The Big Sell | Regulators target price discrimination

Three months after a sweeping crackdown on “forced exclusivity,” Chinese regulators are moving to take more control over Chinese e-commerce companies’ pricing. The latest target of Chinese market watchdogs is price discrimination.

China’s State Administration for Market Regulation (SAMR) indicated that it would take a tougher stance on price discrimination when it proposed regulations on consumer pricing practices on July 2. Price discrimination is a kind of personalized pricing, where companies charge customers different prices for the same product or service by analyzing purchasing habits.

An online travel agency might hike up the price of an airline ticket for a user who is a regular big spender or has a history of last-minute purchases. Platforms even appear to charge their most loyal customers higher prices, who they think would be willing to pay more.

Meituan came under fire in late December after a viral WeChat post accused the food delivery giant of charging its paid members higher delivery fees than its free users. The writer of the post said that he was charged RMB 4 ($0.6) more for a delivery fee than a free user, even though he ordered from a member account for which he paid RMB 6 to RMB 15 per month. Meituan said the extra charge was made in error. TechNode could not independently verify the writer’s claims. 

Research conducted by Fudan University shows that ride-hailing apps charge an “Apple tax” to iPhone users, a group that is generally considered as premium in China. The report shows that iPhone users are more likely to get the pricier “chauffeured rides” and receive less of a subsidy compared with Android users. 

The new regulations would also punish price fixing, price dumping, and price fraud. Included in the 12 pages of proposed rules is a section on the pricing strategies of China’s tech economies, or companies using “new business models,” to use the regulator’s term.

SAMR is seeking public comment on the draft rules through Aug. 2.  

Companies operating under these “new business models” would be subject to a fine equivalent to 0.1% to 0.5% of their sales if they are found to charge different prices for the same product or services by leveraging big data and other technological means to predict users’ willingness to pay. The draft also forbids businesses from dumping products at low prices to create a monopoly. 

Illegal gains would be confiscated and companies could be required to suspend their business operations during a  rectification process. For serious violations, they could even lose their business licenses. 

Under Chinese law, price discrimination is already illegal. But Chinese regulators have largely tolerated these practices for the past two decades. 

Chinese consumers grapple with discrimination 

Amazon first experimented with price discrimination back in 2000, when the global e-commerce titan charged different prices to individual customers for the same DVDs. The company stopped in response to swift consumer backlash and still avoids the practice two decades later.  

But Chinese online businesses are widely believed to employ the revenue-boosting tactic. Platforms deny that they charge different prices to different customers—but few consumers believe it.

User complaints about the practice flood social networks and mass media. As of the end of June, there were over 1,300 submissions about price discrimination on Sina’s Black Cat consumer platform alone. The complaints concern nearly all major tech names in China, from e-commerce giants Alibaba, JD, and Pinduoduo, to food delivery apps Meituan and Dianping, to online travel platforms Ctrip, Qunar, and Alibaba’s Fliggy, to ride-hailing apps like Didi.

While price discrimination exists across industries, it is more prevalent in areas that offer services than those that sell physical and standardized products. “Sectors like online travel and ride hailing are more vulnerable to the practice compared with e-commerce and food delivery, which offer standardized physical products at steady costs,” said Zhang Yi, consulting CEO and chief analyst at iiMedia Research.

Denials from companies haven’t boosted user trust. Most consumers still believe price discrmination is ubiquitous in China. Results from a consumer report conducted in 2019 show that an overwhelming 88% of those surveyed believed online platforms leverage user data for personalized pricing to make users pay as much as possible. Meanwhile, nearly 60% said they have experienced the phenomenon.

Ctrip and Alibaba declined to comment when reached by TechNode.

A woman surnamed  Hu, a membership user of Ctrip, sued the online travel platform for price discrimination last year. She had reserved a hotel room for RMB 2,889 a night in July 2020 but, on checking out, she discovered the price of the room was only  RMB 1,377. A court in Zhejiang province ruled in favor of Hu, requiring Ctrip to pay RMB 4,777 in compensation.

A tricky concept

Although many users believe they face price discrimination, it’s difficult to prove—and its been going on for centuries.

In some ways, companies are bringing back an old way of pricing. People haggled over prices for most of our commercial history until the Quakers invented the “fixed” retail price tag in the mid-19th century. If people pay different prices for the same products, it’s difficult to tell whether it’s a discount or an overcharge.

Users believe that a variety of user data such as birthdate, educational background, occupation, geographic location, past purchases, web visits, and social media “likes” are used to feed the pricing strategies. The fact that personal data is freely traded on Chinese black markets for tiny sums has made the problem worse.

“As a matter of economics, there are both scenarios where price discrimination benefits certain categories of consumers and promotes overall consumer welfare and efficiency and also scenarios where it does not,” Nathan Bush, a partner with multinational law firm DLA Piper, explained to TechNode. 

A platform generally applies the practice to charge higher prices to customers who it concludes will be willing to pay more, mainly targeting premium members. These companies charge their lowest prices to users about whom they have the least data, raising prices once they see evidence of loyalty. 

From a seller’s point of view, the goal is to charge each customer the highest price he or she is willing to pay. Regulators and consumers see it as an unruly, unfair practice that does not benefit consumers. 

The Chinese term for the concept, “shashu,” literally translates as “killing someone you know,” underlining the fraudulent aspect of the practice by which platforms take advantage of the customers who use or trust them the most.

Crackdown on price discrimination

While there are laws forbiding price discrimination on the books, Chinese regulators rarely examined e-commerce platforms’ pricing strategies before 2020. Things started to change late last year as regulators waged a war on anti-competitive practices in the online world.

The 1997 Price Law (in Chinese) says merchants should price their products and services based on “production and operation costs and market supply and demand conditions.” It forbids merchants from “implementing price discrimination” when providing “the same products or services.”

The country’s 2008 Anti-Monopoly Law (in Chinese) also forbids practices such as “implementing differentiated treatment in transaction conditions such as the price” for the same goods. The clause, however, only applies to companies with a “market-dominant position,” or companies that enjoy more than 50% of a “relevant market.”

“Whereas the Anti-Monopoly Law treats price discrimination and predatory pricing as potential ‘abuses’ by dominant firms, the older Price Law contains much broader rules against price discrimination and predatory pricing that are not limited to dominant firms,” said Bush.

“Perfect” price discrimination—when a business charges a different price on every sale in an effort to get the highest possible price every time—is rare in conventional markets, but e-commerce makes it possible for companies to try, Wu Weiming, senior partner at Shanghai-based Allbright Law Firm, wrote in a note (in Chinese).

“On the internet, differentiated pricing for different consumers becomes possible. It is difficult for consumers to notice from their own web pages or mobile terminals even if their prices are different from other consumers,” Wu wrote. 

Not only market-dominant players

In November, SAMR proposed a set of antitrust guidelines targeting internet platforms. The guidelines for the first time pointed out that pricing products or services differently according to customer purchasing power, consumption history, or user preference is considered monopolistic behavior.

The guidelines, formalized in February, call for stricter regulation of unfair pricing practices. But the supplement to the Anti-Monopoly Law once again only applies to companies with dominant market positions. So far, SAMR has only deemed Alibaba a dominant player in China’s e-commerce market, fining the e-commerce giant $2.8 billion for “forced exclusivity” in April.

However, SAMR’s July 2 draft provision on illegal pricing activities is a major step closer to cracking down on price discrimination by all online marketplaces, because it also applies to non-dominant marketplaces like JD.com and Pinduoduo.

More hurdles to overcome

Even though the state is issuing tough regulations to crack down on price discrimination practices, there are more hurdles to overcome when it comes to execution. 

The unpredictability and uncertainty in pricing as a result of peak or low seasons and hours, among other factors, may lead to big price fluctuations. Therefore, it’s difficult to collect evidence to prove that the companies have boosted prices based on an individual customer’s characteristics.On top of that, regulating the practice will need the companies to share, at least with monitoring authorities, their recommendation and pricing algorithms, Chen Wenming, a lawyer with Zhejiang Xiaode Law Firm, told local media. This is a prime obstacle to regulating the practice, since most companies will be reluctant to offer this critical information, Chen said.