US Consumers Wary of AI's Growing Role in Retail Pricing

U.S. consumers are expressing growing apprehension and confusion over the increasing use of artificial intelligence and other high-tech methods by retailers and restaurant chains to set prices.

The shift from paper to digital price tags in grocery aisles, coupled with AI tools that predict customer responses, is fueling anxieties about terms like "dynamic pricing" and "surveillance pricing." Social media platforms are buzzing with speculation about whether different customers are being charged varying prices for the same items, a practice that extends beyond the familiar surge pricing seen in airfare, hotel rooms, and ride-sharing.

"There are major tensions happening right now between who’s really going to have the power with some of these algorithms and usage of bots and AI: the companies or the shopper," said Katie Thomas, who leads a consumer behavior think tank at the management consulting firm Kearney.

Retailers argue that some consumer concerns stem from misconceptions. Walmart CEO John Furner stated in a blog post that digital price tags streamline operations and ensure accurate pricing, asserting that the labels are not used to adjust prices based on external factors or individual shoppers. "We price the product, not the person," Furner wrote.

However, a lack of transparency regarding the collection and use of customer data contributes to consumer suspicion. For instance, social media posts have circulated with unsubstantiated claims that Walmart's planned electronic shelf labels scan shoppers' faces or cellphones to personalize prices, according to Thomas.

In response to these developments, lawmakers and regulators are taking action. Legislators in at least 30 states have considered bills related to pricing this year, including measures targeting algorithmic and personalized pricing, as reported by the National Conference of State Legislatures.

The Federal Trade Commission (FTC) has proposed an enforcement policy that warns businesses that failing to disclose their use of personal data for individualized pricing could violate consumer protection laws.

Pricing Practices Under Scrutiny

Dynamic Pricing refers to the adjustment of prices in response to changing market conditions, such as supply and demand. While common in sectors like air travel and ride-sharing, its application is expanding.

Digital Price Labels allow retailers to update prices electronically, eliminating the need for manual changes to paper tags. While these labels facilitate frequent price updates, companies maintain they are not typically used for surge pricing in retail environments. Retailers generally update electronic shelf prices on a consistent schedule, often weekly, to maintain shopper trust. Researchers tracking prices after the introduction of these labels at an unnamed grocery chain found minimal evidence of surge pricing.

Personalized Pricing, sometimes termed "surveillance pricing" by critics, involves offering different prices and discounts based on individual customer data, including browsing habits and location. It remains unclear how widely this practice is adopted. An FTC staff report indicated that intermediaries offering price customization tools work with at least 250 clients in the retail sector. Several states, including Maryland, New Jersey, and Connecticut, have enacted legislation restricting the use of shopper data for price determination. In 2022, California prosecutors sued Target, alleging its app displayed lower prices before shoppers entered stores and raised them once inside. Target reached a $5 million settlement and agreed to a ban on using geofencing technology for price increases, stating the app functionality was intended to provide accurate pricing across channels.

Algorithmic Pricing utilizes software to recommend or set prices, a practice businesses have employed for decades. AI enhances these systems by identifying patterns in sales, competitor pricing, and other data to predict demand and optimize pricing strategies for various business goals. A global survey by Simon-Kucher found that a significant percentage of business leaders use AI for market intelligence and real-time price optimization. The National Retail Federation views algorithmic pricing as an evolution of traditional price monitoring and adjustment based on market factors. However, some lawsuits have alleged that pricing algorithms have been used to undermine competition. The FTC's antitrust lawsuit against Amazon challenged an algorithm, codenamed Project Nessie, which the agency alleged was used to increase prices. Amazon has disputed these claims, stating the tool was intended to prevent unsustainable low prices due to price matching and was ultimately scrapped. A recent consumer lawsuit against McDonald's alleged its pricing system coordinated prices using nonpublic sales data from competing locations. McDonald's has called the lawsuit inaccurate, stating the tool is made available to franchisees to assist with pricing at their individual restaurants.