Harvard Business Law Review (forthcoming)
This Article offers a novel account of the discriminatory effects and legal status of price discrimination in credit markets. Price discrimination is an economic term that refers to situations where sellers charge different prices for the same good or service based on what they believe different consumers will be willing to pay. This Article argues that price discrimination in credit markets—i.e., charging different borrowers different rates based on what they will agree to—leads to higher interest rates for protected groups, like racial minorities and women. And it proposes a legal framework for evaluating this practice of “‘price discrimination’ discrimination.”
Price discrimination discrimination can have dire consequences, as it saddles those with limited credit market familiarity and greater reliance on credit with more expensive loans, potentially sustaining and perpetuating existing inequalities. This added financial burden threatens to become ever more entrenched, as sellers increasingly rely on big data and artificial intelligence to price discriminate.
Policy-makers, regulators, and scholars have ignored this growing problem in two crucial ways. Firstly, they have focused on risk-based pricing and how this adversely affects protected groups, overlooking price discrimination, which is based on demand. Secondly, traditional economic analysis has failed to appreciate the unique nature of price discrimination in consumer credit markets and how vulnerable consumers are likely to pay higher demand-based prices. At present, the legality of price discrimination discrimination turns on regulators’ interpretation of the “business justification” under the disparate impact doctrine. But as this Article shows, regulators have utterly failed to offer a clear and consistent interpretation of the business justification. Worse, the business justification is a misguided approach to price discrimination because it treats demand-based pricing disparities in a categorical fashion as either always or never permissible.
I propose a new, harm-based approach to price discrimination discrimination. On this approach, the permissibility of price discrimination policies turns on the nature and degree of harm that a given pricing strategy inflicts. In particular, it hinges on two dimensions—the magnitude of disparities created by the pricing rule and the legitimacy of the price discrimination strategy. This harm-based approach addresses the problem of price discrimination discrimination more effectively. And it also fits neatly into the relevant statutory framework, which prohibits unfair, deceptive, and abusive acts or practices.
This novel account of price discrimination discrimination has implications beyond the sphere of consumer credit pricing. For example, in employment and housing, the law also relies on the disparate impact doctrine to prevent the perpetuation of disadvantage and weigh legitimate business interests. An alternative harm-based approach might improve outcomes in these areas by more directly addressing the adverse impact of policies.