Personalized Pricing: The FTC's Newest Enforcement Priority

On August 19, the U.S. Federal Trade Commission (FTC or Commission) proposed an “Enforcement Policy Statement Regarding Personalized Pricing.” The statement explains that the FTC will prioritize enforcing its consumer protection mandate to prevent companies from varying prices based on individual consumers’ personal data without certain disclosures. The public — businesses and consumers alike — will have an opportunity to provide feedback on the policy statement. Comments are due by September 25.

As used by the FTC, “personalized pricing” means the practice of setting the price offered to a particular consumer based on that consumer’s personal data or inferences drawn from it. Importantly, the FTC does not treat every individualized or variable price as personalized pricing. It distinguishes dynamic pricing based on market conditions, such as changes in supply and demand that affect everyone in the same market, including highly localized rideshare demand; regional price differences attributable to taxes, regulation, or local market conditions; and prices that inherently depend on a purchaser’s individual characteristics — its examples are insurance and credit, where individualized risk legitimately affects price.

While noting that “Congress has not given the Commission the authority to prohibit personalized pricing in all circumstances,” the statement emphasizes that “the Commission intends to enforce the law aggressively” in this space.

The FTC is particularly concerned about lines of business “where consumers reasonably expect that prices for a product or service will not vary based on their personal data.” For those industries, “businesses that engage in personalized pricing should clearly and conspicuously disclose” (1) “that the price is personalized,” (2) “the basis for that personalization,” and (3) “the types of data on which the personalization is based.” Thus, a travel site setting a price because it infers from the customer’s previous purchases that the customer is traveling for a can’t-miss event must disclose that logic. According to the FTC, a company’s failure to disclose is likely to violate Section 5 of the FTC Act because a consumer might otherwise be misled into believing that a price is static or widely offered — or merely that the price is based on a narrower set of personal data.

The policy statement leaves vague which industries are industries “where consumers reasonably expect that prices for a product or service will not vary based on their personal data.” The statement focuses on retail sales of consumer goods but also identifies food delivery companies, hotels, and rideshare companies, and the FTC likely has other lines of business in mind as well.

The FTC forthrightly acknowledges that under current conditions, some consumers benefit from personalized prices. Some consumers pay less than they otherwise would while others pay more. The FTC is concerned, however, that as the algorithms driving personalized pricing become more sophisticated, the balance will increasingly skew against consumers. Even so, the FTC did not adopt the most aggressive view suggested by some consumer advocates that personalized pricing is inherently unfair.

Interestingly, the FTC also notes an intersection between these concerns and its antitrust mandate. Simply put, concerns about personalized pricing are less when there are competitive conditions in a market. Competitive pressures limit any firm’s power to set prices, even when prices are personalized.

Enforcement policy statements like this one tell parties under the FTC’s enforcement jurisdiction about how the FTC interprets its legal mandate and what enforcement actions it intends to prioritize (or deprioritize) — and can shape FTC decision making for decades. It likewise sends a clear if nonbinding message to state attorneys general and the plaintiffs’ bar about how the FTC interprets the unfairness and deception standards under Section 5, which many states’ laws mirror. Unlike a trade regulation rule—which by statute the FTC cannot adopt without a substantially more involved rulemaking process—an enforcement policy statement does not give rise to civil penalties or directly apply outside the FTC’s enforcement jurisdiction. Banks, airlines, and other industries exempt from FTC enforcement authority under Section 5(a)(2) of the FTC Act should nevertheless be mindful of the FTC’s position as signaling a potential shift for their separate regulators in the future.