’s Peacock streaming platform made a deal to display “shoppable ads,” where you can buy items featured in the Bravo show Below Deck Mediterranean through your remote or with a QR code. Roku has a similar deal with Shopify for ads that enable purchases through a smart TV.

Kroger and other grocers, which have huge pipelines of first-party data, have inked deals with streaming companies. 84.51°, a media company Kroger acquired in 2015 (Kroger renamed it based on the coordinates of its corporate headquarters in Cincinnati), boasts of “leveraging data

from over 62 million households in the U.S.”

Albertsons has similar data reach and partnerships with tech firms. It’s for this reason that Chester opposes the Kroger and Albertsons merger, which would combine the data of what are really two media companies, bringing their datasets to a new, narrow marketplace where they don’t have to be concerned with posted prices.

The proposed merger between Walmart and Vizio, a smart-TV manufacturer, makes a ton more sense in the context of being able to deliver targeted ads that people can buy direct from the television. Vizio’s SmartCast system has the features of a streaming media site; it serves advertising to viewers based on their data profiles. Vizio is under a federal consent decree right now for collecting user viewing histories without consent.

It’s very clear that Walmart wants to link up Vizio’s capabilities with its retail media arm, Walmart Connect, for the purposes of direct-to-consumer advertising over the smart TV. A letter from 19 groups opposing the merger notes, “Acquiring Vizio will enable Walmart to further grow its business lines that rely on extracting, monetizing, and exploiting consumer data.”

If you thought prices on an app were shrouded in secrecy, prices paid in the home, through your TV set, through your Alexa speaker, through your smart refrigerator, will be even more inscrutable. “We’re talking about a seamless link between platforms, brands, ad agencies, and retailers,” Chester explained. “People have underestimated the role advertising and marketing plays in the media system. It’s the key underpinning.”

A proposed merger between Walmart and Vizio would facilitate targeted ads that people can buy direct from their TV.

Surveillance pricing is done in the dark because companies know there would be some degree of anger if a product with one price suddenly had 330 million. Any kind of discrimination only works well in secret, before too many people understand the implications. “What people fundamentally want as a public-policy goal is predictable pricing,” Hepner said. “If people were aware that they were paying differently, they would be upset.”

Dubé thinks the concern over advertising promotions is misplaced. “If I literally tell you, the price of a six-pack is $1.99, and then I tell someone else the price of a six-pack for them is $3.99, this would be deemed very unfair if there was too much transparency on it,” he said. “But if instead I say, the price of a six-pack is $3.99 for everyone, and that’s fair. But then I give you a coupon for $2 off but I don’t give the coupon to the other person, somehow that’s not as unfair as if I just targeted a different price.”

But the fact that one person can get that coupon and the other cannot is the point. If people understood that, they would see it as a form of discrimination. One way to stop companies from engaging in that discrimination is to simply reveal it out in the open. Several academic papers warn companies of going too far with personalization, of causing backlash. The problem with a sunlight-only approach, however, is that companies have listened, and learned how to shroud pricing strategies in neutral or even consumer-friendly language, and to keep them far from any public sphere.

Zephyr Teachout believes that corpo -

Companies have learned how to shroud pricing strategies in consumerfriendly language, and keep them far from any public sphere.

rate hesitancy to roll out surveillance pricing in a widespread fashion gives policymakers an opportunity. “This turns the public open market into private fiefdoms, and puts people at the whim of algorithms,” she said. “It’ll be a major battle for what the Ubers of the next generation will call the right to price. But now’s the time to do it before it’s embedded in every price interaction.”

One question that raises is how you actually prohibit surveillance pricing, which has two elements: the collection of personal information, and the exploitation of that information to set differential prices. Protecting against the former would involve data privacy rules; protecting against the latter is more standard price regulation. Teachout sees the need for a mix of both.

Some targeted advertising is banned, particularly to children; the FTC is in the midst of a case against Meta on that. And some privacy rules, like on personal health information, are in place. There are disclosure regimes where companies must tell consumers how their personal data is being used; those could be extended to price discrimination.

But policy decision-making thus far has been uneven. The bipartisan deal on a federal data privacy standard announced last month specifically exempts first-party advertising, the very process that is being exploited to deliver personalized prices. On the other hand, the Department of Transportation has announced a privacy review of major U.S. airlines, another industry with access to significant data that it could sell or monetize. If an airline is planning to insert ads or offers based on an identity graph into the seatback video screen of a passenger, the review should catch that.

FTC chair Khan has pursued innovative efforts to label data broker collection and sales as an unfair practice. The data broker is of course only one of the many entities sharing data with one another, but it’s a crack of the window, an opening to manage, limit, or even ban the identity graph on fairness grounds.

“The FTC under Lina Khan understands the system that has emerged,” said Chester. “The fact that it is trying to regulate commercial surveillance shows it understands the potential for consumer harm.” But he thinks it will take more than just regulating data flows. “You have to say no, NBC and Kroger and Walmart can’t work together to

do offers and services and tools that allow you to manipulate the consumer.”

There’s something almost existential about the prospect of surveillance pricing. If sellers know when your wages increase, it’s almost not worth it to get a better job; the money will be extracted away by smart pricing. If every purchasing decision comes with doubt about whether you paid more than your friends and relatives, or more because of the time of day or a personal routine picked up on by the seller, you may spend a lot of time second-guessing your life choices. And if your every habit is intuited so well by marketers, it calls into question what agency you have in the matter.

We already have a unique identifier that follows you around as you try to navigate your financial life. It’s called the credit score, the distillation of a life of purchase histories. The origins date to the 19th century as a high-level form of gossip: A company called the Mercantile Agency hired a network of correspondents, who compiled markedly subjective, often biased information on people seeking credit, which was eventually distilled into a number and used by lenders. The credit score’s transformation of rumor into fact mirrors the transformation of someone’s mindless web scrolling and social media likes into an identity graph that can determine the prices they pay.

The feeling behind that, the humiliation attached to your financial picture with a scarlet FICO score, is perhaps best expressed in fiction. Gary Shteyngart’s Super Sad True Love Story, set in a New York City of the near future, envisions a world with Credit Poles, lamppost-like structures that display the financial worthiness of everyone who walks by. It is a depiction of a repressive government merged entirely with big business, and also an expression of the power dynamics inherent in exposing people’s deepest secrets, in public, for all to see.

Shteyngart gets a lot of this right, and the technology underpinning the Credit Pole may be coming to a phone or TV set near you. But Super Sad True Love Story ends in revolution. Corporate America has figured out that not everything should be on display. If they have their way, only their algorithms get to see the Credit Pole scores; only they know what goes into your personal price. Whether this becomes reality depends on whether policymakers open the backroom door, and reveal the whirlwind of activity going on inside. n

Three Algorithms in a Room

A growing number of industries are using software to fix prices. Law enforcers are beginning to fight back.

By Luke Goldstein

It’s uncanny how most of the modern ills plaguing our economy today can be traced back to airlines. The industry is a petri dish of contaminants, from deregulation to market consolidation to financialization, that metastasized into other sectors in the 20th century.

We can add to that list the rise of algorithmic pricing, an emerging economic configuration where all competitors in a market outsource their price-setting functions to the same third-party software, in a notthat-innocent plot to fix prices.

It all began with the new world of aviation that followed the Airline Deregulation Act, signed into law in 1978 by President Jimmy Carter. By gutting the Civil Aeronautics Board, which had tightly managed airlines, Carter did away with a slew of regulations, including price controls capping airfares.

What followed was a brief window of expanded competition as new airlines entered the market. More airlines led to reduced airfares as competitors tried to

gain market share and take over particular routes. To prevent these price wars, the largest airlines got together to come up with a solution.

The airlines reorganized an existing quasi-independent service they owned called the Airline Tariff Publishing Company (ATPCO), headquartered near Dulles Airport outside of Washington, D.C. By today’s standards, ATPCO wasn’t especially hightech, but it essentially functioned as a clearinghouse to share information across the industry and set airfares. Weeks in advance, airlines would send ATPCO scheduled airfares along with detailed route information, seat numbers, and discount loyalty offers. None of this was public information. ATPCO in turn compiled this data and made it available to other airlines, so they could respond accordingly.

In the 1980s and 1990s, this information was digitized, making it available to member airlines on a moment’s notice. Today, ATPCO boasts of processing 18 million fare changes every day in its database, working

with 447 member airlines around the world.

As fares rose, ATPCO caught the attention of the Department of Justice (DOJ), which filed a lawsuit in the early 1990s. The complaint alleged that by telegraphing competitors’ scheduled airfares, ATPCO allowed airlines to identify when their prices were comparatively low and preemptively raise them to meet a higher benchmark. The DOJ concluded that ATPCO was merely a craftier, more tacit form of traditional collusion outlawed by the Sherman Act. Instead of a handshake agreement in clandestine meetings, airlines just decided to create a third party to do it for them.

That case could have been the end of the road for ATPCO. But inexplicably, it never went to trial. The DOJ opted to settle with ATPCO, a decision that was paradigmatic of the weak, ham-fisted approach that defined antitrust enforcement at the time. In the settlement, ATPCO had to make some light modifications to slow down the pace at which airfare increases could be implemented. The theory was that these mea -

sures would provide travel agents, who can also access ATPCO, enough time to make more informed decisions about the best price options for consumers.

Airfares have only risen since that settlement.

In hindsight, by not enforcing major penalties or banning ATPCO entirely, the DOJ effectively greenlit conduct that its own legal team deemed unlawful. Other actors across the economy took the hint and a proliferation of third-party price-fixing schemes sprung up, now seen in housing, agriculture, hospitality, and even health care.

These new pricing intermediaries are similar to ATPCO , but don’t just act as information exchanges between competitors. They actually set the prices for an entire industry by using machine-learn -

ing algorithms and artificial intelligence, which are programmed to maximize profits. To arrive at optimal prices, these software applications aggregate vast amounts of relevant market data, some of which is public and much of which is competitively sensitive information given to them by their clients.

Each algorithmic scheme has its own distinct features, but they all share the same underlying philosophy: Competing on price in an open market is a race to the bottom, so why not instead coordinate together to grow industry’s profits? In other words, it’s another version of the notorious Peter Thiel adage that “competition is for losers.”

These business arrangements are coming under fire from a new crop of antitrust regulators who are far more aggressive than their predecessors. Both the DOJ and the Federal Trade Commission (FTC) are

intervening to help in numerous lawsuits making their way through courts that target algorithmic price-fixing. The DOJ has even returned to the arena with its own collusion case against an agricultural information hub called Agri Stats. The outcomes could have major ramifications for this field, and rectify the lax enforcement of ATPCO in the 1990s.

Both enforcement agencies have issued statements firmly establishing that pricefixing via new technologies instead of human agents must not escape the antitrust laws.

“The idea that we don’t have a video of executives getting together and making their secret deal … does not automatically defeat a price-fixing claim in this new technological environment,” FTC chair Lina Khan told the Prospect. “We just need to be clear-eyed about that fact and update

the application of the law to match the new technological and business realities.”

It’s not yet clear whether this view will hold sway in courts, with judges entrenched in more conventional understandings of collusion through a handshake agreement. Some plaintiff cases are already meeting snags for that reason. This intensifies the threat that judges may put an exceptionally high bar on evidence of tacit collusion, which would implicitly legalize price-fixing via algorithms.

The dueling schools of antitrust don’t agree on much these days. The neoBrandeisians at the helm of the Biden administration have overturned the consumer welfare standard in favor of broader anti-competitive considerations. The Chicago school theory of consumer welfare, which reigned supreme for decades, held that prices should be the sole indicator for assessing the harms posed by monopolies.

Algorithmic price-fixing has been alleged in (clockwise from top right) Las Vegas hotels, pharmaceuticals, rental housing, and airfares.

But even during the Chicago school’s reign, collusion was the one prong of enforcement that transcended these divisions, because cartels both subvert the very underpinnings of market competition and typically result in higher prices for consumers.

Richard Posner, one of the architects of the Chicago school, argued in an influential piece from 1968 that enforcers don’t always need direct transcripts from meetings where participants explicitly agree to collude. Regulators could use “circumstantial evidence” to infer tacit collusion if, for example, all the major players in an industry were raising prices in a coordinated fashion with no clear rationale like increases in input costs.

Posner, who was effectively pro-monopoly in every other respect, believed that going after aboveground oligopolies fixing prices should be the primary function of antitrust. His position proved to be self-

defeating, since his fondness for mergers set the conditions for cartels to form among fewer players. Plus, as antitrust was deemphasized, cuts to enforcement agency funding left meager resources to identify only the most clear-cut, winnable cases against price-fixing schemes.

Regulators might have been overly cautious, but enforcement against collusion generally remained constant, even as antitrust actions dwindled in every other area.

Oligopolies, however, found new ways to innovate their way out of this regulatory burden. They turned to a burgeoning field at the time called “revenue management.” Its leaders described the work as not only designed to benefit individual firms, but to grow profits for the entire industry writ large.

Information exchanges also became easier to facilitate in the 1990s, when regulators instituted “safe harbor” laws. These were essentially carve-outs for legalized

With market power, RealPage could extract higher rents than any one landlord acting unilaterally would be able to pull off.

information-sharing between competitors, as long as companies could meet certain criteria to justify it. Though specifically targeted for health care, it became common practice for other industries to exploit safe harbors for their own purposes. The DOJ withdrew these safe harbors last year as part of its crackdown.

ATPCO was born out of this new revenue management style of thinking, and its founder, a former Alaska Airlines executive named Jeffrey Roper, was a major adherent. Roper left the country following the DOJ ’s investigation into ATPCO’s practices. He later returned in the early 2000s as a “principal scientist” for a new startup venture called RealPage.

Roper’s new company had the objective to revolutionize pricing in real estate by fixing the same problem that he helped the airlines address post-deregulation: to head off price wars by conspiring together. “A rising tide will lift all boats,” as one real estate executive whom RealPage worked with put it.

Roper took a very unsentimental approach to the business of property management, where he saw irrational human behavior driving inefficiencies. According to Roper, landlords had “too much empathy,” which prevented them from raising rent as high as they could. As Roper once put it, “If you have idiots undervaluing, it costs the whole system.”

He went about rectifying that by deposing the human agents who controlled pricing, and instead introducing algorithms that could make less emotional decisions. In its own words, RealPage promises

to “maximize profits” with the ability to “achieve … revenue lift between 3 percent to 7 percent,” even in economic downturns. There should be no doubt that RealPage does so by consistently pushing rent increases, according to testimony from clients in several recent lawsuits. RealPage, according to one lawsuit, told clients that the data they shared would never be used “to undercut RealPage’s higher prices—doing so for too long would mean losing access to RealPage.”

By virtually guaranteeing higher revenue, the service quickly spread across real estate markets and achieved extraordinary market power in several major cities.

In Seattle, for example, one of the most expensive cities for rent in the country, ten property managers control 70 percent of apartment units in one highly sought-after neighborhood. They all use RealPage.

The company became even more powerful after a major merger in 2017 with another software company called Lease Rent Options, which the Trump administration waved through after opening an investigation.

With market power, RealPage could extract higher rents than any one landlord acting unilaterally would be able to pull off in a competitive market. Without RealPage, customers could just look elsewhere for bargains, and landlords might risk not being able to fill vacancies. But when property managers are assured that virtually all surrounding residential buildings use the same service, then rent increases become more possible. Double-digit rent hikes among RealPage clients are common, according to an ongoing lawsuit.

In order to make these rent hikes stick, Roper and RealPage had to upend the conventional wisdom of the industry, called the “heads in beds” strategy. Usually, landlords want to maintain the highest occupancy rates possible, so they’re not wasting space. That means if landlords set their prices too high and can’t get any takers, they’ll usually drop the price to fill the apartment.

RealPage persuaded property managers that this was an arbitrary constraint. Since using their prices, landlords now report that they frequently operate well below 97 percent occupancy, holding out until they get tenants willing to match their higher rents. Housing prices have soared across every major market RealPage has infiltrated. With government officials looking to bring down rising housing costs, RealPage is now

coming under scrutiny, especially after a ProPublica investigation in 2022 into its business practices.

The company is facing a major class action lawsuit for price-fixing, and two others filed last year by attorneys general in Arizona and the District of Columbia. The lawsuits together paint a damning portrait of RealPage as a collusive enterprise, based on rental pricing evidence and scores of interviews with former employees and clients. The DOJ filed a statement of interest in the plaintiff lawsuit, and has its own criminal investigation into the company.

“It just doesn’t really take a leap of faith to see why it might be that rents keep going up in these dense metropolitan areas where RealPage operates,” said a senior official in the D.C. attorney general’s office. In the Washington-Arlington-Alexandria metropolitan area, over 90 percent of units in large buildings are priced using RealPage’s software, and rents have skyrocketed.

The D.C. lawsuit first explains that RealPage demanded its clients hand over highly competitive sensitive information, such as occupancy rates, rents charged for each unit and each floor plan, lease terms, amenities, move-in dates, and move-out dates.

RealPage’s clients give up this information because they know that their competitors will as well. In fact, many of them encouraged competitors to do so, as former employees allege in the lawsuit. That appears to be the “agreement” between competitors, which is a core part of any legal case for collusion.

This vast scale of information obtained by RealPage gives its algorithm a bird’seye view into the housing supply in a given market, which it can optimize meticulously and raise prices accordingly at each property. By instituting this regime, RealPage has managed to subvert an ordinarily competitive market for housing and centralize command over pricing.

One of RealPage’s subsidiaries acquired in the 2017 merger, known as Rainmaker, is also facing legal troubles for facilitating a similar form of price-fixing in the hospitality sector, promising its clients that it can boost revenues by 15 percent.

One lawsuit was brought last year against Rainmaker for fixing prices in the Las Vegas metro area, where the software is used by virtually every major hotel and casino on the Strip.

HOW PRICING REALLY WORKS

The lawsuit shows that Rainmaker employs an identical strategy as RealPage to dissuade hotel operators from focusing on occupancy rates at the cost of profits. Casinos in Vegas have historically treated their hotel accommodations as a side business, just to get customers on the gaming floor where the big money is made. They’re willing to offer somewhat cheaper prices just to fill beds and get people in the door.

Rainmaker upended that. According to the lawsuit, their team told clients that “revenue managers must recognize the ultimate goal is not chasing after occupancy growth,” and urged clients to “avoid the infamous ‘race to the bottom’ when competition inevitably becomes fierce within a market.”

This dynamic has held beyond casino hotels. Indeed, overall hotel prices remain at or near their pandemic peak, at odds with other services even within the travel industry. A class action suit filed in February against a separate hotel datasharing company called CoStar, which helped luxury hotels in 15 cities set prices, quotes the company telling clients that “total revenue grows higher when hotels understand the maximum amount a customer is willing to pay.”

But despite the evidence, the Las Vegas lawsuit against Rainmaker has seen the first setback for proponents of more active enforcement against tacit collusion by algorithms. Judge Miranda Du dismissed the case last October, citing a lack of evidence, even though the case had only reached the pleading stage, before discovery and depositions take place. Du, who claimed that she wasn’t an expert in the technology, was not convinced that there was proof of an agreement to collude, since each hotel separately accepted the pricing suggestions from Rainmaker.

RealPage is likely to use this defense as well, arguing that it merely makes “recommendations” for prices that are not binding and purely voluntary. The lawsuits say that this argument is a total ruse. Clients accept the RealPage recommendations over 80 percent of the time, and the company includes provisions in its contracts to ensure rent hikes. It heavily pushes adoption to new clients of an “auto-accept” feature that forces price increases automatically. Landlords who deviate from RealPage’s suggestions at too high a rate are subject to “discipline” and potentially even termination of their contract. “You should be compliant,” one

RealPage training document uncovered in a lawsuit stated very clearly.

Rainmaker’s success with an early version of this defense is an ominous circumstance for enforcers and plaintiff lawyers, especially since the company advertises that clients accept its recommendations 90 percent of the time. But Rainmaker isn’t out of the woods. In Atlantic City, where it controls over 70 percent market share, another lawsuit is making its way through the courts. The pleading in that case appears to have a better chance of overcoming dismissal. Plaintiffs are also getting help from the DOJ and FTC, which filed a joint statement of interest.

Asimilar arrangement has also taken hold in agriculture markets, with a third-party information exchange called Agri Stats.

Agri Stats has actually been around for a number of years, founded in the 1980s around the same time as ATPCO, when revenue management theory was on the rise.

When the service first emerged, most farmers didn’t think much of it, as Joe Maxwell remembers. He was a farmer in Missouri at the time, who later became the state’s lieutenant governor. The reason it didn’t set off alarm bells for him was in part that monopolization of the

industry by dominant middlemen was only just getting under way. Once the Big Four meatpackers gained market share, the anti-competitive impact of Agri Stats would become clearer.

Farmers at the time were accustomed to using their own information service called DTN, which compiled and organized prices in a giant tome the size of a phone book. But DTN just assembled scores of publicly available data. Agriculture is a more coordinated sector than most because it’s prone to booms and busts from annual harvests, which skews production levels and prices for the entire market. For this reason, the USDA requires substantial reporting from every market participant and publishes that information.

Agri Stats is a different beast. It works with each of the Big Four meat processors and requires detailed information about their operations. That includes prices, production schedules, and practices; information about suppliers; and full costs, including how much they pay workers and what benefits are offered. The data that meatpackers hand over entails virtually their entire balance sheet.

Agri Stats then synthesizes that data into granular analysis, which it sends out to its clients in extensive reports. It also consults with individual meatpackers several times a year, giving advice on when to raise prices

A slide from a 2016 presentation by leading meatpacker Cargill, cited in U.S. v. Agri Stats (2023)

Potentially the biggest example of algorithmic price-fixing was uncovered in the FTC’s

lawsuit against Amazon.

or cut back supply. As former president Blair Snyder described it, “it’s like Agri Stats is doing the accounting for the whole industry.”

The listings are technically semi-anonymized, but easily identifiable in such a consolidated market. Each of the participants is listed in Agri Stats reports, and industry participation covers at least 80 percent and usually over 90 percent of the various market segments. Several of the meatpackers, notably Tyson, only agreed to participate because they were promised by Agri Stats that their competitor JBS would spill their secrets as well.

Agri Stats, which had to pause its turkey and pork reports due to private antitrust lawsuits, even encourages processors to move in a coordinated direction. According to a Justice Department lawsuit filed last year, one executive at the pork giant Smithfield “summarized Agri Stats’ consulting advice in four words: ‘Just raise your price.’”

“It raises red flags when we see the sharing of competitively sensitive information among rivals, whether directly or through an intermediary,” said Doha Mekki, the principal deputy assistant attorney general at the DOJ ’s Antitrust Division. “Corporations ordinarily work hard to safeguard that kind of information precisely because it helps them compete to win business.”

The department believes that Agri Stats’ price-fixing scheme is a quiet driver of high meat prices, which went up after the pandemic and have remained high.

The lawsuit argues that Agri Stats’ extensive reports allow meatpackers to easily identify when their products are priced low compared to their competitors and raise prices accordingly, which has occurred routinely. They can alter production levels to keep supply lower than they otherwise would,

because they know they can get away with it. Competition for high rankings in Agri Stats’ pricing books is intense; according to the lawsuit, some processors give bonuses to staff for finishing at or near the top.

As Joe Maxwell explains, if this behavior were exchanged between executives in a secret meeting, there would be no question it’s collusion. “The meatpackers just got a third party to do it under another roof, it’s like they all hired the same economist,” said Maxwell.

Both the Department of Justice and the Federal Trade Commission are also monitoring how algorithmic pricing may be impacting the health care sector, where prices continue to increase. Ending the safe harbor laws for information exchanges in health care was part of those efforts.

One potential target is GoodRx, a common coordinator of reimbursement rates on behalf of pharmacy benefit managers, as an investigation by the investigative website The Capitol Forum revealed. Initially, GoodRx was just a consumer-focused service to help patients search for the cheapest prescription drugs. But on the back end, GoodRx teamed up with each of the largest PBMs to squeeze independent pharmacies. By striking deals with the same intermediary, the PBMs pool their claims through GoodRx, which then calculates the lowest possible reimbursements they have to pay out. Because of the market power PBMs have accrued, most independent pharmacists can’t refuse to work with them.

“If this isn’t algorithmic price fixing, I don’t know what is,” Luke Slindee, a pharmacy consultant at Myers and Stauffer who advocates for anti-monopoly policies, told The Capitol Forum.

Potentially the biggest example of algorithmic price-fixing was uncovered in the FTC’s lawsuit against Amazon. An algorithm called “Project Nessie” would test price increases to see if competitors would follow by hiking prices as well. If they did, the price would stay at its new, higher level. This added an additional $1 billion in revenue for Amazon, to say nothing of its competitors across the internet.

Project Nessie represents an even more arm’s-length version of unilateral pricefixing, entirely done by algorithm and the feedback loops it triggers. Amazon says it ended Project Nessie in 2019, but the technological capability to restart it again is as easy as flicking a switch.

Today, there’s a bipartisan consensus emerging that enforcers need to establish a bright-line standard that algorithms can facilitate collusion, especially with the rise of more sophisticated models through artificial intelligence. It’s getting more attention in academia too. A recent paper from Harvard and Penn State researchers found that “[AI] pricing agents autonomously collude in oligopoly settings to the detriment of consumers.”

The current position of the Biden Justice Department on this front in many ways mirrors a speech delivered in 2017 by Maureen Ohlhausen, the former Republican FTC chair under Trump and a Chicago schooler in every respect. She stated very clearly that when it comes to collusion cases, “[e]verywhere the word ‘algorithm’ appears, please just insert the words ‘a guy named Bob.’ Is it OK for a guy named Bob to collect confidential price strategy information from all the participants in a market, and then tell everybody how they should price?” Her answer was affirmatively no.

The only remaining defenders of algorithmic pricing are economists who mostly operate from the theoretical premise of perfect market conditions. In a perfectly competitive market, individual firms using in-house pricing software might be incentivized to lower prices to gain market share. But that’s a figment of the economist’s imaginary models.

“They miss that market power skews the logic of competition,” said University of Tennessee law professor Maurice Stucke, who began investigating new pricing technologies early on.

The only real constraints on the Biden team’s actions are the limited resources they’re allocated to go after practices that appear unlawful. Then, there’s also the task of convincing the judiciary that pricefixing remotely by algorithm is indeed the same as price-fixing in person by humans. But enforcers believe this is an important issue to prioritize before pricing algorithms become completely embedded across the economy.

In previous eras, Doha Mekki explained, “a bad actor might have needed to work harder to facilitate an illegal information-sharing scheme. Today, instantaneous communication, the availability of data at scale, and increasingly widespread use of algorithms, machine learning, and artificial intelligence may have solved those speedbumps.” n

Loaded Up With Junk

Extra profits are the only explanation for many fees businesses charge.

By Hassan Ali Kanu

Most Americans are unfamiliar with terms like “ancillary revenue,” “shrouded attributes,” or “partitioned pricing.” But we’re all well acquainted with the feeling that we’ve been scammed, tricked, or flatout deceived when shopping for products and services.

That’s why the phrase “junk fees,” coined by Consumer Financial Protection Bureau (CFPB) director Rohit Chopra, makes intuitive sense, even if you’re just hearing it for the first time.

The fact that “fees” almost always refer to non-optional costs was an important factor in settling on that descriptor, Chopra told me.

“I saw this as part of a really disturbing trend in the economy that was really about cheating rather than competing,” he said. “Rather than fess up to the real price of a product or service, you saw a swarm of consultants getting companies to price in ways that are much more difficult to understand, and the result is often a way to gouge people.”

Businesses large and small, from hotels and auto lenders to restaurants and utility companies, routinely charge a myriad of inscrutable and unavoidable fees—connection fees, equipment rental fees, “service” fees that beg the question, and “convenience” fees that are almost always a massive inconvenience.

Suburban Propane, a company in legal

trouble from customer plaintiffs and state regulators, has a fee schedule on its website that includes: a safety practices and training fee, a tank rental fee, a transportation fuel surcharge, a restocking fee, a tank pickup fee, a minimum monthly purchase requirement fee, a system leak test fee, a reconnect fee, a will call fee, a forklift minimum delivery fee, a diagnostic fee, an installation fee, an early termination fee, an emergency/special delivery fee, a late fee, a returned check fee, and a meter account maintenance fee.

“Become part of the Suburban Propane family and enjoy our unwavering commitment to safety and customer satisfaction,” the website reads.

Some junk fees are announced to customers up front, and cover “unbundled” or

Consumer Financial Protection Bureau director Rohit Chopra popularized the term “junk fees.”

“à la carte” selections—corresponding to some extra work the seller has to undertake. But many more are totally undisclosed, or concealed until the moment you commit, bank card in hand, having already spent significant time and effort. And, although companies always have a good excuse for imposing a junk fee, the unspoken reason is that they’re good for the bottom line.

The Department of Transportation estimates that airlines made $8.3 billion from baggage, flight cancellation, or change fees alone in 2023, eye-watering profits for services that used to be included in the ticket cost. Cable companies made an estimated $28 billion in 2019 by imposing charges like “broadcast TV fees,” even though people expect broadcast channels when they pay the advertised cost for cable. Ticketmaster’s events business has become synonymous with junk fees; in 2018, the Government Accountability Office estimated that fees for concert and sporting event tickets averaged between 27 and 31 percent of the total ticket price. One advocacy group claims that junk fees could cost the average family $3,000 a year.

Junk fees are also routinely targeted to lower-income people, and disproportionately against people of color. Some of the worst abuses occur in the rental housing market and in the criminal justice system.

The Biden administration has pursued a whole-of-government approach that targets opaque, mandatory charges and fees that are only revealed later in the purchasing process. The administration has even tried to cap or ban certain excessive or unnecessary fees, like the CFPB’s limitation on credit card late fees, or the Federal Communications Commission’s proposal to eliminate “billing cycle” fees that charge cable subscribers who cancel their service for an entire month, even if they canceled one day into the cycle.

It’s good politics; an April poll conducted by YouGov presented voters with 40 separate policy ideas, and the single most popular proposal was “ban businesses from charging consumers hidden or misleading fees for live event tickets, hotels, apartment rentals, and other services.” Another February poll of 600 likely voters in Minnesota, Pennsylvania, and Virginia showed that 83

percent said they would be more likely to vote for their legislator if they voted for junk fee legislation.

But that begs the question of how we got here in the first place.

“This is a direct result of moribund consumer protection and competition enforcement,” Chopra said. Many federal statutes and state laws include broad language that makes it illegal for businesses to engage in “deceptive acts or practices.” Yet junk fees have become ubiquitous in American commerce, enabled by a confluence of monopoly power, big businesses’ related ability to impact the shape and enforcement of the law, and the popularity of internet shopping.

Jay Sorensen, president of consulting firm IdeaWorksCompany, should be more famous.

He has had outsize influence on the spread of unbundling and junk fees in the airline industry, and probably the broader economy as well.

Sorensen bluntly says his job is to “help airlines to make money from creating fees.” He’s careful to point out that carriers do

IdeaWorks Company holds

an “ancillary revenue master class,” a kind of junk fee boot camp.

the actual work of implementing pricing strategies—and that good business means well-served customers.

IdeaWorksCompany doesn’t only present reports and research on “ancillary revenue,” however. It even holds an “ancillary revenue master class,” a kind of junk fee boot camp, where Sorensen and others educate airline management on the latest innovations in pricing.

“I think we’re having this conversation today because of my involvement and my advocacy for this. I’ve had a big impact,” Sorensen conceded, adding that the ancillary revenue concept spread “sometimes far too aggressively.”

Broadly speaking, airline junk fees were introduced in the 1980s, after Congress removed federal authority over market entry, routes, and fares via the Airline Deregulation Act. Legacy airlines reacted in part by adding optional services to make them competitive with new, low-cost carriers, but also by decoupling services that used to be covered by the ticket price.

In the early 2000s, airlines began announcing “fuel surcharges,” explaining that they were needed to cope with rising costs of jet fuel. British Airways introduced its first fuel surcharge in 2004, for example, an added $4 a flight.

Yet just seven years later, British Airways was charging $420 extra on longer trips, as former Federal Aviation Administration (FAA) chief counsel Mark Gerchick writes in his 2013 book, Full Upright and Locked Position. In 2012, an analysis by travel management company CWT showed that the fuel surcharges had risen twice as fast as oil prices between April 2011 and May 2012. Only a handful of U.S. airlines actually decreased surcharges, despite drops in fuel

prices during the period. As The New York Times reported, it had turned into a way to increase profits—a money grab, in short. That pattern has repeated itself in the industry.

Charging people extra for assigned seats, for example, is nearly 100 percent profit, Sorensen said. Ticket change fees can be all profit too, since the process is now automated. Travelers pay a 7.5 percent tax on airfares, in order to support air travel infrastructure. But the fees that carriers charge for “extras,” or just because they can, are exempt from that tax, depriving the government of money they’d otherwise get.

American Airlines became the first legacy U.S. carrier to begin charging fees for all checked bags in 2008. Those fees were also explained as a way to help with fuel prices and other rising costs after the Great Recession, yet they’ve mostly become the industry standard well after the economy rebounded.

All of that ancillary revenue is “deliciously profitable” for airlines, Sorensen said. “What’s missing from that equation is some kind of improvement for the consumer.”

A spokesperson for Airlines for America, a lobbying group representing the industry, told me airlines are committed to “clarity regarding prices, fees and ticket terms,” adding that “the federal government forces airlines to bury the cost of government taxes and fees” in the total cost. The group added that ancillary revenues were at historic lows, and average domestic round-trip fares were 14 percent lower in 2023 than in 2010.

Still, the government certainly doesn’t “force” airlines to “bury” any other fees within their total costs. And, according to Sorensen, Airlines for America’s ancillary revenue calculations are possibly incorrect, in part because they don’t include fees for assigned seats—a new and major category— in their definition of ancillary revenues.

Earlier this year, most of the major U.S. airlines raised their baggage fees from $30 to $35, and added another $5 if travelers decided to check at the airport rather than in advance, even though the bags are going to the same place. Airline executives claimed this was because it took more manpower to check at the airport, although anyone who has been to an airport lately knows check-in activities happen primarily on a self-service kiosk.

Perhaps the most absurd example came in 2011, when the FAA’s authorizing legislation expired for two weeks due to a squabble in Congress. This meant that the agency

could not collect that 7.5 percent federal airline ticket tax on travelers, costing the government roughly $30 million a day.

Several major airlines were eager not to let the crisis go to waste.

They raised their base fare to the level of what the ticket tax would normally cost, pocketing the difference instead of turning it over to the government or passing along savings to customers. A few airlines even told customers that they would have to petition the IRS for a refund if they wanted to get their money back.

The business model pioneered by the airlines has now spread all over the economy.

The CFPB reported last October that some banks were charging customers “paper statement fees” and “returned mail fees” (a shrouded cost of opening the bank account) for statements “they did not attempt to print and deliver,” for example. One senior citizen had been assessed fees each month for five years, until she discovered that her account was nearly depleted, the agency said.

Likewise, restaurants in Washington, D.C., added new service charges to customers’ bills at the height of the pandemic—yet many of those fees have stuck around. Chopra commented that many companies have been “using supply chain shortages as an excuse,” much like the airlines did with fuel crises.

One rooftop bar and restaurant in downtown Los Angeles started charging a 4.5 percent “security fee,” much to the consternation of patrons. Reservation cancellation fees in New York City, if they’re even one minute after the restaurant’s deadline, can now cost as much as $100 per person.

The Biden administration has on several occasions lamented hotel “resort fees,” even tacked onto stays at hotels that cannot be seriously described as “resorts.” But hotel guests in Los Angeles sued Marriott last year over something else: a “hotel worker protection ordinance costs surcharge.” According to Marriott, the $10-to-$14-a-night fee helped them comply with a local law requiring personal security devices to protect hospitality workers from dangerous interactions with guests. The lawsuit estimated that a single airport Marriott makes $3.6 million annually off the HWPO junk fee—quite a bit for a system that amounts to a network of wireless pagers or walkie-talkies.

Almost all food delivery apps rely on a pricing strategy that shows added fees only

HOW PRICING REALLY WORKS

at the final stage, on the final screen, before purchase. The industry term for that practice is “drip pricing,” which brings to mind the image of customers being waterboarded with costs until they succumb to the sensation of being helplessly drowned in fees.

Rental housing fees have also grown in recent years. The National Consumer Law Center and the National Housing Law Project identified several fee “innovations” in a comment letter to the Federal Trade Commission (FTC) last year. They included application and tenant screening fees; fees for services required of landlords like pest control and building maintenance; fees for use of common areas; fees for having a pet; fees for flexible month-to-month leases; fees for roommates or guests; fees for costs related to court cases involving the building; and socalled “January fees” that are charged at the beginning of the year without much explanation. “Valet trash” fees to take tenants’ trash from their door to a nearby dumpster chute are often charged whether or not renters use the service. And, in some apartments, you’re charged an extra fee for paying your rent, whether by check, wire transfer, or online.

Prisons are home to some of the most egregious junk fees, with a literally captive audience unable to avoid them. In March, two lawsuits alleged that St. Clair and Genesee Counties in Michigan prevent families from visiting their loved ones in prison, to funnel them toward online video visitation that charged by the minute. The county corrections departments had exclusive contracts with prison telecommunications providers that gave them up-front money.

One Genesee County official was quoted in the lawsuit saying, “That video visitation is going to work … A lot of people will swipe that MasterCard and visit their grandkids.” Indeed, deceptive fees follow Americans from the cradle to the grave.

Assisted-living facilities, which are already incredibly expensive, have now taken to adding fees for assisting people with the things they need to continue living: $12 to check blood pressure, $50 to give an injection, or $315 a month to help people with their inhalers.

Even funeral homes have used these tactics to tag extra “opening” and “closing” fees onto people’s bills.

The Biden administration has a number of junk fee initiatives. The FTC proposed an outright ban last

Just making the task of buying something complex can be lucrative to companies.

October, which would require up-front disclosure of all fees and ban drip pricing. The Department of Transportation just finalized a similar ban on hidden fees for airlines. The Department of Housing and Urban Development (HUD) banned certain non-rent fees in their properties, and encouraged housing providers to end junk fees. The Department of Health and Human Services has cracked down on deceptive “junk health insurance” plans.

The CFPB is looking into mortgage closing costs, and has prohibited a variety of bank fees. The Department of Education has proposed ending student loan origination fees, automatic charges for textbooks, and the practice of colleges confiscating leftover meal plan balances at the end of a semester. Bills to mandate up-front disclosure of prices have also been introduced in several states, including Minnesota, North Carolina, Virginia, Arizona, Pennsylvania, Connecticut, New York, Rhode Island, Colorado, and Illinois. California passed a junk fee ban last year, along the lines of the FTC’s proposed rule.

Although addressing junk fees is extremely popular, corporations and conservative politicians have resisted the new regulations. Business groups have sued to challenge a CFPB rule that caps credit card late fees—which has successfully led to a preliminary injunction—and have already warned the FTC that its proposed rule to ban junk fees will likely face a legal challenge. In Virginia, a proposed bill was killed after heavy lobbying by corporate representatives, according to the bill’s sponsor, state Sen. Stella Pekarsky.

Trade groups have argued that increased regulation of deceptive practices amounts to government overreach, and that their fees cover costs associated with particular transactions and services, like additional labor.

Others maintain that their practices are an overall benefit to the economy. They argue that drip pricing and similar practices aren’t a problem because customers can always walk away before completing the transaction; and, in any case, other businesses can compete by being even more transparent about their services, lowering prices, or exposing the sham behavior. In theory, that should increase competition and actually lower market prices.

But those arguments are mostly theoretical. Research has shown that they don’t really hold water for most of the practices we see today.

“The idea that firms get to set their price and consumers get to decide, that’s the center of competition,” said Stefano DellaVigna, a behavioral economist at the University of California, Berkeley. “But that doesn’t work if consumers don’t necessarily know or realize what the actual prices are.”

Vicki Morwitz, a professor of business and marketing at Columbia Business School, has studied consumer reactions to different ways of framing prices, like a time-limited discount. Morwitz researches the psychology of how we process pricing information. Her experiments have shown that drip pricing results in the largest consumer welfare losses, when compared with four other common price-framing methods.

“Companies miss a lot of the consumer psychology here,” Morwitz said.

The research shows that drip pricing and similar deceptive strategies trigger a number of biases in people’s thinking that make it difficult to walk away. There’s the sunk cost fallacy, for example, when people overestimate the costs of starting the price comparison process all over. Or loss aversion, where customers worry that they may not be able to get a better deal elsewhere— perhaps prompted by a countdown clock at the checkout screen—or believe that every other business will just gouge them as well, whether or not that’s true.

Just making the task of buying something complex can be lucrative. A CFPB research report released in April set up an experiment of two similar products sold in different ways. The report found that the more complex method of pricing led to a more than 70 percent increase in cost, and that companies competed not over quality and service but on how they could confuse buyers into paying more.

Some businesses’ near-monopoly or

actual monopoly power also exacerbates the problem. Consumers don’t have a choice of ticketing companies when they want to see Taylor Swift, for example: It’s Ticketmaster or nothing. And monopolies and oligopolies have little incentive to behave honestly, because customers don’t really know they’re being scammed, and don’t feel like they have convenient alternatives.

In 2014, StubHub tried to switch to “allin pricing,” where customers pay only the advertised price. The company thought it might gain a competitive edge that would transform the event ticketing industry, company executive Laura Dooley said in March 2023.

Instead, “StubHub’s all-in pricing confused buyers who assumed our prices were exclusive of fees and therefore more expensive relative to our competitors,” Dooley said. “The result was a significant shift in market share away from StubHub to our competitors.” The company went back to the infuriating traditional pricing model the next year.

Those economic and market realities support increased regulation of junk fees.

Both existing laws and proposed regulations leave sellers with broad freedom to set their prices and present them how they’d like; the laws only restrict their freedom to mislead or deceive customers. Moreover, big businesses have already erected large walls to prevent individual customers from using those laws to fight back.

For example, the use of pre-dispute arbitration provisions in consumer contracts made it nearly impossible for consumers to challenge many junk fees. Many of the clauses prohibit class action lawsuits, meaning that individuals have to go through a costly arbitration process simply to dispute a nominal added fee. This insulates businesses from the legal repercussions for their deceptive practices.

Until those background issues are addressed, government remains the last, best line of defense against junk fees—and officials have tools beyond the new regu-

latory rules. Some state attorneys general have begun battling junk fees by using their existing authority to prevent deceptive and anti-competitive practices. Outrage over the Taylor Swift ticketing fiasco could lead to a federal antitrust lawsuit against Ticketmaster, in part over junk fees.

Chopra told me his agency wants people to file more consumer complaints, and is working to enlist more state attorneys general in the fight.

Consumer protection advocates also can play a role. In January, a major restaurant group in Washington, D.C., dropped its newly introduced add-on charges after a nonprofit named Travelers United sued the company under the District’s laws for allegedly charging deceptive junk fees.

The Biden administration clearly feels banning junk fees is a winning issue for voters in November. In their view, consumers and voters would welcome a tough-oncrime push that seeks more regulation and enforcement against businesses that are constantly ripping off Democrats, Republicans, and everyone in between. n

Prisons, live events, and airports are where you can find some of the most egregious junk fees.

The Urge to Surge

Businesses are hiking prices to take advantage of consumers. They learned it from Uber.

By Sarah Jaffe

The internet nearly exploded this February when Wendy’s CEO Kirk Tanner announced that the fast-food chain intended to embrace “surge pricing,” raising the prices of a burger and a Frosty in line with customer demand.

The company had included a mention of “dynamic pricing” in its fourth-quarter earnings presentation, but clarified after the kerfuffle that the announcement of its new digital menu displays had been “misconstrued in some media reports as an intent to raise prices when demand is highest,” and said that it had “no plans to do that.” Instead, the new system would merely allow Wendy’s to “offer discounts and value offers to our customers more easily.”

The snark, which included Sen. Elizabeth Warren (D-MA), ranged from pure outrage to questions of whether the company would also offer “surge pay” to its low-wage workforce. But it’s not like Wendy’s invented

price-gouging. A quarter-century earlier, Coca-Cola’s CEO mused about equipping its vending machines with thermometers, and triggering them to raise the price of a soda on a hot day. People hated that too; we just didn’t have social media then.

Wendy’s and Coke aside, surge pricing is spreading. Since deregulation in the late 1970s, airlines have used a form of it, with flights costing more at short notice or at high-demand times of year. Now, the practice has crept into golf courses, hotel rooms, gyms, pubs, and concert venues. Amazon alters its prices every ten minutes. Like Wendy’s, brick-and-mortar retailers are moving to digital price tags, allowing them to surge at will. Consulting firms like Sauce Pricing promise automatic surge pricing at restaurants to boost revenues. A chain bowling alley called Bowlero charged $418.90 for two lanes one day last year. Surge pricing “will eventually be everywhere,” the Financial

Times , that chronicler of modern capitalism, said last September.

Customers tend to want to know in advance how much something will cost, and though we’re used to the cost of a gallon of gas, or even a quart of milk or a can of Coke, changing over time, those things tend not to fluctuate rapidly over the course of a day or even an hour. People make a distinction between things you need right away and things you could wait for; between luxury items, like market-price lobster at the hottest restaurant in town, and something we all know is cheap and easy, like a Wendy’s cheeseburger.

As companies gather more data available on consumer preferences, the process of algorithmically adjusting prices rapidly based on supply and demand will get easier, affecting all sorts of goods and services we’ve grown to count on. And there’s a case study in how this affects not only consumers but the workers who serve them. You

encounter it every time you hit up your phone to find a way home.

In recent years, “surge pricing” has been mostly associated with rideshare companies like Uber and Lyft. It was one of Uber’s earliest sources of bad press, even back when the tech press mostly penned breathless paeans to genius founder-disruptors. Uber took advantage of dysfunctional taxi systems in cities like Washington, D.C., to win goodwill, according to Kafui Attoh, associate professor of urban studies at the City University of New York’s School of Labor and Urban Studies and co-author of Disrupting D.C.: The Rise of Uber and the Fall of the City

The pricing system was justified as a way to encourage drivers to come out at peak times by offering them more money, something that a regulated taxi system could not offer. It worked, ostensibly, by some combination of three incentives: reducing demand for rides because fewer people could afford the higher price; offering drivers a higher rate if they hit the road; and getting already-working drivers to head to the high-rate zone.

But regulated taxi systems at least offered a steady price that users could count on, whereas Uber’s sudden price spikes turned a short ride home into a luxury good. Uber spokespeople would suggest that riders simply wait for prices to fall again, but anyone who’s ever been stranded at closing time or

missed the last subway knows that waiting sometimes isn’t an option.

Defenders of the practice consider it just an updated version of the same old capitalist supply and demand. “Get used to it, consumers!” wrote Peter Fader, professor of marketing at the University of Pennsylvania’s Wharton School of Business, nearly a decade ago. “Surge pricing is here to stay, and that’s a good thing in most circumstances. It is a more natural way for markets to operate, and smart retailers can learn a lot about the value of their customers (and the value of their products/services) from it.”

Utpal Dholakia, a professor of marketing at Rice University, suggested in 2015 that Uber “rebrand” surge pricing with another name, perhaps part of the reason we hear

HOW PRICING REALLY WORKS

more about “dynamic pricing” these days. But Uber’s problems didn’t have so much to do with a name. Its lightning-fast response to incoming data allowed it to spike prices quickly, before customers could react or adjust, in ways that seemed unfair.

While public transit, Attoh noted, might have a simple “peak” and “off-peak” fare system, those are at least predictable; customers during peak commuter hours pay peak commuter fares, encouraging those whose plans are flexible to take a later, cheaper train. But Uber can notice a sudden spike in calls for cars in a certain part of town—maybe there’s a subway outage, maybe a torrential downpour—and spike rates within minutes.

Returning to the Wendy’s context, it’s the difference between a standard happy hour or “early bird special” at a set time, and a free-for-all of minute changes in customer orders leading to surges, in ways nobody can anticipate. Attoh noted that particularly in moments of acute need—during natural disasters and the like—customers would be especially enraged at Uber’s price hikes. Price rebellions, he pointed out, have a long history.

The secrecy of the price-setting process is another part of the problem: Users often have no idea how the multiplier is calculated for a surge, or how long it will be in effect. And the increasing sophistication of the data these companies are extracting makes the whole practice seem less than honest.

For instance, in 2016, Keith Chen, Uber’s head of economic research, let slip that the company is aware that “one of the strongest predictors of whether or not you are going to be sensitive to surge … is how much battery you have left on your cell phone.” A desperate passenger about to lose the ability to call an Uber, in other words, was one who would pay any price. Chen insisted that Uber “absolutely” didn’t use that knowledge to spike prices, but what was curious was why Uber was tracking user battery life to begin with.

A later investigation seemed to contradict Chen’s denial. Last year, the Belgian newspaper La Dernière Heure “conducted a test using two smartphones, one with 84% battery and the other with 12%, to request a ride from their office in Brussels to Tour & Taxis in the centre.” The phone with the low battery was offered a price a euro higher for the same ride. Uber once again responded that it never used battery data to determine rates.

For apps like Uber, obscuring how pricing is determined is a core part of the business model. Because Uber is controlling both its ostensibly independent labor force and also its riders’ demands for services through an algorithm, it is in real time determining both the wage rate and the fare, and those two things are not always as closely related as they might seem.

In some ways, of course, the interests of drivers and riders are opposed. Nick Srnicek, a lecturer in digital economy at King’s College London and the author of Platform Capitalism , recalled one story of Uber driver organizing in which drivers would coordinate turning off their apps at the same time in a high-demand area in order to get the algorithm to kick in surge pricing, raising their rates for the same trips. In a more individual fashion, drivers sometimes “chased the surge,” Attoh noted, which is of course what Uber was ostensibly trying to incentivize with surge pricing in the first place.

“The only way for some people to make working for Uber work was if they were able to get enough surge rates,” Attoh said. “And so that meant trying to figure out, OK, today’s a baseball game, so I’m going to drive to this area because I’m going to get more money that way.” There were also apps that attempted to predict pricing on the rideshare apps; and perhaps even (though Attoh never confirmed this) a consumerside app that would tell you where the surge pricing zone ended. “It’s these competing apps to try to avoid either paying more or getting paid as a worker less than you otherwise could. It was like this technological arms race between consumers and drivers.”

Other research by Nicholas Diakopoulos, a professor of journalism now at Northwest-

Uber can notice a sudden spike in calls for cars in a certain part of town and spike rates within minutes.

ern University, found that surge pricing did less to change the supply of drivers in the moment and more to move drivers from one area to another. Again, it was the variability and rapidity of prices at play: Surge prices jump too quickly to get drivers to stop anything else they might be doing and leap into the car to speed toward the surge spot. (In other words, drivers have lives.)

Diakopoulos noted that an Uber spokesperson cited the long-term value of such pricing, teaching drivers where and when the “highest-value times are for driving.” It served, Srnicek said, to press workers to internalize ideas of where and when surge pricing might apply in order to shape their working schedules, without the company having to assign them shifts and otherwise treat them as employees.

Meanwhile, Uber’s recent profitability was built on the backs of its workforce. According to Forbes, Uber quietly reduced per-trip base pay for drivers by 12 percent in 2023, while increasing its take rate from each fare to 40 percent. The cuts were concealed through a new pay policy powered by artificial intelligence that sets the rate up front, through data points unknown to the driver. In addition, drivers bid for trips in a real-time auction known as Trip Radar, putting them in competition over taking the least amount of money for a ride.

It can be hard to convince people who are thinking as consumers to have sympathy for drivers, especially when higher rates for those drivers means higher fares. But most of us are both worker and consumer at different times, and those two roles together make up not just our economic existence but our lives. Wages are nothing more than the price of labor, and those prices can be just as easily manipulated, algorithmically, at the boss’s whim. And in the case of Uber, driving down wages for workers and locking them in a state of desperation has a knockon effect for all of our working lives.

Veena Dubal, professor of law at University of California, Irvine and one of Uber’s most prominent critics, has described the way Uber and other companies set wages as “algorithmic wage discrimination.”

Dubal told me that Uber also has many methods to “gamify” wages. For example, the company offers token bonuses that she referred to as “wage products.” As Dubal explained, “If you do this many rides or this many tasks in X amount of time, you get this little token that gives you X percentage off

on your insurance or gives you a hundred dollars or whatever. And if we’re talking about net wages or even a net hourly wage, then that stuff really matters.”

Algorithmic pricing, in other words, is part of a broader system of labor discipline when it comes to the gig economy. It’s a new form of scientific management, Dubal said, designed “to control how workers behave, how they move and when they move and what they do … It’s literally manufacturing consent in a way that is rooted in behavioral science, rooted in what we know about human behavior, rooted in literally theories of manipulation.”

The fluctuating price of labor pits drivers against one another, making collective organization harder (though certainly not impossible). It creates assumptions that drivers who earn more are simply working harder to master the system, an individualized men-

tality that cuts against solidarity. But in the end, it just confuses workers, because they don’t understand why they’re getting paid and what underlies that decision.

To Dubal, variable pricing has a much more insidious effect on workers than on consumers. “I don’t like talking about it in the same breath as I like talking about consumer prices, because when a worker is selling their labor … It is about livelihood. It is about dignity. It is about the ability to survive.” And that variability on the wage side is creeping into sectors where we might least expect it, even in professions where workers have access to basic wage and hour protections.

Take health care. Hospitals, Dubal said, have begun using apps to allocate tasks based on increasingly sophisticated calculations of how workers move through space and time. Whether the

task is done efficiently in a certain time frame can impact a worker’s bonus. It’s not surge pricing per se, but a more complex form of control that often incentivizes the wrong things. “It might not be the nurse that’s really good at inserting an IV into a small vein that is the one that’s assigned that task,” Dubal said. “Instead, it’s the nurse that’s closest to it, or the nurse that’s been doing them the fastest, even if she’s sloppy and doesn’t do all the necessary sanitation procedures.”

With technological labor pricing, then, what workers are paid and the services customers receive (and pay for) are becoming disconnected. The Uber app is calculating my price based on what it thinks I will pay, and it’s calculating the driver’s rate based on what it thinks they will accept for the trip I want to take. These calculations operate at cross-purposes, but similarly

A Belgian study presented evidence that Uber increases rates on riders when their batteries are low.

HOW

overextend consumers and workers for the company’s benefit.

“What’s interesting,” Dubal continued, “is that all of these practices have emerged out of this particular sector because really there’s no enforcement of existing employment laws in the sector, and there’s been so much experimentation as a result, and therefore you have these really problematic Tayloristic practices that emerged that now leave us in this complete dystopia of digitalized pricing.”

It’s not impossible for drivers and users to express solidarity. During protests against Donald Trump’s Muslim ban in 2017, when New York City taxicab workers showed their support by refusing to take airport fares, Uber announced that it would halt surge pricing at the airports. Some consumers surely took advantage, but #DeleteUber trended on social media, and some 200,000

people deleted the Uber app in support of the taxi strike. New York Taxi Workers Alliance leader Bhairavi Desai told me at the time, “People out there know that taxi drivers are really hardworking and that people really struggle day-to-day to make ends meet. The idea that they would put their incomes on the line and it would be a workforce that is so vulnerable, particularly in these times, to surveillance and deportations and further policing … It seemed to really touch people and we were so moved by their reaction.”

But the apps make it difficult to express that solidarity on a day-to-day basis, because riders and drivers have been set apart. Riders cannot easily compare data with drivers, to show how much you’re being charged versus how much they’ve been paid. That makes it hard for riders to recognize the plight of the drivers.

And the mechanisms for control that the

algorithm provides are often deeply inefficient. Drivers are kept in a loop, circling and waiting for fares, in order to push down the price they’re willing to accept; riders are kept waiting rather than offered the driver nearest them. “It’s not just about an evaluation of objective supply and demand, it’s also an evaluation of our varying individualized willingness to wait to exploit ourselves, to put up with different environments,” Dubal said. “It’s really a digitalized evaluation of who we are in some sense, and as it relates to the company’s profitability.”

Uber was unprofitable for years, subsidized by venture capital to grow its market share. They’ve now managed to achieve record profits, but, Srnicek said, “they’ve done it by slashing what workers receive and jacking up prices to the point where in London, it’s not much cheaper

Uber drivers are also affected by algorithms that manipulate their take-home wages.

than a black cab anymore to get an Uber.” Forbes ’s data shows that rides have surged in price to well beyond even the elevated rate of inflation post-pandemic.

Despite the odes to Econ 101 that surge pricing’s fans offer, Srnicek said that the company’s success is really due to anticompetitive behavior: driving out all competition from the market, colluding at times with rivals to crush public options or traditional taxis or regulation, and then becoming the only option for transit. (The day I went to meet Srnicek for our interview in outer London, I walked into the Liverpool Street station to massive ads telling me to book my next train journey through Uber.)

Digital platforms, in other words, succeed when they get to saturation, and they wring profits out of increasingly sophisticated data collection that becomes possible only at that saturation point. We see this in food delivery apps—in which Uber is a player—which have consolidated and then exploded in price, just as more and more users have gotten hooked on one-click lunch and dinner.

These apps of convenience are not stable, profitable businesses, and they can only succeed by making their services unaffordable yet unavoidable. (We know the stories about delivery apps listing restaurants without their permission, to the detriment of those businesses.) Uber hides behind surge pricing; Uber Eats and DoorDash and Grubhub behind a wall of unexplainable fees. Either way, the push is toward higher prices.

Those bowling alleys and fast-food joints and other businesses are places where the customer still does often walk in from the street. People have not previously had to use the mental energy to think about what prices will be at particular times of the day for a physical product, rather than a ride or a ticket. But Uber has made Americans more comfortable with Uber-ized prices. And that’s very useful for brick-and-mortar retailers, economist James Meadway believes.

“One prospect with surge pricing being used more widely,” Meadway said over WhatsApp, “is that in situations where there are (1) few suppliers, so suppliers have some market power and (2) inelastic demand (i.e. people carry on buying even when price rises), there could be a ratchet effect—prices surge, but then as the pressure point eases companies don’t simply put them down to where they

were before.” Meanwhile, workers don’t usually share as the revenues go up. In fact, they suffer from the monopoly or near-monopoly too; just on the other side of the equation.

It’s become somewhat popular to say that today’s economy has changed so much that we’re no longer in an age of neoliberalism, or even, if you believe Yanis Varoufakis, capitalism. But the direction in which we have been pointed by the gig economy’s pricing models is actually in many ways neoliberalism’s apotheosis, where each of us is a number evaluated by various algorithms, with our behaviors used to inform our prices, without our even knowing it.

Uber’s effects on existing systems have been a continuation of neoliberal attacks on regulation and shredding of both worker and consumer protections. The road to monopoly power has been paved with broken laws and decimated transit systems. Price regulations are scoffed at; minimum-wage laws lead Uber to declare that it will exit an entire market. The technology is certainly helping bring dynamic pricing to a shop near you, but the real problem here remains brute force and a lack of political will to change.

Attoh and his co-authors’ research bears that out. They started out, he said, intending to look at Uber drivers’ working conditions, but at the time, the company was battling a bill in D.C. that would have put a price floor on fares. “In response, they encouraged everyone who had taken Uber—they have their contact information—to write into their city council person. And so they killed the bill,” Attoh said.

That turned their research to the ques -

Uber has made Americans more comfortable with Uber-ized prices. And that’s useful for brick-andmortar retailers.

tion of how Uber exploits gaps in the social safety net and manipulates our expectation of public versus private, regulated versus the free market. Uber, Attoh noted, becomes part of our transportation infrastructure, not just a private service provider, which increases its ability to set prices. “There has been a real shift in what people expect just given the technology,” he said. “This phone gives them access to a whole servant class with immediate one click on demand.” But what happens when you become dependent on a service and then the price goes through the roof?

As I write this, the state of Minnesota is negotiating with Uber and Lyft to keep operating after the companies threatened to pull out to avoid paying a minimum wage to drivers in Minneapolis. The city passed an ordinance requiring a pay rate of at least $1.40 per mile in the city limits. The rideshare companies freaked out. Price increases are one thing. Regulations, it seems, are quite another.

Yet wouldn’t all these sophisticated pricing algorithms have an easy enough time calculating the minimum rate and setting prices accordingly? Surely they’re capable of such a thing. But that’s not the point of the screaming and wailing and threats. Rather, the point is once again that the company’s right to set prices should not be impinged upon by human beings’ pesky needs, whether that be to move around the city or to make a living wage.

The flip side of the ongoing job precarity, for gig workers and Wendy’s workers alike, is a new pricing precarity, where you never really know what anything will cost and it becomes impossible to make a budget, to plan ahead at all. This is why people worry about inflation, and this is why gig work, as Veena Dubal pointed out, is so particularly dehumanizing.

In this sense, the fight for Minneapolis Uber drivers’ wages is actually a fight that affects all of us, because it is a fight over who will run the city: the elected government, or corporate power. n

Sarah Jaffe is the author of Work Won’t Love You Back: How Devotion to Our Jobs Leaves Us Exploited, Exhausted, and Alone, and the forthcoming From the Ashes: Grief and Revolution in a World on Fire. Her work has appeared in The New York Times, The Nation, The New Republic, The Atlantic , and many other publications.

THE One-Click Economy

Digital subscriptions are here to stay. What should we do about that?

By Joanna Marsh

You’d think that having subscriptions to three online fitness programs would make me the healthiest person in the world.

I have: (1) a Zumba subscription, because until recently, I was an instructor at a local gym and I needed choreography to teach; (2) an Essentrics subscription, because it emphasizes dynamic stretching and elongating your muscles, and doesn’t that sound so delightful; and (3) a Les Mills subscription that I got during the COVID-19 pandemic, because I didn’t want to quit body combat.

Do I use all these subscriptions regularly? Heck no! Should I give them up? Probably. Would I like to receive reminders that I subscribe to these online programs, so I can finally decide whether I should lace the sneakers or find the cancel button? Also probably.

I’m pretty sure I’m not the only person in North America faced with this dilemma.

A May 2021 article from consulting firm

Mc Kinsey said businesses offering subscriptions grew by more than 300 percent from 2012 to 2018—and this was before the pandemic forced people to socially isolate and shop for hammers online. According to Statista, a business intelligence firm, subscription revenues from media and digital content are expected to increase by another 13.5 percent between 2021 and 2025, with consumer spending for subscriptions globally estimated to grow as high as approximately $1.26 trillion by the end of 2025.

Subscriptions “seem to be models that consumers are really liking. You see retailers moving toward those kinds of models because consumers are responding to them,” said Mike Lemon, vice president of legal affairs for the National Retail Federation (NRF).

But while subscriptions can save consumers from the hassle of having to renew wanted services every month, they can pile up, and go months or years without being used or even remembered. Companies can also

trick people into enrolling in a subscription, or make it difficult to cancel; this is something that the Federal Trade Commission (FTC) is looking into. And with artificial intelligence and machine learning poised to increase a company’s information advantages, it begs the question of how consumers—and government—should respond to a form of commerce that’s likely here to stay.

The Inattention Economy

Consumers used to associate subscriptions with having newspapers and magazines delivered to their front door. (Like this magazine, for example.) But the rise of the internet cleared the path to online subscriptions, enabling access to so many things without leaving the comforts of home. Need new razors? Join the Dollar Shave Club and get razors delivered to your door. Need ideas for dinner? An assortment of prepared meal services are available by subscription. You can get subscriptions for boxes of clothing

or makeup, or treats and toys for your dog. There are even subscriptions for meditation, or washing your car.

Subscriptions have also risen up for services that were previously bundled together, like cable television. Now, many favorite shows and movies are scattered on Netflix, Max, Apple TV, Paramount+, or Disney+. Said my

friend Janice Huang, a software developer living in Fairfax, Virginia, “I like the contents/service that my subscriptions provide. Disney and Amazon allow me to keep up with the newest Star Wars content and to watch movies that I either enjoy or want to see but am unwilling to pay theater prices for.”

That brings us to Amazon Prime, which

is sort of the ultimate mega-subscription. For $139 a year, members get access to free shipping on hundreds of millions of items, plus Amazon Prime Video for first-run TV and movies, Prime Reading for e-books, Amazon Music for music streaming, Amazon Photos for unlimited file storage, and Prime Gaming for free games and a Twitch

HOW

channel. You also get discounts on other services and subscriptions, from Whole Foods groceries to One Medical health care. Prime is like a gateway drug for making your whole life dependent on subscriptions, and the rise of the subscription economy can be attributed to Amazon’s path-leading efforts.

Companies offering subscriptions often make money off access to a product, not the product itself, according to Marco Bertini, an associate professor of marketing at Esade Business School in Barcelona and co-author of the book The Ends Game: How Smart Companies Stop Selling Products and Start Delivering Value.

“Imagine me buying all of the movies that Netflix offers outright. All the music I like to hear. All the clothes I want to wear. Or I have to buy a gym itself. I mean, I cannot afford this stuff, right? So, a subscription allows me to have access to something at a much lower amount,” Bertini said.

Jimmy Fitzgerald, CEO of Paddle, a tech provider that enables software-as-a-service (SaaS) companies to develop a payment infrastructure that can manage subscriptions, says they offer three core benefits to consumers: convenience, predictability, and value for the money.

“A subscription means they don’t have to go through the purchasing process again and again. They can rely on the business renewing their subscription automatically, ensuring they have an uninterrupted customer experience,” Fitzgerald said. Customers can fold that recurring fee into their monthly and annual budgets, he added, and the company can offer consumers discounts as an incentive for signing up and making a long-term commitment to the product.

But the danger in free trials is that a consumer can easily forget about them unless they actively commit to making a note in their calendar about the trial’s end date. Companies can also vary in how well they explain to consumers just what happens when the free trial ends.

Furthermore, while a consumer might experience financial pain or discomfort from opening up a wallet, that consumer is unlikely to feel the same stress when a subscription automatically charges a credit card or deducts money from a bank account.

For example, if I had to pay, let’s say, $150 in cash each month for my various subscriptions, I might think twice about keeping all the subscriptions that I own. But automatically billing on a credit card?

Dark patterns are used to entice users into subscribing and make it more difficult to cancel.

Out of sight, out of mind.

“Because these things operate in the background, on autopilot, with little in the way of monitoring, credit card companies have made it more difficult—not less—to figure out what charges on your bill are for,” said Ted Mermin, executive director for the Center for Consumer Law & Economic Justice at the University of California, Berkeley, School of Law. “And that’s not an accident. There’s an overarching effort to make it less obvious to consumers what they’re paying for.”

Consumers tend to underestimate not only how many subscriptions they have but also how much they pay every month. A survey conducted by market research agency C + R Research in May 2022 found that consumers estimated they were spending $86 per month on average for their subscriptions.

But how much were they really spending? After itemizing expenses, C + R found that the total was actually $219, 2.5 times more than the initial estimate.

Companies are also banking on consumers being complacent with their subscriptions. An August 2023 study from the National Bureau of Economic Research entitled “Selling Subscriptions” looked at what happened when consumers were faced with the choice of renewing subscriptions after they got their credit and debit cards replaced. From that natural experiment, the authors determined that inattentiveness can actually raise seller revenues by anywhere between 14 percent and more than 200 percent.

“It can be a powerful tool for growth, as well as guaranteed recurring revenue,”

A survey found that consumers estimated they were spending $86 per month for their subscriptions. The total was actually $219.

Fitzgerald said. “Subscription models benefit businesses by allowing them to build stronger and longer-term relationships with their customers; lower customer retention spend; improve demand forecasting; and identify opportunities for upselling/cross-selling.”

Spotlight on Dark Patterns

Tons of thought and engineering design goes into the subscription offers you see on the internet every day. The FTC describes the most deceptive of these efforts as “dark patterns,” which it defines as “sophisticated design practices … that can trick or manipulate consumers into buying products or services or giving up their privacy,” according to a September 2022 report.

One example of a dark pattern is an advertisement that looks like content. You can find comparison-shopping sites for subscription-based services all over the web. What you might not know is that companies pay to be rated highly on those sites.

Countdown timers that say a subscription offer is only available for a limited time create artificial urgency to sign up. Companies using a prechecked box for a subscription, or automatically adding a subscription to a one-time purchase, can also lead to someone being signed up without their knowledge.

Another dark-pattern technique involves hiding or burying key terms and conditions. Hewlett-Packard’s “All-In Plan” for a printing subscription stresses convenience. For between $6.99 and $12.99 a month, consumers are sent a printer, without having to worry about maintenance (which is included) or the familiar loss of printer ink. The

printers deliver feedback to the company on when ink is running low, and a new cartridge is shipped the next day.

But the low base rate only guarantees as few as 20 printed pages per month; consumers are charged $1 for every set of 10–15 pages above the limit, or can upgrade to the higher rate. And after 30 days, you get locked into a two-year contract. Cancellation triggers a fee of as much as $270.

A free trial period can also be seen as a dark pattern, if it’s not clearly disclosed that after the trial a recurring subscription will kick in. Often the words “free trial” are prominent, while the explanation of future terms is buried at the bottom in tiny type. The Restore Online Shoppers’ Confidence Act of 2010 was intended to fix this by requiring the terms of a transaction to be conspicuous and mandating that businesses obtain the consumer’s explicit consent. But even that can fall short once the remembrance of the trial offer fades.

“There are considerations consumers should be aware of when paying for a subscription,” said Eden Iscil, public-policy manager for the National Consumers League (NCL). “Generally, a seller can raise their prices and change other material terms of their services, and charge you this new price, without any action or new consent on your part. This moves the burden from the business—which outside of a subscription would have to convince their customers to purchase a new offer—to the consumer.”

Artificial intelligence and machine learning can also be used to harness even more insights about how to ensure customer retention. Users who are less sophisticated or web-savvy are often the ones tripped up.

“Even an honest business that says, ‘I don’t think that’s a fair way of treating our customers because we understand how consumer psychology works and we know that people will find this tempting and they may get in over their heads’—well, they might find that their competition is doing it and that they’re losing market share,” Mermin explains.

A Subscription for Your Subscriptions

When Jordan Mackler was a student at MIT’s Sloan School of Management, he and his classmate Yohei Oka were paired together to play fantasy football. Since it was the first time that Oka, who was originally from Japan, would be playing, he wanted to study up and research the teams by using free trials to streaming services such as Fubo and

YouTube and news sites such as The Athletic.

The duo lost, and they eventually forgot that Oka subscribed to these services. However, they got a rude awakening when the bills came after their free subscription trials ended.

But Oka and Mackler found a silver lining from the experience. They thought, why not create something that could help people keep track of subscriptions before consumers get charged for them? Their answer served as the impetus for their company ScribeUp, which enables consumers to use a virtual credit card to sign up for subscriptions. The service then notifies consumers of when subscription renewals are coming up, when trials will end, or if subscription prices change.

“There’s really no way for consumers to keep up with discretely managing all of the 20-plus services that they interact with on a day-to-day basis without [running into] the financial waste,” said Mackler, who serves as the company’s CEO. Oka is its chief technology officer.

“We thought that the financial tools that consumers have today just plug them into this recurring consumption model. And our opinion was that your cards and your payment forms that you use today are really built for you to make one-off purchases, [like] going to a grocery store or going to a pizza parlor and buying a slice of pizza,” Mackler said.

The service is free of charge for consumers. ScribeUp makes money by monetizing a data interchange on the virtual credit card, so they get a small fee from the merchant every time the card is used. It also works with financial institutions to offer the technology.

ScribeUp is just one of several services consumers can use to manage their subscriptions. Others include YNAB—which is short for You Need a Budget—Rocket Money, and Hiatus. These are all subscriptions that consumers sign up for and pay to manage their finances, including tracking digital subscriptions. YNAB costs $99 a year; Hiatus is $10 a month; Rocket Money can be anywhere from $3 to $12 a month.

That’s where we are in the digital age: You need to buy a subscription to manage your subscriptions.

Welcome to the Hotel California

A very informal poll of my friends found that each of them has had trouble canceling subscriptions. Nancy Dunham, a fellow journalist living in Tucson, Arizona, says

HOW PRICING REALLY WORKS

she’s encountered situations where she’s had to make a phone call to cancel an online subscription. Deborah Beckwin, a content strategist based in Seattle, said she tried to end an annual subscription to the online meeting platform Zoom. Although customer service said she had successfully canceled it, the account was actually still active.

A 2022 FTC complaint against online phone provider Vonage notes that the company offers only one way to cancel: by speaking to a live operator by phone. The cancellation number is hard to find on Vonage’s website, and calling the general line did not lead to Vonage transferring customers to where they can cancel. The cancellation line was only available for limited hours of the day. And Vonage charged termination fees and even continued to charge users after cancellation.

Other examples of elaborate cancellation practices gathered by federal regulators on one-click subscriptions include having to go to the place of business in person to cancel, or sending certified mail. And even when users can cancel online, companies can revert back to dark patterns.

This includes presenting a screen where “Keep My Subscription” is displayed in bold or large type or is preselected as the default option, while “Cancel My Subscription” is smaller, or hidden behind a hyperlink. Or the language could be riddled with confusing terms (like having to turn off “autorenewal”), double negatives (“No, don’t cancel”), or attempts to shame the consumer into changing their mind (“Yes, I don’t want to keep using this great product”). One website discovered 20 different dark patterns across 16 companies’ cancellation practices, and found that they lost $330.60 in nonrefundable fees after trying to unsubscribe immediately after signing up.

Subscriptions are “great for businesses in terms of recurring revenue, but I’m not sure how great they are for customers, especially when they make it like Hotel California and you can’t easily cancel your subscription,” Beckwin said. She’s referring to that famous line in the song: “You can check out any time you like, but you can never leave.”

Making it extremely difficult to cancel a digital subscription is something that the FTC is seeking to address through efforts to modify the 1973 Negative Option Rule, which addresses “unfair or deceptive practices related to subscriptions, memberships, and other recurring-payment programs,” according to a March 2023 press release.

The proposed rulemaking would require companies to make the cancellation of a subscription as easy as starting one, with the same number of steps and clear indications of how to cancel (so no hiding of the cancellation button on the website). Sometimes described as “click to cancel,” it also requires sellers to provide consumers of digital products with an annual reminder ahead of an impending renewal.

The agency received more than 1,000 comments on the proposed rule. James Kohm, head of the FTC’s enforcement division, said that the agency is in the middle of conducting a formal cost-benefit analysis, after a federal administrative law judge determined that the rule could have a $100 million net impact on the U.S. economy.

The FTC has argued that this proposed rule would provide industry with a consistent legal framework instead of facing a patchwork of state laws. But trade groups such as the U.S. Chamber of Commerce, the Association of National Advertisers, and the Software & Information Industry Association have called the proposed rule ambiguous and impractical, resulting in consumer harm through raised prices as companies seek to fall into compliance. The groups have also argued the changes could hinder innovation and the free flow of commerce.

“There’s additional information that consumers actually want to know before they cancel,” NRF ’s Lemon said. “For example, say it takes you two clicks to sign up for your automatic renewal subscription, but when you go to cancel, you might actually want to know that there’s an option to pause your subscription … [Or] you’re canceling Amazon Prime. But did you know that means you’re also canceling your TV service with Prime and your music service? That’s actually pro-consumer because consumers should know exactly what they’re canceling.”

The proposed rule actually does allow for sellers to make competing offers to retain the subscriber. But the seller must first ask the subscriber whether he or she would be interested in seeing the seller’s pitch. If the subscriber answers no, then the seller must proceed through the cancellation process.

Lemon suggested that the FTC adapt their regulation along the lines of a 2010 California law preventing companies from charging consumer credit or debit cards on an ongoing basis without consumers’ explicit consent. Many states followed California’s lead with similar regulations, and

The FTC’s proposed rule would require companies to make the cancellation of a subscription as easy as starting one.

companies have changed their operations to comply with those laws. That should be sufficient, Lemon asserted.

“The more we’re changing rules, the more expensive it becomes for both retailers and consumers at the end of the day,” Lemon said.

Meanwhile, consumer advocates either support the proposed regulation as it stands or are calling for stricter measures, such as forcing companies to increase the frequency of notifying consumers about recurring charges, and prevent instances where free trials automatically convert into paid subscriptions without the consumer’s awareness.

“Sellers should earn a profit by running an honest business and competing to offer the best product,” NCL’s Iscil said, “not trapping consumers in subscription plans with nightmare cancellation processes.”

Subscription for Performance

Even if the FTC were to revise the Negative Option Rule, the subscription model itself is evolving, in large part because subscriptions can now collect a lot of data about consumers.

In The Ends Game , co-authors Bertini and Oded Koenigsberg, professor of marketing and deputy dean at London Business School, describe subscriptions as being more of a means to an end. They argue that eventually, subscribing consumers and businesses might not pay simply for access to a service, but for how that service succeeds in obtaining or fulfilling the customer’s needs.

“This transition is exactly what all the SaaS businesses are going through right now,” Bertini said. “And the reason why they’re moving this way is, one, because I can measure it. And two, because the

moment I take some of that consumption risk on my shoulders, the market expands and the willingness [of subscribers] to pay goes up.”

Examples of this kind of model are even cropping up within the consumer market. For instance, a textbook company may charge you not for access to the textbook, but for how well that textbook helped you ace a test, Bertini said. “As long as you can measure performance, that’s where the market will go.”

This is where artificial intelligence and machine learning come in, because they are enablers of the performance model. They “allow us to shape the product to the different needs of the customer as they are using it and then shaping the revenue model behind it,” Bertini said.

For instance, an airline purchases jet engines from Rolls-Royce or General Electric, and they ensure Rolls Royce or General Electric maintains the engine properly through establishing a contract. In the consumer market, Progressive Insurance might encourage good drivers by having contests, where a customer might compete against their grandmother or their brother for who was driving better in a given time, Bertini said. The winner then gets points and incentives to ensure good driving.

The downside with the subscription model is that people don’t get enough value from subscriptions, Bertini said. “And, by the

way, the companies that provide subscriptions know this. That’s why they can have this very hard way of unsubscribing. That’s why it happens.” A performance model, by contrast, could align the business and consumer, so that the subscription would be concerned with keeping the customer happy.

Technology to Empower Consumers

Mackler, of ScribeUp, may run a company that helps people navigate the murky world of subscriptions. But he thinks federal regulation should ensure that consumers don’t get caught by bad actors. That said, he also thinks that as retailers and others garner new insights about consumers and even put them to use as a form of deception, companies like his can use AI to develop financial tools to counteract some of these practices and benefit the consumer.

Some subscription companies even do this now. Netflix identifies inactive users who haven’t watched the service for years, and sends messages to them asking if they want to keep their accounts. If there’s no response, Netflix cancels the subscription automatically.

“Consumers will demand the power of technology to help them,” Mackler said. “I do think technology ultimately exists on both sides of the equation. I don’t think you become bombarded by merchants and there’s nothing you can do about it.”

The question of data collection and uses of AI and machine learning tread onto the issue of data privacy. The range of views there is wide. Bertini says companies need to show customers that they’re managing their data responsibly, so that customers can clearly see the benefits. Meanwhile, NCL’s Iscil says that policymakers need to insist that companies should be directed to collect only the information necessary to perform actions that the consumer requests.

The FTC’s Kohm says all these questions and unknowns may be best addressed by Congress: “The FTC is not a legislature. So, it’s not like we see a problem and then we can address it with any regulation that we think would be beneficial. We are limited to our jurisdiction, which is over deceptive and unfair acts or practices.”

In the meantime, I should probably start by managing my subscriptions to online fitness programs and others the old-fashioned way: scour my credit card bills and create a budget spreadsheet. Bonus points for me if I can still add up my monthly charges using pencil and paper. n

Joanna Marsh is a freelance writer and journalist based in Washington, D.C. As a business journalist, she’s covered transportation and logistics, the North American freight railroads, and sustainability and civic science initiatives.

ScribeUp is one of several services consumers can use to manage their subscriptions.

What We Owe

The big banks behind the rising cost of credit

By Kalena Thomhave

Melissa Marquez is not your typical banker. She rails against the globalization of big finance and the concentration of the financial sector through mergers and acquisitions. She calls high interest rates “obscene.” Her financial institution has issued mortgages for 42 years but has never once foreclosed on anyone.

To be fair, Marquez doesn’t technically work for a bank; she’s the CEO of a credit union. And Genesee Co-Op Federal Credit Union in Rochester, New York, is different even from most credit unions.

“We really try to help create wealth for low-income people,” says Marquez, explaining that as a result, interest rates and fees need to be low. “Otherwise, you’re just extracting money, not helping build wealth.”

Genesee Co-Op FCU is a community development financial institution, meaning serving low-income people is part of the organization’s mission.

When Marquez talks with new members, they’ve often come to the credit union after leaving the largest banks. “The pricing is just so exorbitant, whether that’s

interest rates—well, if they can even borrow,” she says after a thoughtful pause, “or the fees being charged.”

In August 2023, consumers in the U.S. broke a new record. Total credit card debt shot past $1 trillion. The latest statistics put that number $129 billion higher. At the same time, the credit card industry was breaking its own record, raising annual percentage rate (APR) margins on credit cards to their highest average ever.

As the price of credit increases alongside inflation’s higher prices, Americans spend more to borrow more. We know about the theory of “greedflation” exhibited by corporations since the COVID pandemic. Corporate profiteering was responsible for more than half of the increase in prices between 2020 and 2021, per the Economic Policy Institute. Even when inflation was slowing in 2023, 53 percent of price increases between April and September was driven by corporate profits, according to Groundwork Collaborative.

A recent study published by the Consumer Financial Protection Bureau (CFPB)

suggests something similar happening in finance. The APR margin is the difference between the average APR and the prime lending rate, which is influenced by the federal funds rate, what the Fed tinkers with when it wants to lower inflation. About half of the increase in credit card interest rates over the past decade can be attributed to higher APR margins—bigger differences between the cost of lending and the average interest rate. That translates, the CFPB estimates, into an additional $250 in payments on the average credit card balance in 2023.

The average APR went from 16.3 percent in 2020, as the pandemic began, to 22.8 percent in 2023, a dramatic rise after several years of relative stability. That suggests that consumers are experiencing a “double greedflation,” with the cost of goods and services going up, and then the cost of credit to afford those goods and services going up opportunistically.

But over the history of the credit card, banks have been systematically scheming to raise interest rates, long before the pandemic unfurled.

A credit card industry dominated by a handful of big banks—perhaps fewer

if the Discover–Capital One merger goes through—can rake in profits through widespread indebtedness. Monetary policymakers, like the Federal Reserve, seem to work in concert with the financial industry’s thirst for higher profits. And if customers look outside established credit channels, they will find new products like buy now, pay later that are hardly regulated at all. While wages have finally seen real growth over the past year thanks to a tight labor market, decades of stagnation has ensured that wages are still insufficient for many workers to meet their needs. In lieu

of those higher wages, we have credit. Want a better car? Charge it. Want to make rent this month? Charge it. Want to buy groceries? Charge it.

“We have made debt, and like the credit score that’s often required to borrow, nearly a requirement to participate in society today,” says Terri Friedline, associate professor of social work at the University of Michigan. Credit is embedded into society, and thus the economy. And the companies that provide credit, just like the companies providing goods and services, are using their indispensable nature to raise prices.

In 2022, just under half of consumers carried an unpaid balance on a credit card. As a result of the wide landscape of credit card use, the increase in credit pricing has a major impact on the economy at large. Households spend, the economy keeps whirring, and the credit purchases of both wants and basic needs turn into securitized assets, mainly benefiting financiers. After decades of this, the “real” economy and the credit economy are impossible to separate.

It hasn’t always been like this, but in some ways, it has. “People have always needed things before they had the cash to pay for it,” says Josh Lauer, associate professor of media studies at the University of New Hampshire and author of Creditworthy: A History of Consumer Surveillance and Financial Identity in America . Lauer explains that, rather than eschewing debt and prioritizing frugality, early Americans would rack up debts with local shopkeepers that they’d pay off after the harvest.

What’s changed after hundreds of years are the relationships between lenders and borrowers. Debts are not “personal between people who know each other anymore,” he says. Now, they’re “between people and faceless institutions.”

Those institutions brought about the rest of the changes.

Credit cards started out as an unregulated industry, but after a number of bank experiments—like mailing credit cards to consumers unsolicited—consumer advocates demanded that the new technology submit to state anti-usury laws, explains Sean Vanatta, a financial historian at the University of Glasgow in Scotland and the author of the new book Plastic Capitalism: Banks, Credit Cards, and the End of Financial Control. Under those anti-usury laws, credit cards were “operating in a world

HOW

where the price of credit was fixed,” Vanatta says. This was not ideal for the big banks that intended for credit cards to be a new and profitable technology.

Lawyers at Citibank found a solution in the Great Plains. Citibank approached South Dakota—a state whose entire economy was reeling from the beginnings of the 1980s agricultural crisis—and inquired about moving bank operations to the state, if it would change its anti-usury law. South Dakota traded the higher interest rates for the promise of 400 jobs, and Citibank moved to the city of Sioux Falls in 1981.

A 1978 Supreme Court case called Marquette National Bank v. First of Omaha opened the floodgates for the scheme. First

of Omaha, a Nebraska bank, was soliciting customers in Minnesota for credit cards that were based on Nebraska’s interest-rate law, not Minnesota’s more restrictive version. The Court ruled that the state where a bank is headquartered governs what credit card laws apply, not the state where consumers were based. With that ruling in place, it was a race to the bottom, with all credit card companies flocking to the states with the most generous laws, like South Dakota.

“After the 1980s, banks can charge whatever they want,” Vanatta says. Unsurprisingly, credit prices began to climb.

This kind of bank innovation—the kind that has lawyers hunched over regulations searching for weaknesses or inviting

themselves to legislative sessions—hasn’t stopped since.

Just ask Elena Botella, a principal at Omidyar Network and the author of Delinquent: Inside America’s Debt Machine . Before she wrote her book and got a job at the eBay founder’s social change project, Botella worked at Capital One. She started at the bank fresh out of undergrad, and eventually rose to run the company’s subprime credit line increase program.

Your credit line, of course, limits how much you can charge to your credit card. Your issuer grants you a specific credit limit when you open your card, though the limit can be changed—and not just by the card-

Government studies show that credit cards offered by bigger banks charge higher interest rates than smaller ones.

Generating more borrowing—thus generating more interest—is

the credit card business model.

holder asking for an increase. Botella didn’t handle consumers requesting credit line increases, but proactive, automatic credit line increases imposed by Capital One.

Financial institutions often make the argument that extending credit to “subprime” customers with low or no credit scores—who are often low-income or are people of color—is actually about extending opportunity to these communities. For example, when the CFPB capped credit card late fees in March, a statement from the American Bankers Association argued the move would result in “reduced credit access for those who need it most.”

The idea that she was expanding access to credit is what kept Botella at Capital One, until she began asking herself: What if a bank is just extending credit in the hopes that it will be used?

“Capital One runs tens of thousands of experiments per year,” like any other bank, Botella says. The program had an “underlying experimental design” to determine who exactly would be granted credit line increases, and how much. From the experiments, Botella learned that the vast majority of credit line increases led to net new debt, meaning that cardholders wouldn’t otherwise take out debt on a different card or use the credit line increase to pay down different debt; they would spend more.

In other words, the cardholders were partly induced into debt by the mere availability of new credit. The new credit limit didn’t take a call to customer service or a trip to the bank—it was just there. Perhaps this is one reason why, as Botella says, “people will turn to a credit card to borrow where they would never take out an installment loan.”

And borrow they do, because even as wages stagnated over the past few decades,

average consumer expenditures still continued to tick upward. This is sometimes attributed to the indefatigable power of the American consumer, but it’s just as much about the lure of easy access to credit.

Generating more borrowing—thus generating more interest—is the credit card business model, as interest is where companies make the bulk of their revenue. Approximately 80 percent of credit card profitability is based on the role of “credit” in credit cards—people actually carrying balances and being charged interest. In 2022, credit card companies charged Americans more than $105 billion in interest alone.

In a 2022 earnings call, Capital One CEO Rich Fairbank said the company was “leaning hard into origination growth and having the balances build over time”—that is, focusing on opening new accounts with a strategy to profit long-term, through things like credit line increases.

Botella says that Capital One starts cardholders with much lower credit limits than most banks. Only later, after they’ve gathered lots of data about you and how you spend your money, will they raise the credit limit. “Issuers can wait until they have extremely targeted information about you as the consumer specifically,” Botella, now a proud industry turncoat, says.

Of course, according to Capital One, a proactive credit line increase is “an indication you’ve used credit responsibly,” according to the company’s website. They say that a higher credit limit “may help you continue to use credit responsibly while meeting your spending needs.”

Customers can also request their own credit line increases online. If a customer wants to decline a Capital One–initiated increase, they … can’t do that online, but instead need to call customer service, talk to an automated voice, and then wait on hold for however long.

In 2023, Capital One made nearly $20 billion in interest from customer credit cards, a figure that represented more than half of the company’s total annual revenue.

Due in part to the high interest and fees charged by credit cards, the Consumer Financial Protection Bureau under the Biden administration has set its sights on the industry. There are “serious questions about how competition is working, or not working, in the credit card market,” CFPB director Rohit Chopra

told a gathering of the Consumer Bankers Association in March.

To support his point, Chopra regularly recites statistics such as the $130 billion that credit card companies charged U.S. cardholders in 2022, of which more than $25 billion was fees. While interest is the main moneymaker for credit card companies, fees—mainly late fees—drive a healthy 15 percent of credit card profitability. Or at least they did, until the CFPB moved on late fees.

In March, the CFPB capped credit card late fees to $8. The agency said that the reduction in late fees to a level commensurate with what it actually costs credit card companies to collect overdue bills will save Americans more than $10 billion annually. The regulation is currently under a flurry of legal objections from industry trade groups, and in May the Chamber of Commerce successfully secured a preliminary injunction, pending a resolution.

If it survives legal challenge, the late fee cap will disproportionately benefit people in low-income and majority-Black neighborhoods. Indeed, Black cardholders are significantly more likely to pay credit card fees than white cardholders, with 1 in 10 having paid a late fee in 2021. When controlling for income, the effect is smaller, but Black cardholders still were more likely to be assessed late fees than white cardholders. Plus, cardholders with revolving balances pay the majority of credit card fees—not just late fees, but annual and other usage fees, too. This means that credit card companies make most of their money, whether in interest or fees, off of the same group.

According to the CFPB , credit cards offered by big banks—Capital One, Citi, and the like—charge higher interest rates than the credit cards offered by smaller banks and credit unions. Still, people are much more likely to have credit cards from big companies.

Learning about these alternative options can be difficult. Often, comparison websites feature cards more prominently if the credit card company pays for placement. Other websites that promise to help people shop for credit cards have been accused of deception. In 2022, the Federal Trade Commission fined Credit Karma $3 million for promoting “preapproved” credit card offers that weren’t preapproved at all, and which sometimes led to customers’ credit scores getting lowered.

The CFPB is currently working on a pub -

HOW PRICING REALLY WORKS

lic comparison-shopping website, allowing consumers to legitimately compare options with the confidence that they’re not being marketed to.

While Vanatta, the financial historian, thinks a cap on late fees is “unambiguously good,” he is not convinced an independent credit card marketplace will inspire much change, since it’s ultimately, as he says, “relying on consumer choice to ensure the market works better.”

Choice, or the illusion of it, is always lopsided when other parts of people’s lives are lopsided, too. “It’s the people who have the most time, who are the best informed, who can actually shop for prices” who will benefit, Vanatta says. “And it’s the people who have the least time, who are likely paying the highest rates, who are going to struggle to use those kinds of services.”

There’s another independent agency within the government that moves much more in step with credit card companies: the Federal Reserve.

Over the past couple of years, the Fed has been increasing the federal funds rate in order to combat inflation. The idea is that higher interest rates—a higher price of credit—will curb demand and prices will fall.

In doing so, the Fed “creates kind of a paradox for monetary policy,” says Gerald Epstein, professor of economics and founding co-director of the Political Economy Research Institute at the University of Massachusetts Amherst. “In trying to lower price increase, they themselves are raising prices,” he says, thus ultimately “hurting some groups at the expense of others.”

One group that is not hurting from the Fed’s actions is the financial industry. The Fed is essentially “mobiliz[ing] finance to help it with its policy,” Epstein says, which is allowing the industry to “act in concert as if they were a monopoly or an oligopoly.” Bank customers have nowhere to go, because financial institutions are all raising interest rates at once.

Plus, when inflation falls, interest rates don’t necessarily fall with it. “A lot of these interest rates that banks and credit card companies charge go up when inflation goes up, but they come down much more slowly,” Epstein says. That’s exactly what happened with credit card interest rates after the Great Recession. Even after instances of delinquency decreased and the

prime rate fell during a period of low inflation, credit card companies still increased their interest rates.

They can, so they do.

And the same thing is happening today. In response to the CFPB late fee cap, Synchrony Financial, a large credit card issuer, has increased its interest rate, not because of increased risk of default or costs of doing business, but because it wants to offset the loss in revenue and maintain profit margins.

Credit cards entered the sphere when companies were looking to profit from a new, unregulated industry. As credit cards face even more regulation, corporations are again looking outside the regulatory perimeter.

Buy now, pay later (BNPL) companies have been quickly gaining ground as an alternative to credit cards, corresponding to a rapidly growing tally of consumer debt. Like credit cards, BNPL offers shortterm loans that may be interest-free. Unlike credit cards, BNPL users aren’t subject to a traditional credit check, making the option easy, and to some consumers, much more attractive.

Companies like Klarna and Affirm have taken shopping by storm, with loans totaling more than $75 billion in 2023—a 3,650 percent increase from 2019’s $2 billion in BNPL spending.

Little of this is being tracked at the individual level. For instance, nearly all BNPL companies do not submit purchases to credit agencies. That may sound good to some consumers, but most BNPL transactions are exempt from the protections of the Truth in Lending Act, which allow consumers to dispute fraudulent charges and get disclosures on interest rates and fees.

Moreover, critics argue that the ease of using BNPL facilitates runaway spending and unsustainable debt, spilling over into other parts of financial life. One research paper indicates that people using BNPL are more likely to incur bank overdrafts and credit card late fees.

It’s clear that the BNPL industry is targeting customers who are more likely to “exhibit measures of financial distress,” according to a 2023 CFPB report. The agency found that most consumers don’t use BNPL because they lack access to other credit products. Rather, people who take advantage of BNPL were more likely to have revolving credit card debt and were more likely to frequent

When inflation falls, credit card interest rates don’t necessarily fall with it.

high-interest financial service providers like payday lenders.

Meanwhile, BNPL is spreading. Affirm is now even offering loans for elective medical procedures, which include cosmetic surgery as well as dental procedures.

Credit card companies have viewed BNPL both as competition and as a promising model. For instance, in 2020, Capital One barred its customers from using their credit cards to pay BNPL debt, citing BNPL payments as “risky.”

By 2021, Capital One was testing its own BNPL software. Many other big credit card providers have launched their own BNPLlike platforms: There’s Citi Flex Pay, My Chase Plan, Barclays Easy Pay, and American Express Plan It.

When Andria Barrett was growing up in a Jamaican family in Canada, her mother and grandmother saved money with other women in a group known in Jamaican patois as a pardna partner. The lending circle worked like this: Each person gave the same amount each month, and one person received the monthly total until everyone received their share.

“It was an informal, community style of banking,” Barrett recalls. Women would “come together, pool their money, and lend credit to each other.” There was no interest charged. The success of the system was based on trust.

Barrett thought the informal lending circle was distinct to Jamaicans.

But pardnas, which academics call rotating savings and credit associations (ROSCA s), can be found all over the world. In Somalia, a ROSCA is called a haghad; in Trinidad, a susu. In 2022, Barrett formed the Banker Ladies Council in Toronto, where—like across the United States—ROSCA s are particularly popular within immigrant communities who may not feel welcomed by

the formal banking system. The council promotes ROSCA s as a legitimate financial choice throughout Canada.

“If you have issues at a regular banking institution, you can work cooperatively as a group,” Barrett says. “The informal mutual aid and banking of the past has a place today and in the future.”

Credit unions like Genesee Co-Op FCU in Rochester are another alternative to big banks, one that operates within the formal financial landscape. But many credit unions strayed from their original missions because of financial deregulation in the 1980s. Credit unions often make themselves look more like banks so that they can compete with banks.

Genesee Co-Op FCU formed in 1981 at the cusp of financial deregulation, but it doesn’t

look much like a bank. It serves a diverse constituency in Rochester of mostly people with low incomes, including refugees and others with little to no credit history.

The firm doesn’t require a minimum credit score at all for consumer lending. (In fact, Marquez doesn’t consider credit scores an effective predictor of repayment.)

Still, Genesee’s loan loss rate is normal for a credit union of its size, and even comparable to credit unions that only lend to borrowers with the best credit, Marquez says.

Marquez used to think of access to affordable credit as her competitive advantage. In the last decade, she’s realized “it’s not just about the access to credit,” but “how servicing happens as well.” In other words: What happens after a person gets their loan?

If members have trouble repaying, Marquez wants them to simply reach out. An actual warm human being will be on the other end of the phone line to help with getting an extension or creating a repayment plan.

“Not to say we haven’t had members struggle with repayment—we have,” Marquez says. But the credit union works with them.

“I think that’s what’s been lost [with] consolidation of the monster global institutions,” she says. “At such huge scales … how do they build good servicing that helps their borrowers?” n

Kalena Thomhave is a freelance journalist and researcher based in Pittsburgh. She is a former Prospect writing fellow.

Critics argue that the ease of buy now, pay later apps facilitates runaway spending and unsustainable debt.

War in the Aisles

Monopolies across the grocery supply chain squeeze consumers and small-business owners alike. Big Data

will only entrench those dynamics further.

By Jarod Facundo

You’ve grabbed a shopping cart, walked through the sliding doors, and checked your list for the week. Keep it simple—Monday, spaghetti and meatballs. Tuesday, of course, is for tacos. Wednesday, how about a stew. Can’t forget the cold cuts, bread, and Cheez-Its for lunch this week. Thursday? Oh yeah, the dinner plans. On Friday, salmon, asparagus, and potatoes.

Down the snacks aisle, you were tempted and grabbed more than what was on your list. Next, you head to the dairy section for cheese, milk, and Greek yogurt. A couple rows over, you take a look at coffee and drinks. Then it’s time to head to checkout.

It’s a quietly amazing experience. No other time in human history has delivered as many food options to the masses as the supermarket has. A great logistical project involving hundreds of thousands if not millions of people from numerous countries on nearly every continent on Earth has brought this abundance to your little town, a panoply of tastes and combinations previous generations could only dream of.

But then you remember that time when contaminated wheat gluten at a single

manufacturing plant in Wangdien, China, caused a recall of almost 100 pet food brands, including 17 of the top 20 sold. Or a few years ago, when a strike of just 1,400 Kellogg’s workers at four plants led to a national cereal shortage, with footage of empty shelves across the country.

Moments like these reveal the truth about the seemingly endless set of options. Your supermarket choices actually narrow to a handful of suppliers making different brands whose prices are tightly coordinated. Step deeper inside the supply chain, and you find that the ingredients that make your food so addictive derive from an even smaller circle of titans.

What you end up learning, if you take the time, is that the supermarket, this tribute to human ingenuity, is actually a battlefield, a war between some of the biggest companies on the planet. And you are the guinea pig for their experiments.

In the grocery business, nothing is accidental. Every product’s placement, every advertisement, every coupon is a function of marketing wizardry and hardball tactics, in a bid for the eyes and wallets of consumers.

Because everybody needs food to survive, retailers and manufacturers are willing to

try every pricing strategy known to man. The grocery store is where all facets of this new era of pricing come together, where attempts to squeeze more from shoppers are tested, analyzed, and put into action. It started with traditional marketing like coupons and loyalty programs, hooking consumers by giving them a reason to come back. But more insidious schemes lurk inside the grocery store: price-fixing, product shrinkage, electronic shelf tags that change on a whim, and skirmishes between grocers and food producers, or even grocers and other grocers.

This cutthroat dynamic has accelerated consolidation across the food and retail supply chain. It has also kept grocery prices noticeably higher since the pandemic than other goods in the economy. Since the beginning of 2020, grocery prices have risen 25 percent, significantly higher than wages. Consumers experience the most reverberating effects, particularly lowincome consumers who spend more of their paychecks on groceries. But food suppliers must also navigate the anti-competitive landscape and pay tolls just to get noticed. Meanwhile, independent supermarkets struggle to survive.

The story of how these towers of nutritional delight turned into rent-seeking alligator pits involves new technologies and fewer competitors for the grocery dollar at all levels. But every economic era has contained opportunities for food monopolists. Today’s difference lies in markets realizing the amplifying effects of this era’s more powerful, more granular, more invasive schemes to profit.

The final, surprising result could be a

near future where grocery store consumers become the product.

Before Amazon and Walmart’s legendary logistics operations were even conceived, there was another everything store: the Great Atlantic & Pacific Tea Company, otherwise known as A&P.

The first grocery stores looked more like the average New Yorker’s bodega. They had basic goods like coffee and tea supplied in

bulk, and your grocer would ladle them out. Quality from place to place was a dice roll. And if you wanted meat or bread, you had to go to the butcher and the baker.

A&P wanted to put all of a customer’s needs under one roof. The definitive book on A&P’s rise and fall, written by Marc Levinson, describes how A&P saw the rebuilding efforts in Chicago after the Great Fire of 1871 as an expansion opportunity into the Midwest. The company grew from

70 stores across 16 cities in 1878 to nearly 200 stores by 1900.

To get suppliers and producers to converge at one company’s locations was a logistical feat. But the speed at which A&P took over the manufacturing processes themselves—a vertical integration play—immediately drew critics.

First, the company hired an on-site chemist to manufacture baking powder for changing consumer tastes, and slapped the well-regarded A&P name onto the powder’s red tin.

On one level, A&P eliminated the cost of acquiring baking powder from an outsider, and signaled to other suppliers to lower their prices or risk being taken over, too. But more importantly, the in-store brand distinguished the company from its competitors. This strategy would be repeated across coffee, fresh produce, and in-house meat departments. By 1929, the company was the second company to reach $1 billion in sales; the following year, the chain reached a peak of 15,737 U.S. stores.

In the mid-1930s, Congress passed the Robinson-Patman Act (RPA) and the Miller-Tydings Act, taking direct aim at stores like A&P in defense of small grocers. But it could have been worse. Separately, Rep.

Wright Patman introduced a “death tax” bill targeting chain stores. A&P spearheaded a massive lobbying campaign against it by bringing organized labor, producers, and consumers together. The campaign succeeded, and the death tax provision never became law.

Still, antitrust enforcers pummeled the company. “In 1938,” Levinson wrote, “[the FTC] required A&P to pay for brokerage commissions on purchases involving no brokers. A decade later, it restrained the Morton Salt Company from selling small quantities of table salt at $1.60 per case while charging less to customers buying by the rail car load.” By September 1946, a federal court ruled that A&P’s owners had conspired to violate the Sherman Antitrust Act by maintaining artificially low prices.

In Levinson’s telling, these RPA enforcement actions caused chain stores to raise their prices. “The discount revolution would be postponed by several decades, to help keep small businesses alive.”

But enforcement of predatory pricing waned, and in the case of Robinson-Patman, disappeared entirely after the 1980s. By the time the discount supermarket returned, building on A&P’s model, it was more sophisticated and more ruthless. And eventually,

those lower prices, which devastated food suppliers and independent grocers alike, would find the opportunity to turn higher.

The seeds of food inflation today are planted long before items hit the grocery store. A recent book, Barons: Money, Power, and the Corruption of America’s Food Industry, written by Austin Frerick, details how a handful of families came to dominate meat processing, commodities such as corn and soy, and nearly every sip of coffee on the planet. A recent report from the progressive think tank Groundwork Collaborative details how four companies control between 55 and 85 percent of the market for beef, poultry, and pork processing.

Consolidation creates the illusion of product choice. Aquafina and Gatorade are both Pepsi products. Minute Maid and Simply are parts of Coca-Cola’s portfolio. Beverage makers are also in the snack game. Pepsi owns Frito-Lay, competing with other chip makers such as Utz Quality Foods and Kellogg’s Pringles. Pepsi even owns Gamesa, Mexico’s largest cookie manufacturer, popular for its Marias cookies. One of its top competitors for the snack dollar is Mondelez International, maker of Oreos, Wheat Thins, and Ritz crackers.

Walmart captures more than 50 percent of U.S. grocery sales in 43 metro areas and 160 smaller cities.

This dominance gives companies pricing power, and alongside the pandemic inflation they put that power to work. Pepsi and Coca-Cola each raised their prices by double digits over the past few years; because they control so many brands, customers had few options but to pay up. Keurig Dr Pepper, a subsidiary of the JAB coffee empire, doubled margins on U.S. non-coffee beverage sales in the third quarter of 2023 from the year before. For snacks, Groundwork quotes a Hershey executive on an earnings call last year, telling investors “pricing and productivity gains more than offset inflation and higher manufacturing and overhead costs.”

Sometimes this price inflation is of the illegal variety, involving collusion of small groups of food producers to raise the price. A notable win for consumers in Washington state came after Attorney General Bob Ferguson found that 19 chicken producers had driven up chicken and tuna prices since 2008; regulators anticipated returning 1.2 million low-income residents checks ranging from $50 to $120.

Another lawsuit brought forward by delis and restaurants against Hormel Foods resulted in an $11 million settlement. A New York Times Magazine article on federal antitrust enforcers and poultry tycoons details how even large fast-food chains such as KFC can be goaded into higher prices, dictated by even bigger chicken companies.

The food companies have gotten bigger because the outlets where they sell their products are getting bigger. At the height of its power, A&P took in about 16 percent of U.S. grocery market sales. According to a 2019 report from the Institute for Local Self-Reliance, Walmart captured more than 50 percent of that share in 43 metropolitan areas and 160 smaller cities. Other grocers in the marketplace are big—and the merger between Kroger and Albertsons, now under

challenge from the FTC, could make them even bigger. But nobody has the share that Walmart has.

Walmart’s unique money-extraction capabilities can be inferred from how assiduously the company has fought to increase its share of dollars from federal anti-poverty programs like the Supplemental Nutrition Assistance Program, otherwise known as SNAP. Frerick estimates the company took in $26.8 billion in SNAP benefits last year, more than doubling the total collected in 2013.

“Walmart wants to capture every dollar of America’s underclass,” said Frerick, a former Treasury Department official. “Most people don’t realize how essential Walmart is to lots of parts of the country.” Outside of the most densely populated urban areas on the coasts, Walmart and scattered Dollar Generals fill the void left by shuttered independent grocers. Frerick worries about the mid-level grocers “collaps[ing] like the rest of America.”

Walmart learned well from its monopolist predecessor, particularly in how it deals with suppliers. The company demands the lowest possible prices from those suppliers, taking more of the grocery dollar for itself. And it demands logistical perfection, or the prices drop even further. Over a three-year period, Walmart raised the percentage that a supplier’s deliveries must be made on time from 75 percent in 2017 to 98 percent in 2020, with a 3 percent penalty on delayed orders, a large number considering the industry’s narrow profit margins. The implication was clear; sell to Walmart or get out of the business.

Another common grocery tactic sends prices higher. Retailers charge food companies “slotting fees” to acquire prime shelf space in stores. With limited space, especially for cold or frozen foods, companies get into bidding wars to present themselves to customers in the biggest stores. Eventually, you and I pay for these auctions in the grocery aisles.

Errol Schweizer, a nearly three-decade veteran of the grocery industry and former vice president of Whole Foods’ grocery division, told me that for every dollar in a grocery supplier’s operations, about a quarter of it goes toward a web of wholesaler and retailer fees. Meanwhile, federal oversight guidelines for slotting fees haven’t changed in nearly 25 years.

The battle for shelf space is difficult; though some food companies consider it unfair, legal action to remedy competition harms is rare, because of the cascading effects of speaking out. “They rarely come public,” Frerick told me, referring to suppliers that have reached out to him since his book was published, who fear retaliation from their market’s largest buyers.

However, an unlikely set of actors, Snoop Dogg and Master P, filed a lawsuit earlier this year against Walmart and Post, the famous cereal brand, alleging the two sabotaged Snoop Cereal by making it unavailable on shelves. On the surface, most coverage of the lawsuit fixates on the novelty of a discrimination case against the “first ever black-owned cereal brand.” But there’s more to the saga.

Broadus Foods, the duo’s brand, initially approached Post for a marketing partnership. The lawsuit alleges that Post refused, instead offering to purchase the cereal outright. The two turned down the offer and Post came back to the table, this time offering to manufacture, market, and distribute the cereal, with an equitable split of the profits. Snoop and Master P agreed.

But they allege that Post then slowwalked their cereal and didn’t get it stocked on store shelves, while Post’s own brands— Grape-Nuts, Honey-Comb, Raisin Bran, Fruity Pebbles, and more—remained prominent. Boxes of Snoop Cereal were stuck in Walmart stockrooms, with codes that told store staff not to display them.

The grocery store is where all facets of this new era of pricing come together.

The space is even more constrained because companies make room for their own store-brand products, like Great Value at Walmart or Private Selection at Kroger. These products are usually cheaper—after all, they don’t pay slotting fees—and have become more popular amid inflation. Outside companies get whatever space is left. This benefits the biggest food companies that can afford the cost of slotting.

It was a catch-and-kill situation, according to the plaintiffs, a way to destroy a competitor by locking it out of the market. “Because Snoop Dogg and Master P refused to sell Snoop Cereal in totality, Post entered a false arrangement where they could choke Broadus Foods out of the market, thereby preventing Snoop Cereal from being sold or produced by any competitor,” the complaint reads.

Legal counsel for Broadus Foods could not arrange an interview with the Prospect. Walmart and Post also did not return comment.

HOW PRICING REALLY WORKS

The war continues between giant supermarkets and their smaller competitors, a battle that came to a head during the supply chain crunch. A 2021 white paper published by the National Grocers Association, an independent trade group of over 1,700 retailers, detailed how wholesale prices offered to independent grocers were as much as 53 percent higher than the retail price at big-box stores.

This was an exacerbation of long-standing trends in the industry. Schweizer told me that big grocers have always applied pressure to suppliers and wholesalers, demanding steep discounts and custom packaging that competitors cannot access. The NGA report offered a revealing example. One grocer wanted to carry a 36-pack of toilet paper, the same as what Walmart’s bulk store Sam’s Club sells. “The manufacturer said they could only offer the product if the member committed to 2,380 pallets of the jumbo packs—a volume that would have exceeded all of the member’s sales of that product in the previous year.”

During the pandemic, the NGA report claimed, Walmart, Amazon, and others also pressured suppliers to serve them first, before any competitors. “ NGA members have been told by numerous manufacturers that, as a result of pandemic supply challenges, they would receive reduced allocations or no allocations of popular staples and essential products,” the report said. “Those same products have been fully stocked at Amazon and on the shelves of big box national chain retailers.” Independent grocers were also denied price promotions and discounts. This all tended to entrench the buying power of the biggest groceries.

The NGA report and media amplification sparked the FTC to launch a comprehensive study into the food and retail industry, based on publicly available data and information from grocery retailers, wholesalers, and producers. The report, titled “Feeding America in a Time of Crisis,” ultimately confirmed complaints that anti-monopoly advocates and smaller grocery industry firms had voiced for years, that power buyer retailers demanded that suppliers prioritize their orders, by imposing short deadlines and steep fines for noncompliance.

However, Christopher Jones, chief government relations officer at NGA , told me that the report missed the gray market of independent grocers having to buy goods from larger competitors. “It’s arbitrage,” he

said. “It’s a cost-raising strategy [on rivals].”

The report also notes that retailers responded to supply chain risks through a mix of building out and acquiring manufacturing capacity. For example, like A&P before it, Walmart has also become a food supplier, building its own milk processing plant in Georgia, and a beef-packing plant in Kansas. The FTC warned that, given the incumbent market power of the largest retailers, such moves could leave smaller buyers “worse off.”

While the FTC carefully notes it did not directly study the relationship between grocery industry profits and input costs, the damaging of rivals had an effect that can be seen in publicly available data. Profits rose over total costs in 2021 and 2023 at a higher rate not seen since 2015.

Outside of battles for supermarket dominance and shelf space, consumers experience the trickledown effects of experiments with pricing strategies. For example, there’s been a recent shift to repackage goods into smaller containers, without changing the price.

A report from Groundwork sheds light on these recent industry changes. Shrinkflation, or “price pack architecture,” in the industry’s preferred lingo, has been a hot topic on earnings calls from the last year. In the best case, packaging innovations cut down on environmental waste or align with what consumers say they want. But they’re also a method of extracting greater profits.

Take for example the explosion of minicans of soda. On the one hand, they appeal to consumers who may be more conscious of their dietary habits. However, as Groundwork puts it, companies use consumer preference to mask “introducing new smaller portions that can be sold at a higher weight per ounce.”

The story of falling inflation rates obscures how by repackaging goods, the consumer’s dollar is worth less than it was before. The Groundwork report compares inflation rates accounting for and excluding shrinkflation from January 2019 to October 2023. With shrinkflation included, the rates range from 3 to 10 percent higher, depending on the goods. These small hikes upward are “the path to higher margins,” as Utz’s CEO Dylan Lissette told analysts in 2021. Other pricing strategies leverage consumer data. Groceries have previously used low-tech programs to understand customers, essentially personalizing pricing for each

Retailers are driving consumers toward a future of surge and dynamic pricing models.

shopping cart. That long ribbon of coupons you get with your receipt initially just reflected the purchases you just made. That evolved into “rewards” cards, and subscription-based services to big-box stores like Costco or Sam’s Club. These entitle customers to a combination of either lower prices or targeted discounts over their non-member counterparts. But members give something up in the exchange: Grocery stores can assemble long and detailed purchase histories.

If a grocer can identify distinct patterns of buying, or when customers switch from one brand to another, they can build powerful and intelligent individual profiles to inform future promotions and overall pricing. In-store deals that require customers to “clip” coupons on digital apps give grocers access to even more personal information. There was already immense data available on consumers. But by linking them to individualized profiles, retailers gain a more granular look at who their customers are.

This insight into personal shopping habits opens up numerous possibilities. Walgreens has begun to use video screens in their refrigerated section. That enables rapid price changes at the click of a button, without having to deal with physical price tags. Digital price tags have popped up at Kroger and other stores as well.

As Phil Longman of the Open Markets Institute told me, with data in hand and a way to rapidly deploy it, retailers are driving consumers toward a future of surge and dynamic pricing models and eroding consumer surplus, economist-speak for the difference between what a consumer will pay for a good and what they actually paid.

“Surge pricing is definitely on the horizon,” Schweizer told me, though it’s only being talked about at this point. The conver-

sations reminded him of when self-checkout was just an idea. Yet, “we’re on the opposite end of it now.”

This can help retailers eke out more revenue by knowing what a customer wants even before they do. But, grocery profit margins only hover around 1 to 3 percent. There’s a much bigger potential outlet for this data, and it’s the grocery industry’s hottest new trend: retail media.

Essentially, grocers can sell access to consumer shopping histories, which contain some of the most valuable information available: what people buy and when. Advertisers are willing to pay top dollar for that data. Kroger and Albertsons both have in-house retail media agencies, willing to work with advertisers to essentially sell your likes and dislikes while food shopping to the highest bidder.

This advertising is directed at people outside the grocery store: in their homes, while they look at their phones, anywhere. Walmart’s proposed acquisition of the TV manufacturer Vizio for $2.3 billion, critics note, is about gaining access to smart-TV users, to place more ads with sharply refined data. And though Amazon is a smaller player in grocery, its endless supply of data lends itself to a retail media play, in addition to the fact that it sells devices like Fire TV and streaming

services like Amazon Prime Video that can be landing spots for data-rich ads.

The data trove can also empower retailers with additional negotiating power. If they know what customers like more than the suppliers, they can make even more overbearing demands for delivery and logistics.

“Selling groceries is incidental to how [grocers are] making profits. It’s an advertising-driven data factory,” Longman said. That’s why he thinks that the real stakes over the pending Kroger-Albertsons merger are less about a more concentrated grocer, and more about a richer database of consumer behavior.

For Schweizer, the first steps to addressing problems in the grocery industry have been taken by the FTC publishing its report on the industry. But that’s just the beginning: “Walmart is the center of gravity in this industry … You don’t deal with Walmart by creating another Walmart,” he said, referring to the Kroger-Albertsons deal.

In September 2022, FTC Commissioner Alvaro Bedoya gave a speech in Minnesota, signaling readiness to revive Robinson-Patman Act enforcement at the FTC: “Certain laws that were clearly passed under what you could call a fairness mandate … directly spell out specific legal prohibitions. Congress’s intent in those laws is clear.”

The following year, the FTC announced two investigations into the food industry, which appear to be focused on pricing strategies in violation of the RPA . The first targets Pepsi and Coke for soda pricing. The second is looking into Southern Glazer’s for selling to Total Wine at discounts unavailable to smaller retailers.

Stacy Mitchell, the co-executive director of the Institute for Local Self-Reliance, told me Bedoya’s speech represented a watershed moment, and the FTC investigations take it to its logical conclusion. For the grocery industry, it means the power of the chain stores—exemplified by their dominance over suppliers, ability to muscle out rivals, and unparalleled access to consumer data—may finally be tackled. And that could reverberate across the supply chain, to the big processors and food conglomerates.

Until then, Schweizer has concerns about the pricing strategies on the horizon. Surges on Uber and Lyft are frustrating, he said, but the prospect of such strategies brings into focus ethical concerns when applied to basic necessities. The war for your shopping cart, in other words, has collateral damage. n

Jarod Facundo is a writer with The Capitol Forum, an investigative news site. He is a former Prospect writing fellow.

Post and Walmart were accused of deliberately keeping Snoop Cereal off store shelves in a recent lawsuit.

Fantasyland General

Hospital pricing is impenetrable to consumers and regulators alike.

The result: increased costs and profits, and wasteful reliance on armies of middlemen.

By Robert Kuttner

In 2018, the Department of Health and Human Services issued a rule on hospital pricing transparency, requiring hospitals to post prices in easily accessible form. This was done under a Republican administration, and it expresses free-market ideology: If consumers have more information, they can shop around for the best price. A betterinformed consumer will in turn discipline sellers, lead to more salutary competition, and restrain costs.

The rule was strengthened in 2021 to include sanctions for hospitals that failed to comply. What followed speaks volumes about the folly of attempting to use consumer market discipline in a profit-maximizing system that is opaque and manipulative by design. In practice, most people just follow the advice of their doctors and use the hospital where their doctor practices.

Suppose you are the rare outlier who would like to shop for the best deal. If you look at the website of Mass General Hospital, you will learn that an “HC BYP FEM-ANT TIBL PST TIBL PRONEAL ART/OTH DSTL” will cost you $35,014.00. Even if you can decipher what that means, it’s just the beginning of determining the real price.

Posted price lists give hospitals wiggle

room by noting that the actual price will vary with the length of stay and the patient’s condition. And a bill for a single procedure typically has multiple elements, from individual treatment aspects like sutures or anesthesia, to “facilities fees,” which have of late been added even to routine outpatient care, like consultations and ordinary screening.

Every procedure has a billing code. In recent years, there has been an epidemic of upcoding, in which the hospital bases the charge not just on the procedure that necessitated the current visit, but on every prior condition the patient has ever had.

Upcoding also undercuts one widely hyped reform that was supposed to restrain costs: so-called Prospective Payment Systems, which were introduced in the late 1980s. The idea is to pay hospitals a lump sum for treating a given condition rather than reimbursing each specific task. This was supposed to give hospitals an incentive to use the most cost-effective treatments rather than the most profitable ones. But with upcoding, two patients in adjoining beds can receive identical treatments, and the one with a medical history that becomes the basis for upcoding is more profitable to the hospital than the other. HHS audits hospitals to limit extreme abuses of upcoding but cannot audit every charge, and the penalties for flagrant abuses are slaps on the wrist.

People are skeptical of giving their data to Big Tech platforms. But they trust their doctor. Clinically, the physician needs to know their entire medical history and is professionally bound by an ethic of confidentiality. Patients expect their doctor to keep the information safe. Little do they know that this data is used to raise prices on them.

The airlines have multiple possible prices for the same seat, but hospitals have a practically infinite number of possible prices for the same procedure. Indeed, compared to hospitals, airline pricing is a model of transparency and simplicity.

One of the biggest fallacies in treating hospital prices as consumerdetermined—and why public posting is no kind of solution—is that most individual patients never actually do all the paying. Hospitals typically negotiate price schedules with insurers. Depending on the relative market power of the hospital and the insurer in a given area, the same

HOW PRICING REALLY WORKS

hospital will make different pricing deals with different insurers.

In Boston, where I live, the Mass General Brigham conglomerate is both the most prestigious and the most economically powerful hospital system. Though insurers attempt to “manage” care, no insurer would dare tell a subscriber, or an employer who buys insurance for employees, that they are not allowed to use Mass General Brigham. That, in turn, gives the hospital more power to negotiate relatively higher charges with the insurer.

The insurers, in turn, have also been merging, in order to maximize their market power with hospitals. The wave of mergers in the health industry has nothing to do with greater “efficiency” and everything to do with the quest for greater pricing power.

But there is one area of convergence for these behemoths fighting over price. Both the hospital and the insurer gain to the extent that they can offload costs onto patients.

For instance, if a given procedure is not covered by insurance, the “self-pay” rate is typically several times that of the hospital’s negotiated rate with the insurer. This has nothing to do with the hospital’s costs; it simply reflects the fact that the individual patient, unlike the insurer, has no bargaining power and has not negotiated a discounted rate in advance.

I encountered one of the games hospitals play when my mother had an emergency admission to Mass General Hospital after a bad fall. She was admitted and treated by specialists, and was an inpatient for three days. But she was placed in a category invented by hospitals called “admission for observation.” That misclassification, for billing purposes, technically made her an outpatient.

Under Medicare, an outpatient is responsible for a 20 percent co-pay. An inpatient is not. But why does Mass General care if Medicare saves money? Because under a Medicare policy instituted under George W. Bush’s presidency, hospitals are punished if they bill Medicare under inpatient rates when they might have charged outpatient rates. So the government created an incentive for hospitals to make patients pay more. Shifting costs to patients is a major source of profit maximization for both hospitals and insurers. Many insurers have a variety of complex requirements for authorizing treatment. The purpose is partly

legitimate—to avoid medically unnecessary care—but it has the handy side effect of tripping up patients who fail to comply with some arcane technicality.

Having written numerous pieces on health care for the Prospect and having served earlier in my career as national policy correspondent for The New England Journal of Medicine, I am more sophisticated than the average patient trying to navigate the system. But in trying to determine what I needed to do to be sure that Blue Cross would cover a pending minor surgery, it took me upwards of ten hours on the phone with Blue Cross and staffers in two doctor’s offices to avoid getting caught in a trap that would have substantially increased my costs.

Blue Cross insisted that under my PPO plan, my treatment by a specialist did not require a referral from my primary care doctor. But after I saw the specialist, Blue Cross refused to pay his bill for the initial consultation, or to authorize further procedures. On what grounds? They had not heard from my primary care doctor.

After numerous calls and emails, I finally figured it out. Blue Cross has its own terminology and I wasn’t using the right words. Blue Cross does not require a referral to a specialist; but before it will approve payment, it does require pre-authorization based on a communication from the primary care doctor on the medical condition that necessitates the treatment.

If I hadn’t figured this out, I would have been liable for the specialist’s entire bill. At best, I would have to engage in prolonged wrangling with Blue Cross after the fact. The terminology game serves as a trap to confuse the consumer of health care.

None of these needless complications apply when the insurer is Medicare, an island of efficient socialized medicine amid an ocean of sharks. No referrals or “preauthorizations” are required; there is no such thing as in-network versus out-ofnetwork. The money saved from this endless gaming and counter-gaming goes to patient care.

Medicare Advantage is a whole other story. Despite the misleading branding, Medicare Advantage plans are run by private insurers. They are a kind of HMO, related to Medicare only in the sense that if you qualify for Medicare, the government will pay premiums on your behalf to the Medicare Advantage plan.

These plans are aggressively marketed to older Americans on the premise that they offer lower-cost and better coverage. Traditional Medicare does have some deductibles and co-pays, though they can be covered if you purchase a relatively inexpensive Medigap policy. But Medicare Advantage has no co-pays, and special perks like gym memberships and wellness programs.

That’s the theory and marketing pitch. In practice, cost-shifting to patients, gaming the Medicare program, and reducing treatment are the central components of the business model.

Medicare Advantage plans often decide that a proposed treatment, test, or medication is not medically necessary. So the patient either absorbs the entire cost or goes without. Unlike traditional Medicare, the private plans also stringently limit which doctors and hospitals a patient may see. All of this makes Medicare Advantage plans highly lucrative to insurers, at the expense of patients.

In this sense, sticker prices and promises of cheaper coverage have no relationship to what the plan actually pays, or doesn’t pay, the doctor or hospital on behalf of the patient.

Surprise billing is another area where there is an endless cat-and-mouse game between insurance industry profit maximization and attempts to protect consumers. The most common sort of surprise billing comes when a patient gets treatment from a medical provider who turns out to be out-of-network, and charges an exorbitant bill.

The No Surprises Act of 2021 prohibits the most extreme forms of surprise billing. Typically, that occurs when a medi -

Two patients in adjoining beds can receive identical treatments, and one is more profitable to the hospital.

Conglomerates like Mass General Brigham in Boston have more power to negotiate higher prices with insurance companies.

cal provider whom the patient did not select, such as an anesthesiologist in a surgical procedure, turns out to be outside the insurer’s approved network, and the patient is billed after the fact for the full, nondiscounted fee.

The federal government found that 16 percent of in-network hospital stays involved at least one non-network provider. The act says that hospitals and other providers must not bill patients for more than the in-network rate if it turns out that someone on the medical team was out-of-network.

But the whole concept of in-network versus out-of-network is worth a closer look. It began in the 1970s with the arguably legitimate premise that the entire team of doctors who worked for an HMO were in close communication on a patient’s comprehensive needs. This supposedly improved care and reduced costs. The patient, therefore, needed to use a specialist who was in-network.

As HMO s grew from so-called staffmodel systems into networks whose only common feature was that participating doctors agreed to accept the HMO’s treatment protocols and payment schedules, providers on the “common team” treating a given patient had often never heard of each other. The point was not better communication; it was restraining the HMO’s costs and increasing its profits.

Today, in-network versus out-of-network is a pure game of gotcha. If I happen to misunderstand the complex requirements and get treatment from a doctor who is considered out-of-network by my insurance company, there is no clinical difference. The only difference is that I am stuck with a larger co-pay.

Insurers and hospitals have used the issue of which doctors are in-network to play chicken with each other, as they bargain over what the insurer will pay the hospital. In New York, UnitedHealth -

care has repeatedly threatened to remove Mount Sinai Hospital and its affiliated doctors from its network of approved providers. UnitedHealth has done this because Mount Sinai was bargaining for rates more in line with what the insurer pays other New York hospital systems. Had UnitedHealth carried out its threat, tens of thousands of New Yorkers would have had to pay out-of-network charges or switch doctors.

The hospital and the insurer finally came to terms in March, but only after UnitedHealth had already classified Mount Sinai inpatients as non-network, disrupting treatment of cancer patients, among others. As part of the deal, that cynical move will be reversed. Note that this battle had nothing whatever to do with using networks to ensure quality of care. On the contrary, it degraded care. It was purely about money.

In the late 1960s, a physician and public-health researcher named John Wennberg began doing systematic analysis of clinically unwarranted variations in medical interventions and their costs. The results, updated annually in what became the Dartmouth Atlas of Health Care, were shocking. Wennberg’s studies, among the most widely replicated findings in health research, found that hospitals in comparable cities performed medical interventions at absurdly divergent rates and with wildly divergent costs, based not on medical necessity but on market power and profit maximization.

Wennberg died earlier this year, at 89, and his work continues. A recent summary of his findings, spanning five decades of research, reports: “Where there are more hospital beds per capita, more people will be admitted (and readmitted more frequently) than in areas where there are fewer beds per capita. Economically, it is important for hospitals to make sure that all available beds generate as much revenue as they can, since an unoccupied bed costs nearly as much to maintain as an occupied bed. Similarly, where there are more specialist physicians per capita, there are more visits and revisits.”

In other words, supply generates demand. And it gets worse. The summary adds: “Studies by Dr. Elliott Fisher et al have indicated that there is higher mortality in high-resourced, high-utilization areas than

HOW PRICING REALLY WORKS

in low-resourced, low-utilization areas. One explanation for this phenomenon is that the risks associated with hospitalizations and interventions—hospital-acquired infections, medication errors and the like—outweigh the benefits.”

One of Wennberg’s most consistent findings was a crazy quilt of pricing disparities. Despite decades of supposed reforms, that pattern keeps worsening. A 2022 study of pricing for cardiovascular procedures published in JAMA Internal Medicine found: “Across hospitals, the median price ranged from $204 to $2588 for an echocardiogram and from $463 to $3230 for a stress test. The median price ranged from $2821 to $9382 for an RHC [heart catheterization], $2868 to $9203 for a coronary angiogram, $657 to $25 521 for a PCI [treating a blocked coronary artery], and $506 to $20 002 for pacemaker implantation.”

Once again, these extreme pricing disparities had nothing to do with hospital costs. The fees increased in line with the hospital’s power to do so.

The more complicated the system gets, the more its participants rely on middlemen to shift costs. We see this with pharmacy benefit managers and group purchasing organizations, which claim to save money on drugs and medical supplies for insurers and hospitals, but which raise costs throughout the system because of the profits they skim off the top. My Blue Cross policy uses an outside vendor to review all claims and payments, and find reasons to deny some after the fact.

One cost-containment firm called MultiPlan has attracted extensive private equity investment and a position of dominance in the practice of determining out-of-network pricing. The firm’s algorithm, Data iSight, is marketed to insurers, and recommends ways to cut reimbursements and shift costs onto patients or doctors. Sen. Amy Klobuchar (D-MN) has accused MultiPlan of being a form of algorithmic collusion, gathering payment data from across the industry and using it to inform its low reimbursement rates. “Algorithms should be used to make decisions more accurate, appropriate, and efficient, not to allow competitors to collude to make healthcare more costly for patients,” Klobuchar wrote in a letter to the Federal Trade Commission and the Justice Department. Another middleman comes in the form of electronic medical records. These were

The more complicated the system gets, the more its participants rely on middlemen to shift costs.

supposed to revolutionize medical care by making it easier for doctors to access patient histories. What some would call a natural monopoly of hospital patient data was quickly taken up by Epic, a for-profit product sold by an outside vendor. But although numerous hospital systems now use Epic, doctors affiliated with one hospital typically cannot access patient records at another.

That’s because the Epic system only pretends to be mainly about providing access to computerized patient records; it’s primarily about maximizing billing. All of the upcoding I talked about earlier is facilitated through Epic. When patients are asked about their prior medical history, each keystroke can enable hospitals to add a code and raise prices. And for clinicians, it is more time-consuming than a purely clinical data system.

Obviously, patients suffer from this in the cost of medical care. Even if they don’t feel the direct cost in co-pays and fees, they eventually have it passed through to them in higher insurance premiums as well as frazzled doctors. And that brings up another cost: how it affects the quality of care.

I see an eye doctor twice a year for a condition that requires monitoring. When my ophthalmologist retired, I was referred to a new one whose practice had been bought by the hospital. He spent about ten minutes with me, skimmed my chart, did not bother to take a history, and did a cursory examination. He had two waiting rooms, and raced between patients, almost as if he was on roller skates.

When I sent him a very polite note to express some concern, I received back a plaintive letter going into great detail about his economic situation. His net earnings were about half of what he had expected. He lived in a small apartment, and drove an old car. The only way he could make a decent

living was to see what he acknowledged were too many patients. And the hospital, which took a cut of his caseload, put no limits on how many he saw.

The abuse of medical professionals is especially extreme in the area of mental health. Each insurance company has its own protocols, its own payment scales, and systems for clawing back payments if its consultants can find some excuse. Too many clinicians find the system too much of a hassle with too much personal risk, and decide not to take insurance at all. Their patients are typically rich people who can afford to pay out of pocket, while far needier people, both economically and clinically, struggle to find someone who will treat them.

Needless to say, none of this gaming and counter-gaming around prices operates in national health systems, either in the comprehensive systems of socialized medicine on the British model, or the tightly regulated systems of true nonprofit insurers and hospitals on the German model.

In the British National Health Service, there are no prices for procedures at all. Each hospital in the system is given a global budget to serve a population of patients. The hospital allocates its budget as efficiently as it can. Doctors are salaried, based on the size and age of their patient panel. Specialists are also salaried.

We’ve seen global budget reforms attempted in the U.S., but only on a limited scale. The entire system of insurers here is parasitic on the provision of actual health care, and the industry of middlemen is a parasite on top of a parasite. Each hapless attempt at price reform only creates new openings for gaming and more opportunities for middlemen.

The fact that universal socialized systems have no counterpart to the U.S. system of price manipulation, with all of the money spent on administration and gaming, goes a long way toward explaining why the U.S. spends upwards of 17 percent of GDP on health care and the typical OECD country spends about 11 percent.

That difference—6 percent of GDP is about $1.5 trillion a year. Just imagine what else we might do with $1.5 trillion a year. The only solution is to get rid of prices entirely by treating health care as the social good that it is. n

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Taming the Pricing

The government has a variety of strategies to protect the public from price-gouging and information advantages over the consumer.

By Bilal Baydoun

The responsibility for reining in high prices has in recent decades been relegated to a single body: the Federal Reserve.

Since May 2022, the Fed has raised interest rates to slow the economy by making it more expensive to borrow money. When businesses can’t borrow, the story goes, they’re less likely to expand operations and hire people—and when families can’t borrow, they buy less. The goal is to ensure people have less money to spend “chasing goods,” thereby cooling the economy.

Of course, this theory falls flat when it is collusion, price-maximizing algorithms, and opportunistic price-gouging driving up prices, as opposed to high demand. Indeed, despite these interest rate hikes, the economy has not slowed down, and while inflation has eased—mainly thanks to supply chains returning to normal—it has not returned to the 2 percent target level, as corporate pricing strategies persist.

Over the past four years, inflation of housing, food, and gas prices has

Pricing Beast

garnered widespread attention and angered millions of Americans. Yet over the same period, federal regulators have uncovered actual price-fixing conspiracies in rentals, meat processing, and oil and gas. In the latter, price-fixing may have accounted for 27 percent of inflation in 2021, according to estimates from Matt Stoller, research director at the American Economic Liberties Project.

Yet somehow, the anti-inflation response remains the same: keep interest rates high until prices (as measured by the Consumer Price Index) are tamed. In the case of housing, rate hikes have had the opposite effect, fueling a vicious cycle in which the Fed thumps the housing market in the name of price stability, only to push those prices higher in turn by driving up mortgage rates and stifling new housing construction.

The Fed’s outdated theories have obvious limitations in an age of monopolistic concentration, low taxation, and high-powered algorithms. As corporate America’s pandemic profiteering spree demonstrates, pricing is often a function of power, not demand. And the Fed’s principal tool—tinkering with

interest rates—is woefully inadequate to deal with the market muscle that inevitably leads to predatory pricing. When corporations are too powerful, they will use that power to strong-arm both American workers and consumers. That’s particularly true when they can capture so much data about their customers, and use so many high-tech tricks and traps to get them to pay more.

The Fed can’t implement price controls, break up big corporations, or sue companies for anti-competitive practices. The Fed cannot control algorithms used by corporate landlords to drive up rent prices, or force the largest credit card issuers to stop collecting predatory junk fees. Yet all of these are imperative components of a strategy to combat predatory pricing. The Fed has a single blunt tool—interest rates—that scapegoats workers and makes them poorer. And in this era of pricing, it doesn’t really work that well.

A new paradigm is needed to deal with high prices, one that involves Congress, executive branch regulatory and law enforcement agencies, state attorneys general, and the White House working in tandem to tackle

the corporate power that enables predatory pricing. It means shaking off our obsession with “inflation,” and instead thinking broadly about affordability and fairness.

How Tax Reform Can Change the Rules

Low taxation is a key yet underdiscussed enabling force of this new pricing regime. Companies may be able to hike prices by taking advantage of their market power, technological innovation, and economic emergencies like the pandemic recession. But those higher prices reap supernormal profits because of tepid taxation, creating a perverse incentive to profiteer.

A February paper from the Institute on Taxation and Economic Policy that studied 342 profitable corporations found that these companies paid an effective tax rate of 14.1 percent, well below the historically low statutory rate of 21 percent signed into law by the Trump administration in 2017. At the same time, we have seen record corporate profits since 2021, culminating in an all-time high in the fourth quarter of

HOW PRICING REALLY WORKS

2023. Companies seek out excess profits in increasingly harmful ways, because they get to keep more of those excess profits.

This is where the tax code deserves attention as a regulatory tool. The tax code doesn’t just raise revenue for investments. It’s arguably the single most important rulebook that structures incentives throughout our economy. This is why, at its inception, corporate taxation was seen as an antimonopoly tool. When the first corporate tax was enacted in 1909, the Taft administration was waging a battle against the big oil and tobacco trusts, and envisioned corporate taxation as a way to complement ongoing antitrust litigation by limiting the earnings stockpile in their corporate treasuries, what can be used to buy rivals or outpace competitors. Excessive corporate power has always threatened economic stability and democracy.

But many of the antitrust functions of that tax were soon rolled back, and over the last century corporate taxation as a percentage of GDP has steadily fallen. The 2017 Trump tax law made permanent changes to corporate taxation that opened the floodgates for predatory profit-seeking. But the expiration of most of that law’s provisions at the end of 2025 offers an opportunity to fundamentally remake the tax code in a way that curbs bad behavior.

Scholars like UCLA law professor Kimberly Clausing, who worked in the Treasury Department during the Biden administration for two years, have noted the promise of a graduated corporate income tax, which offers a targeted approach to the challenges posed by rising market power among corporations. Under this system, companies reporting larger profits—above, for example, $10 billion—would pay significantly higher tax rates on those profits.

This approach targets above-normal returns to capital, which often signifies a company’s significant market power. The implementation of a graduated tax system could potentially reduce predatory pricing by disincentivizing the pursuit of supernormal profits, which are frequently a result of exploitative market practices rather than innovation or efficiency.

This tax structure aims to curb the incentives for companies to engage in anti-competitive behaviors that lead to higher profits. For example, a corporation that has cornered a substantial portion of the market might find its additional profits taxed at a

higher rate, diminishing the financial benefits of spending money to grow through acquisition, or otherwise maintain such dominance. This approach not only fosters fairer pricing but encourages a more competitive marketplace, aligning corporate behaviors more closely with societal and economic health.

As any proponent of tax fairness would point out, corporate taxation is a game of whack-a-mole, and reforming the system has to be a package deal that includes measures against international tax avoidance, or large firms masquerading as small businesses. The president’s budget includes several additional provisions that would fortify corporate taxation and disincentivize harmful behaviors. It includes quadrupling the already-successful tax on corporate stock buybacks, raising the corporate tax rate to 28 percent, and expanding the alternative minimum tax on large corporations from 15 to 21 percent.

The goal would be to reduce the incentives for price-gouging by making it far less lucrative to do so.

Public Options

The tax system also includes tax administration. The IRS Direct File program acts as a built-in junk fee eliminator, offering a stark contrast to the predatory pricing practices of for-profit tax filing services like TurboTax.

By successfully processing over 140,000 returns in 2024 and saving users approximately $5.6 million in unnecessary tax preparation fees, this initiative directly challenged the deceptive advertising and hidden costs that have plagued consumers using commercial tax software. According to a recent survey, approximately 90 percent of Direct File participants rated their experience as “excellent” or “above average,” underscoring its effectiveness as a consumer-friendly alternative that can significantly alleviate the financial and administrative burdens of tax preparation for millions more if expanded.

Public, nonprofit competition to the most egregious predatory pricers could significantly benefit consumers. Several communities with little access to fresh and abundant food have opened public, nonprofit grocery stores, which would be less likely to trick shoppers and monetize their data. Illinois Gov. J.B. Pritzker (D) recently allocated $20 million to stand

Low corporate taxation is a key yet underdiscussed enabling force of this new pricing regime.

up public grocery stores in food deserts across the state.

The Consumer Financial Protection Bureau (CFPB) decided to crack down on bogus credit card comparison-shopping websites, which charge companies for access to the top of their ratings, by creating a public alternative. When complete, it would offer comprehensive data on dozens of credit cards, including those offered by regional banks and credit unions, so people could clearly see interest rates, fees, and other features. If picked up widely, it could create real competition for an industry that has been charging more for credit.

Many other public options could be created to keep businesses honest and give consumers an alternative to endless price-gouging.

The Revival of Antitrust

At the heart of pricing power is market power, the anti-competitive edge that allows companies to price their way to record profits. Antitrust enforcement offers a crucial tool in curbing these burdens on American consumers by addressing the core issue of concentration.

This tool has largely sat on the shelf for decades. But over the last several years, agencies like the Federal Trade Commission (FTC) and the Department of Justice’s Antitrust Division have revived antitrust as a cornerstone of economic fairness, leveraging their powers to challenge anti-competitive behaviors that lead to unjustified price increases.

One of the most potent powers in the antitrust arsenal is the ability to challenge and block mega-mergers. The FTC’s decision to block the $24.6 billion merger between Kroger and Albertsons is a good example of preventing concentration in the supermarket sector, which could result in higher pric-

Credit card shopping sites, tax preparation, and grocery stores have been disrupted with public options as an alternative to price-gouging.

es and lower service quality for consumers, not to mention the combination of massive amounts of consumer data that could lead to more novel pricing strategies. By preserving competition between these grocery giants, the FTC is actively safeguarding competitive prices and quality, benefiting both consumers and workers.

The DOJ has gotten involved too. Its successful challenges to JetBlue’s acquisition of Spirit Airlines and its proposed Northeast Alliance with American Airlines preserved competition, including from low-cost carriers, that prevents the dynamic of market power leading to price inflation.

Beyond mergers, the FTC has tools to address anti-competitive practices. Last November, the FTC challenged improper patent listings in the FDA’s Orange Book— a tactic used by some companies to prolong the monopoly status of their drugs. This challenge not only disrupts monopo -

listic practices but also accelerates access to affordable alternatives. It has already led to inhaler manufacturers withdrawing those patent listings and dropping their prices to $35 a month.

FTC chair Lina Khan has also signaled that the FTC will treat algorithms no differently than human agents that facilitate collusion. Algorithmic price-fixing technologies can distort prices in sectors ranging from retail to specialized services, and the FTC ’s proactive stance highlights its commitment to adapting antitrust tools for the digital age. On March 1, the FTC and DOJ filed a joint brief on addressing allegations against landlords using Yardi Systems’ pricing algorithms to artificially inflate rental prices in violation of the Sherman Act. Last September, the DOJ sued Agri Stats, Inc., for allegedly organizing a scheme that facilitated the exchange of competitively sensitive information among

major meat processors, thereby manipulating market prices and output levels.

And there are always straight-up monopolization cases, as is expected soon by the DOJ against event ticketing monopolist Live Nation, perhaps the nation’s biggest purveyor of junk fees.

The collaboration between the FTC and state attorneys general has also intensified, enhancing the capacity to enforce antitrust laws effectively. This partnership is crucial in marshaling the necessary resources and expertise to tackle complex antitrust cases, including those involving intricate corporate maneuvers designed to circumvent competitive constraints.

These decisive actions tackle the core issue of excessive market power, which can lead to predatory practices such as unjustified price increases. Through their efforts to keep the market diverse and competitive, the FTC and DOJ are not just preventing price

HOW

hikes; they’re also fostering an environment where companies continue to innovate and improve. This kind of vigilance is crucial for protecting consumers and ensuring a healthy, competitive market.

Anti-Price-Gouging Rules

On a national level, Sen. Elizabeth Warren’s (D-MA) Price Gouging Prevention Act aims to extend price-gouging protections across the United States by creating a federal antiprice-gouging statute. This proposed legislation would empower the Federal Trade Commission and state attorneys general to enforce a federal ban against excessive price increases, regardless of a seller’s position in the supply chain. It targets dominant companies that exploit consumers by unfairly

leveraging their market position to implement unjustified price hikes. Additionally, the act seeks to increase transparency by mandating that public companies disclose changes in their pricing strategies in their SEC filings during significant market shocks.

If passed, the Price Gouging Prevention Act would represent a critical step toward establishing a nationwide safeguard against predatory pricing practices, especially during periods of crisis. Sen. Amy Klobuchar (D-MN) has a somewhat related bill, the Preventing Algorithmic Collusion Act, which would codify that price-fixing through an algorithm is indeed illegal.

These federal statutes would reinforce efforts at the state level. California, Illinois, and New York all have initiatives aimed at

protecting consumers from corporate pricegouging. In California, legislation specifically targeting the oil industry, which has habitually charged higher prices for gas in the state, mandates unprecedented transparency. Companies are required to report daily on market conditions and import levels, and must provide advance notice of refinery maintenance schedules. If successful, it would showcase the direct benefits of regulatory intervention on pricing.

Illinois has tackled the issue in the pharmaceutical sector by implementing a law that caps the annual price increases of essential generic drugs. By tying allowed increases directly to actual cost changes, the state protects consumers from sudden and unjustified price hikes, addressing the

(L-R) Sens. Elizabeth Warren (D-MA), Amy Klobuchar (D-MN), and Bob Casey (D-PA) all have legislation to crack down on corporate pricing strategies.

The bully pulpit can serve as a pivotal tool in the battle against predatory pricing.

potential for abuse in the pharmaceutical industry’s use of market power.

New York’s strengthened price-gouging statutes under Attorney General Letitia James set clear, actionable standards. The regulations define a 10 percent price increase during an abnormal market disruption as potential gouging, providing a clear standard for enforcement and making it easier for both consumers and businesses to identify and challenge exploitative pricing.

Unfair and Deceptive Practices

Recent actions by federal regulatory agencies, particularly the CFPB, demonstrate significant progress in addressing unfair and deceptive practices in the marketplace, further showcasing the reach of antitrust tools.

The CFPB’s focus on junk fees, for instance, has resulted in substantive policy changes that promise to protect consumers from predatory fees. Nowhere is this clearer than the Bureau’s rule capping late fees at $8. Prior to the adoption of this rule, credit card issuers could charge fees as high as $41 for a late payment, due to an immunity provision inserted into the implementation of the CARD Act by the Federal Reserve. The CFPB did some math and challenged companies to justify these exorbitant late fees based on the cost of collecting them. There was no justification.

Far from incentivizing on-time payments, these fees have been built into issuers’ business models because they’re immensely profitable. The new regulation is expected to save American consumers over $10 billion annually. This policy not only alleviates the financial burden on consumers but also challenges financial institutions to justify any higher charges, ensuring that fees are more aligned with actual costs. (The rule is currently on hold as it works through the courts.)

Similarly, the CFPB’s proposal to reform overdraft fee regulations aims to realign overdraft fees with the actual costs by allowing banks to charge overdraft services at a break-even cost or a benchmark fee as low as $3. This is a stark contrast to the $12.6 billion generated in 2019 from these fees. By imposing stricter standards on these fees, the proposal seeks to curb their disproportionate impact on low-income consumers and prevent banks from exploiting these fees for profit.

In cases where companies have resorted to outright deception, Congress has put forward strong bills to restore pricing fairness. The Shrinkflation Prevention Act of 2024, introduced by Sen. Bob Casey (D-PA), empowers the Federal Trade Commission to categorize shrinkflation as a deceptive practice under Section 5 of the FTC Act. By defining shrinkflation this way, the bill would authorize the FTC to pursue civil actions against corporations that reduce product sizes while maintaining prices, a practice that effectively raises the unit price without consumer awareness. (In France, supermarkets must put actual warning labels on products whose volume has decreased without a concurrent reduction in price; the FTC could take that on as a fairness measure.)

Moreover, the CFPB’s actions against UDAAP (unfair, deceptive, or abusive acts or practices) could be put to use in a broader federal commitment to consumer protection. The enforcement of UDAAP regulations ensures that financial institutions cannot engage in practices that exploit consumers through hidden fees or misleading financial products. In a series of interesting data broker cases, the FTC has argued that the collection and sale of personal data is an unfair practice. This could frustrate efforts to combine data in a way that allows companies to personalize prices to each individual. By establishing clear rules and enforcing them rigorously, agencies like the CFPB and FTC are helping to create a more transparent and fair marketplace, demonstrating the tangible benefits of regulatory vigilance in promoting economic fairness and consumer welfare.

The Bully Pulpit

Interestingly, CFPB director Rohit Chopra’s description of overdraft as a “junk fee harvesting machine” and threats to take action on new rules in 2021 had a significant catalyzing effect. Chopra’s leadership prompted several major banks to adjust their fee struc-

tures or even eliminate overdraft fees altogether. Consumers felt the relief well before any rulemaking came out.

The episode showed how the bully pulpit can serve as a pivotal tool in the battle against predatory pricing, leveraging the president and his team’s influential platform to advocate for consumer protection policies and shape public opinion.

This strategy is evident in President Biden’s concerted efforts to spotlight and tackle high prices and junk fees. The last two State of the Union addresses contained long sections rallying support for combating these deceptive corporate practices. “Junk fees may not matter to the very wealthy, but they matter to most other folks in homes like the one I grew up in, like many of you did,” Biden told Congress in 2023.

Furthermore, the White House recently announced the launch of a Strike Force on Unfair and Illegal Pricing, co-chaired by the Department of Justice and the FTC This initiative underscores the administration’s commitment to enhancing interagency efforts to root out and penalize illegal corporate behaviors that inflate prices. By focusing on sectors like prescription drugs, health care, and financial services, the strike force aims to strengthen enforcement against anti-competitive, unfair, and deceptive practices that burden American families.

In the 1960s, President John F. Kennedy sought to break a coordinated price hike by the steel industry. His first tool of response was a television camera. In a prime-time press conference, he highlighted the industry’s increasing profits amid lower costs, adding: “The American people will find it hard, as I do, to accept a situation in which a tiny handful of steel executives whose pursuit of private power and profit exceeds their sense of public responsibility can show such utter contempt for the interests of 185 million Americans.” Four days later, the steel companies rolled back their prices.

Eventually, those price increases came back. There are limits to the bully pulpit, just as there are to everything else. But combined with concrete regulatory actions, government can mitigate unnecessary costs that make life more unaffordable for Americans. In a time when companies think they can use novel pricing strategies with impunity, it’s important for someone in power to tell them no. n

Bilal Baydoun is the director of policy and research at Groundwork Collaborative.

PARTINGSHOT

Lina Khan: Extraction Exterminator

The Federal Trade Commission chair plays a key role in preventing exploitative pricing schemes from taking root.

In March, President Biden established a Strike Force on Unfair and Illegal Pricing, an interagency team designed to coordinate responses to the growing use of tactics that gouge and confuse consumers. The co-chair of that effort is Lina Khan, the head of the Federal Trade Commission. The Prospect sat down with Khan to discuss trends in pricing and the technologies that enable such tactics, and how government can play a role in protecting the public. An edited transcript follows.

TAP: Your famous law review article on Amazon talks a lot about pricing below cost, but the FTC’s lawsuit against Amazon deals with its higher prices. Do you think that we’ve moved from an age of market share gains and corporate cost-cutting to an age of recoupment, not just with Amazon but across the economy?

Lina Khan: It’s an interesting question. Stepping back, we’ve seen what could be described as a monopoly life cycle. Especially in digital markets, there is a premium to, in the early stages, chasing market share, chasing scale, chasing customer lock-in effectively, because the network externalities and self-reinforcing advantages of data reward early winners. And then, [when] we see markets tip to one player or a very small number of players, the monopolist can shift to the next stage of the life cycle. Which you can call recoupment if you’re talking about predation, or you could call extraction. The extraction phase. Where you now have the monopoly, so let’s milk it. And I think that what we see across all sorts of markets, all sorts of sectors, is dominant middlemen that are able to then flip the switch and start extracting.

sumer, more opportunities to use various pricing tactics. Why do you think the judicial system has had such trouble with these tech innovations?

When you have moments of new technologies or new business models, there can be efforts by firms to try to dazzle enforcers and courts into thinking that there’s something fundamentally new here. And so maybe the existing laws don’t apply, or don’t apply in the same way. That’s why we’ve been crystal clear that there’s no AI exemption from the laws on the books: the laws against collu-

That brings us to this Strike Force on Unfair and Illegal Pricing that you’ve been put in charge of as the co-chair. Obviously, it has only been in existence a short time. What do you see philosophically as its function and how can it help police pricing deemed unfair or illegal?

I think the strike force responds to a broadly held view among the public that they’re really not getting a fair shake these days. I think there is a recognition that even as some of the acute strains and stresses and shocks that we saw during the pandemic have actually started to get addressed and be relieved, prices are not concurrently falling. And I think people at a more visceral level believe companies are exploiting them and taking advantage of them. And so the strike force is also intended to ensure that, if there are illegal forms of pricing, we’re not standing for that.

sion, the laws against fraud, the laws against unchecked surveilling of people.

With more people on e-commerce, there are more opportunities to isolate the con -

The whole premise of the FTC Act, and Congress stipulating prohibitions on unfair methods of competition and unfair and deceptive acts and practices, [is that] businesses are endlessly innovative, including in their mechanisms of lawbreaking. And so we want to be able to stay relevant even as business practices evolve, even as technologies evolve, and applying [the law] whether you’re in 1914 or 2024.

Typically when we think about inflation, governments have outsourced the management of that to the Federal Reserve. Do you see the work of the strike force as a last line of defense for the consumer, considering that monetary tools aren’t going to be as effective if these kinds of schemes are allowed to proliferate?

Across the FTC ’s work, we’re moving away from this really hollowed-out conception of consumer protection where all you need to do is make sure that people are not getting tricked or actively deceived in the marketplace, and that’s the only role for government. The mechanisms for tricking people are way more sophisticated now and the affirmative burden needs to lie with corporations rather than on consumers. This is not about putting out signs that say, “Beware, predators are around.” The role of consumer protection is to stop the predation. n

Connecting through community schools

By Randi Weingarten, President, AFT

Ihave been crisscrossing the country on a tour of community schools—public schools that are both a place and a partnership between educators, students, families, community members and service providers. They’re all different, because they start with the premise of providing their particular school community what it wants and needs to thrive. From services for immigrant and refugee families in Kansas City, Mo., to financial literacy classes and adult education in Cincinnati, to clothes closets with everything from winter coats to prom dresses in Boston, community schools are one of the most effective strategies we have to help students and their families thrive.

Community schools are also a powerful antipoverty strategy. More than 11 million children live in poverty in the United States—the equivalent of the number of residents in Maine, Minnesota, Mississippi and Montana combined. Community schools address barriers to student success, from hunger to hopelessness. They lessen life’s hardships by connecting students and families with supports like physical and mental health care, legal services, English classes and housing. Through meaningful partnerships with families, engaging and empowering students, and deep community connections, community schools create environments where not only are students and families welcome but they want to be there.

It doesn’t take much to start a community school; it stems from community aspiration and requires a community coordinator (which can be paid for by federal Title I dollars). That person can make a huge difference. Take Lilliana Arteaga, the dynamic community hub coordinator at Mario Umana Academy, a K-8 school in Boston, who has built a network of 60 partners for her school in the last two years. She connects students and families to everything from fresh produce and groceries, to a well-stocked clothes closet, to dental checkups, to outdoor adventures. And Umana has expanded after-school programs in response to parents’ work schedules, offering swimming lessons, culturally relevant dance classes and a soccer program.

Community schools are grounded in empowerment and shared decision-making. Students on the student advisory board at another K-8 public school in Boston, the Sarah Greenwood School, gave me a tour of their school. They explained that the board surveys students and families about their needs and priorities and that those results inform decisions at the school.

In my first speech as president of the AFT in 2008, I called for a vast expansion of community schools. Since then, AFT local unions in Chicago, Los Angeles, New York and elsewhere have worked to make that vision real. Schools like Umana and Sarah Greenwood are the result of the Boston Teachers Union’s decadelong campaign for whole-child and family wraparound support. The union and Boston Public Schools just reached an agreement that will expand community hub schools to 20 next year, up from 14, and will prioritize schools slated for closure or merger to become hub schools.

I recently visited the Collins Academy High School, a community school in Chicago, with Mayor Brandon Johnson and three teachers union leaders, Stacy Davis Gates, Dan Montgomery and Tony Johnston, who are calling for state and federal funding to increase the number of sustainable community schools in the city from 20 to 200. Our message is clear: Community schools not only change lives for the better, they also are smart investments. Research shows that community schools produce an average $7 to $15 return on investment for every $1 spent.

The AFT is investing in close to 1,000 community schools, and our monthlong tour aims to lift up this transformational strategy. One of our stops is Buena Vista Horace Mann K-8 Community School in San Francisco. When the wellness team at

BVHM found more and more families struggling with housing and unable to find shelter services, school staff came together with students’ families to set up an emergency shelter in the school gym, providing a safe space for 140 students and families from across the city. Rather than arriving at school exhausted, hungry and stressed—or not getting to school at all—unhoused students in the Stay Over program at least are rested and nourished. And families feel supported, not judged.

The AFT is fighting to make community schools the norm, not the exception. We welcome the support of the Biden-Harris administration, which has expanded grants for full-service community schools since taking office—from $25 million in 2020 to $150 million in 2023.

Community schools are both a place and a partnership to help students and families thrive.

I wish I had a magic wand to eliminate the economic, social, emotional and educational challenges that rob too many children of the opportunities they deserve. But I have hope when I see what’s happening in community schools. In a world in which many people feel that they are on their own, there is something magical when students, families, school staff and community partners come together to solve challenges and create supportive environments where disadvantage is not destiny.

Learn more at www.aft.org/realsolutions.

Follow AFT President Randi Weingarten: threads.net/randiweingarten

Weingarten, left, with student leaders and staff at Sarah Greenwood School in Boston on April 11.

Photo: Alexandra Palombo

IDEAS, POLITICS & POWER

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