The National Retail Federation has sued to block a New York state law that requires retailers to disclose their use of “algorithmic” pricing. The law was passed as part of the state’s budget and signed by Governor Kathy Hochul on May 9 and is set to take effect July 8.
The New York Algorithmic Pricing Disclosure Act requires any retailer that sets prices using information about its customers to place a disclosure next to each affected product, saying: “This price was set by an algorithm using your personal data.”
The NRF’s lawsuit, which was filed in the U.S. District Court in Manhattan, argues that the law is “replete with arbitrary exemptions” and violates both the First and 14th Amendments. The NRF is asking for both preliminary and permanent injunctions blocking its enforcement.
“This law interferes with retailers’ ability to provide their customers with the highest value and best shopping experience they can,” said NRF Chief Administrative Officer and General Counsel Stephanie Martz in a statement. “Algorithms are created by humans, not computers, and they are an extension of what retailers have done for decades, if not centuries, to use what they know about their customers to serve them better; it’s just done at the scale of the modern economy. Stigmatizing tools that drive prices down turns offering deals into a liability, and consumers will end up paying more.”
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The Dynamic Pricing Debate
A debate has been raging for years about the benefits and fairness of dynamic pricing practices, ever since Amazon’s widespread use of the technique became common knowledge. Technological advances now allow retailers of all stripes to adjust their prices based on various data inputs, including consumer shopping histories as well as competitors’ pricing and market conditions.
The practice is generally perceived negatively by consumers, who have complained for years about the pricing fluctuations in sectors like the travel industry. In fact, a recent study by Gartner showed that brands that use dynamic pricing risk losing consumers’ trust, with 68% of respondents saying that dynamic pricing made them feel they were being taken advantage of.
Dynamic pricing techniques, like those often employed by airlines and hotel booking sites, are a form of algorithmic pricing. However, algorithmic pricing is a much broader term that encompasses the use of computer programs to automate any part of the process of setting pricing, which is part of the NRF’s issue with the New York law.
In its lawsuit, the NRF pointed out that, for example, grocers have long offered coupons at checkout for items similar to those previously purchased and coffee shops have offered rewards cards giving repeat customers every 10th cup free, while an online merchant might offer a promotion to a customer who leaves a product in an online shopping cart for a number of days. Additionally, the NRF argued that retailers have always checked to see what competitors charge, made seasonal price adjustments or offered promotions based on intuition. In using algorithmic pricing ,“they simply do it with greater sophistication and on a much-larger scale,” the suit says.
Not to mention the fact that as algorithmic pricing becomes more widespread, retailers that opt out of the practice can risk hurting their business, missing opportunities to drive sales and loyalty. And as the NRF points out in its lawsuit, any discrimination or price gouging that might occur through use of these systems is already prohibited by other state laws.
“Algorithmic pricing mechanisms lower overall consumer prices in the aggregate,” the suit says. “Studies have consistently shown that algorithmic pricing incorporating data on market conditions plays a powerful role in driving prices down because algorithms allow companies to be more responsive to supply and demand and so better optimize pricing to reflect market conditions.”
