How Advertisers Can Use Your Personal Information To Make You Pay Higher Prices

Imagine that you are halfway through the second week of a grueling diet. It's been going all right -- but lunches are always the hardest for you. You walk out of your office building to get a salad, when suddenly, you get a text message. It's from a nearby restaurant offering you a discount on your favorite burger, encouraging you to "cheat just this once" and they'll throw in a free side of fries. Somehow the company behind the advertisement knew what foods you like, when you'd be craving them, how much you'd be willing to pay, and the pitch most likely to get you through their doors.

This is just one example of what advertising might look like in the very near future as described in a thought-provoking report on "digital market manipulation" by legal scholar Ryan Calo.

His research details the ways that new technologies will enable companies to profile consumers and deliver advertisements in a dramatically more personalized way. Given what's already being done with your personal information, Calo is concerned that advertisers will soon be able to target your weaknesses and vulnerabilities on a scale never seen before.

In other words, the main problem with the way advertising is conducted online isn't so much about privacy -- it's about control.

Becca Rosen summarized it well in The Atlantic, "This is about protecting consumers from profit-seeking corporations, who are gaining an insurmountable edge in their efforts to get people to part with their money." Much of what we hear today about advertising online is a tired debate focused on abstract threats to privacy and a weak defense filled with half-truths about benefits and "free" services. Instead, Calo's arguments use a behavioral economics lens to explore what happens to these practices as they mature.

To be clear, companies have legitimate reasons for wanting to make advertisements more personal. The problem is that online marketing today isn't very sophisticated. For all the information that these firms are collecting, they are not very good at "relevance" -- they're still struggling to get the right ad in front of the right person. But that doesn't mean it will be this way forever.

There seems to be a lot of interest in making ads more "useful" to both companies and consumers, even when it borderlines on being invasive. Apple and Microsoft have already filed patents for "mood-based advertising," Facebook has expanded  tracking into the physical world, and Amazon is exploring how to get customers what they want before they even place an order. Companies like Orbitz have already gotten in hot water for steering Mac users toward higher-priced options, and Staples was recently exposed for charging different shoppers different prices for the same items.

While some might argue this is just the natural extension of coupons and promotions into the digital age, there are some stark differences. For one, today's shopper is a "mediated customer."  They are making purchases through some sort of interactive or networked device designed by somebody else. The technology being used captures all their interactions, analyzes their behavior, and shares it widely with third parties. Unlike being approached by a salesperson in a mall, online ads can reach you any time and any place - and it's all automated. Theoretically, the ugly practice of price discrimination could be employed whenever the opportunity arises.

We are at the start of a massive shift;  As Calo describes it, "The truth is that we are only beginning to understand how vast asymmetries of information coupled with the unilateral power to design the legal and visual terms of the transaction could alter the consumer landscape."

Perhaps the largest challenge consumers face with this issue is that they can't clearly know when digital market manipulation is taking place. Ads are served up by complicated algorithms which the public is not allowed to scrutinize. The larger problem here goes deeper, as Calo told me:

"Today you can't know. You don't have access to the backend. We're stuck in Gutenberg era when it comes to telling people what's going on. Amazon is talking about delivering with drones, and people are wearing smartphones on their face, but privacy policy is still this goofy, outdated way to tell people things."

To deal with this, Calo suggests a variety of methods: internal review boards, a paid option for popular "free" services online, notification, regulation; each, as he points out, with its own flaws and drawbacks.

The only way to really protect people from the potential harms of these practices is to interrupt the incentives for companies to even do this. This could involve providing consumers more legal protections, limiting the collection of personal data, building systems for greater transparency, or making the practice toxic in the eyes of consumers. Nobody likes being the "sucker" -- the problem is the system is designed so that you'll never find out if you're being taken advantage of.

What is at stake isn't purely a matter of annoying ads or nosy companies -- it's a deep set of customer protections that have taken decades of hard work to secure.


This article originally appeared on Forbes - Disruption and Democracy. Check out my upcoming book, Identified: How They Are Getting To Know Everything About Us