- Let's say you and your friend meet at a cafe on a hot day.

Your friend drove in their air conditioned car while you decided to get some exercise and bike the three miles.

You show up sweaty and out of breath, and you both order an ice cold lemonade.

The waiter takes one look at you and informs you that the lemonade will cost twice as much for you as it will for your friend.

Pretty unfair, right?

- If you're thinking they can't do that, actually they can.

Unless they discriminate by certain protected categories like race, gender, age, sexual orientation, or disability, sellers are legally free to charge different prices to different people.

- It's called personalized pricing or discriminatory pricing, and it's a way to juice profits by extracting the maximum that people are willing to pay.

- Of course, if they did that out in the open like that, customers would probably be so offended they'd boycott the place.

- But when it comes to online shopping, there's no easy way to know whether the price you are shown is the same for everyone else.

(bright music) - Personalized pricing is actually as old as commerce itself.

For much of human history, most goods were custom made.

If you were an artisan hired to make something, you would weigh the complexity of the job, the cost of the materials, and the pocket depth of your client before quoting a price.

But ever since the Industrial Revolution, mass manufacturing of identical products and the emergence of large retail outlets like department stores have normalized the idea of standardized pricing.

It wasn't until the late 19th century that department store pioneer John Wanamaker implemented the use of price tags, a nail in the coffin for the ancient tradition of haggling.

- That's not to say we're not accustomed to some forms of dynamic pricing.

We know that an airline ticket will cost more the day of the flight, and a hotel room will cost more during tourist season.

We know about Uber surges and senior discounts, and we know that when we walk onto a car lot, the salesman will exploit observations about our income and urgency to squeeze as much money out of us as he can.

But when it comes to everyday retail items, we've come to expect that everyone should pay the same price.

- That may be changing thanks to technology.

As you probably already know, data trackers follow you relentlessly around cyberspace, monitoring what you read, what you watch, and most importantly, what you buy.

They remember how many times you looked at that sweater and how long your mouse hovered over the "Add to Cart" button.

All of this personal info and behavior is analyzed by an algorithm that can not only guess what products you'd like, but what you'd be willing to pay for them.

It's like if the salesman at the car dealership knew everything about you the moment you walked onto the lot.

- Defenders of price discrimination argue that it can lead to a more efficient market.

Even though some people will see higher prices, others will see lower prices allowing them to buy things they otherwise wouldn't be able to afford.

For example, price discrimination in college tuition allows universities to offer low income students scholarships and grants subsidized by the high tuition paid by wealthier students.

- And there are studies that show that some forms of discriminatory pricing result in higher overall customer satisfaction.

After all, in theory, everyone's paying what they think is a fair price, but only when the participants don't know about it.

As soon as they found out that different people were paying different prices, the majority thought the system was unfair.

As a paper from Seattle University puts it, if a transaction satisfies a customer only because of a lack of transparency, one cannot claim that it increases utility.

- These justifications aside, there's only one reason a for-profit company would be interested in discriminatory pricing.

It maximizes profits.

We're all familiar with a standard demand curve, which illustrates the higher you set your price, the fewer people will buy your product.

With standardized pricing, sellers wanna find the highest number that won't scare away too many potential customers, but no matter how hard they try to strike that balance, there will always be some customers who would've paid more.

That gap is known as consumer surplus.

- Consumer surplus feels great.

It's that warm fuzzy feeling you get when the pleasure of a purchase outweighs the cost.

Like the saying goes, everyone loves a bargain, - Except not everyone.

Sellers hate consumer surplus.

To them, that's money left on the table.

In a perfect world, every customer would pay the absolute most they'd be willing to pay so that no one ever feels like they got a good deal.

This is the end goal of discriminatory pricing.

- It's also important to remember that willingness to pay does not always correlate with wealth.

Some customers might tolerate high prices, not because they can afford it, but because they're desperate or have few other options.

Grocery stores in low income neighborhoods, for instance, can charge more than those in wealthy neighborhoods because they know the locals have less flexibility to drive around looking for the best deal.

- Discriminatory pricing also violates the principle of informational symmetry.

In classic market theory, fair prices are set when the parties to the transaction have similar levels of knowledge.

But while online sellers know everything about us, we rarely know anything about them.

We don't really know how much these products are worth, what they cost to manufacture or how big their profit margins are, and we certainly don't know what their minimum willingness to charge is.

- In fact, the only leverage we usually have is knowing what other people are paying.

But in the atomized world of the internet where we each inhabit a unique isolated bubble, even that knowledge is hidden.

In the battle of information between consumers and companies, consumers are at a huge disadvantage.

- Discriminatory pricing is still in an experimental stage with many online retailers interested but not quite ready to pull the trigger, perhaps out of fear of customer anger.

Still on some sites, you might see lower prices if you use your mobile device instead of a laptop or a Windows PC instead of a Mac.

For some reason, they think MacBook users have money to burn.

You can also try using a private browser to do your browsing, so the algorithm won't catch you gazing longingly at that mid-century modern shoe hutch.

And some customers report getting lower prices by visiting competitor sites first, a signal that you're a smart customer.

- Another way for consumers to work around discriminatory pricing is through arbitrage, the buying of goods where demand is low and reselling where demand is high.

In this case, customers offered low prices can resell them to customers who are only offered high prices.

However, any good algorithm will be able to spot such entrepreneurs and adjust prices accordingly.

- As more companies use artificial intelligence to navigate their pricing strategies, we may see a world where prices are constantly fluctuating based on everything from the weather to your mood, to what you had for breakfast that morning.

- One experiment even found that competing pricing algorithms figured out how to cooperate to keep prices high just by observing and reacting to each other's strategies.

In the real world, such price fixing is flat out illegal, but is it considered collusion when there are no humans involved?

- Consumers still disapprove of personalized pricing by a wide margin, and that may be enough to scare away retailers for the time being.

- But as our shopping experience has become more and more personalized, consumers may have to fight back by just communicating with each other about what we think things should cost.