TCS Daily

Database Blues?

By James D. Miller - November 15, 2004 12:00 AM

Easily obtainable consumer reviews are one of the great boons of the Internet. They allow you to determine quickly what others thought of the product you are considering buying. True, people sometimes make unfair product assessments, but most consumers surely realize that product reviews are not perfect and take this into account when making purchasing decisions. Well, if consumers have a right to keep track of how firms treat us, don't firms have the right to keep a log of how we treat them? The Washington Post recently wrote about how firms are using consumer databases to decide when to bar given customers from returning items. Most consumers should welcome such databases as a means of acquiring better services and of preventing unfair discrimination.

I had to return three computers before I obtained the one I'm using to write this article. I returned two computers to Dell that had surprisingly similar problems, then I returned a computer to Best Buy because it didn't have a feature that the salesman claimed it had. Although I think I was justified in all of these returns, I could understand why my track record might convince a computer retailer that I was a bad-risk customer. Surely if I had a similar record of many other product returns retailers would be justified in either charging me higher prices or restricting my right of return.

Before a firm determines its return policy it must first estimate how many returns it expects. The greater the number the more the company must charge for its product. Consequently, if a firm cannot penalize customers who engage in excessive returns, they will charge all customers more for their products. Indeed, if firms don't keep track of customer behavior the firms will necessarily engage in "unfair" discrimination.

Rational individuals discriminate when they lack information. For example, imagine that a group of men of race X are walking towards you at night and you must decide whether to walk past them or avoid them by "unnecessarily" crossing the street. To decide, you must estimate the chances of men of this race harming you. If, however, you had full information about these men then their race would be irrelevant because you are concerned only about their propensity for violence and crime.

When a store in location X sets its return policy and prices it must calculate what percentage of customers in this location abuse returns. Consequently, if a firm didn't have individual information on consumers, a "good" customer located in a "bad" neighborhood would suffer from association and be unfairly discriminated against. In contrast, if this business had an accurate consumer database it wouldn't care about the location of the store and could set fair return policies for every customer based on his past behavior.

Landlords, too, are using databases to identify undesirable tenants. When setting rents landlords have to take into account the chance that a tenant will trash the apartment, not pay rent and not leave until evicted by a court order. Let's assume that poor tenants are statistically the most likely to become these nightmare tenants because their lack of assets makes it impractical for landlords to sue them for money damages. Consequently, absent tenant databases landlords with properties that rent only to the underclass will have the greatest nightmare tenant premium built into their rents. If landlords have accurate databases of past tenant behavior, however, they should be willing to remove these nightmare premiums for tenants who have behaved responsibly in the past. Consequently, tenant databases have the greatest potential to help poor but responsible renters.

As the Washington Post reported some employers are using employee databases when making hiring decisions. Lying on resumes used to be fairly easy. This lying didn't just hurt businesses but also job applicants because potential employers could never be sure of one's background. In a hiring world where businesses can't trust strangers they would instead rely on the old-boys network to vet potential employees. The reliance on the old-boys network harms the would-be upwardly mobile who have the right skills but the wrong social connections. A reliable database of employees, however, would reduce the importance of social connections because firms could now verify their applicants' resumes.

Of course, all databases will contain errors can cause great individual harm. But competition among businesses would insure that firms have incentives to minimize the damage caused by these errors because basing business decisions on bad information reduces profits.

James D. Miller writes The Game Theorist column for TCS and is the author of Game Theory at Work.


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