“ON THE internet, nobody knows you're a dog,” ran the caption of a cartoon in the New Yorker in 1993, showing one grinning pooch at the keyboard and another looking on. In fact, plenty of people know not only that you're a dog, but lots of other things about you, including your favourite brand of dogfood. The internet and associated technologies have had a devastating impact on privacy. The effect, argues Andrew Odlyzko of the University of Minnesota in a new paper*, will be to usher in an unprecedented level of price discrimination.

That is not what most people expect. Because the internet makes it easier to compare prices, the consensus has been that sellers' ability to charge different amounts to different buyers will be eroded. Not so, argues Mr Odlyzko. Thanks to the internet, lots more opportunities for price discrimination are emerging. The most obvious example is airlines. Airline websites now discriminate in extraordinarily refined ways, setting fares that may vary not just by class but by the date of booking and the time of the flight. Some manufacturers are starting to do the same: Dell Computer, Mr Odlyzko notices, charges different prices for the same computer on its web pages, depending on whether the buyer is a state or local government, or a small business. And such discrimination is being extended to other parts of the economy. JSTOR, a non-profit organisation that makes available online back numbers of scholarly journals, analyses the electronic data it thus accumulates to charge libraries and academic institutions different fees, depending on their use and circumstances.

Of course, not all products and services can be priced in such ways. Price discrimination will be undermined if secondary markets develop in which people who can buy at low prices resell to those who would otherwise have to pay higher prices. In the case of airlines, that cannot happen: government security requires that a passenger's name must match the one on the ticket. The result is that the ticket cannot be sold to somebody who might otherwise have to pay more for it. It is harder to discriminate in sophisticated ways among train passengers, say, because there are fewer identity checks to prevent tickets being resold.

Generally speaking, goods are easier to sell on than services. That is why American private universities are extremely good at charging students who can afford high fees and giving rebates to those who can't; and also why drug companies have been so unwilling to set prices for AIDS drugs that discriminate in favour of poor countries. The electronic collection of data, which is the consequence (and cause) of the erosion of privacy online, provides new ways to see who is likely to pay what and to monitor whether secondary markets are developing.

Price discrimination, points out Mr Odlyzko, makes economic sense. Customers are willing to pay different amounts for the same product or service, depending on how well off they are and how much they need it. A company will maximise its revenues if it can extract from each customer the maximum amount that person is willing to pay. In primitive street markets, plenty of price discrimination goes on, through a mix of haggling and local knowledge. But in supermarkets and restaurants, the goods generally have a single, published price tag.

And that is how customers prefer it. People generally resent the idea that somebody else should pay less than they have had to do. In the 19th century, railways charged more for some freight routes than others. But customers bitterly resented that. In America, they eventually won government intervention, in the form of the Interstate Commerce Act of 1887—“the first serious federal regulation of private business,” Mr Odlyzko observes.

Today's customers will also hate the trend towards price discrimination on and through internet-associated technology, even if some of them enjoy lower prices and are better off as a result. Companies will therefore have to find increasingly clever ways of hiding it. They already discriminate in the non-electronic world: petrol stations, for example, charge more in some parts of town than in others. But two techniques look likely to flourish: loyalty clubs, which extract additional information from members and give them discounts; and “bundling”, or the offering of packages of services, partly in order to make it harder for consumers to compare the prices of individual components.

The world of electronic communications is full of examples of bundling, such as the charging arrangements offered by telecoms companies and by internet-service providers. Curiously, individual customers turn out greatly to prefer paying a single fee for, say, unlimited text-messaging or 90 hours of telephone talk-time, rather than paying for each item, one at a time—even though that might be a cheaper option. Many bundling arrangements take the form of site-licensing agreements, under which companies or other organisations pay a single fee for unlimited online access to a database, say, or a software package. A company may feel it has a bargain if it pays a single fee that gives all its employees access—even though it might cost less to charge only the employees who are likely to make use of the package. Mr Odlyzko's explanation is that at least with such “bundles” both individuals and companies can be sure of the total bill. With charging by item, they cannot.

Such devices offer the best way to square the circle. As electronic media elicit more personal information, discrimination will increase. Most consumers are likely to resent it. Only by disguising what is happening can sellers discriminate, yet keep buyers happy.

* “Privacy, Economics and Price Discrimination on the Internet”. Available online at http://www.dtc.umn.edu/~odlyzko/doc/privacy.economics.pdf

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