N.Y. Law Could Set Stage for A.I. Regulation’s Next ‘Big Battleground’

The new law seeks to prevent retailers from ripping off consumers by using artificial intelligence and their personal data to charge them higher prices.

As New Yorkers scrolled, surfed and searched their way to digital deals on Black Friday, they had certain unique protections.

This month, New York became the first state to enact a law targeting a practice, typically called personalized pricing or surveillance pricing, in which retailers use artificial intelligence and customers’ personal data to set prices online.

The law aims to prevent retailers from ripping off unwitting customers by abusing their data: jacking up the price of jeans for a shopper with a history of buying expensive pants, say, or lifting hotel prices for a traveler who already splurged on airline tickets.

Enacted through the state budget, the law requires retailers that use personalized pricing to post the following disclosure: “THIS PRICE WAS SET BY AN ALGORITHM USING YOUR PERSONAL DATA.”

The law attracted criticism and litigation from the start. Some business interests say it is far too broad and will cause confusion. And some consumers’ rights groups, who sought an outright ban of the practice, which is also called algorithmic pricing, worry the law is too narrow to meaningfully protect all shoppers from price-gouging.

But just about everyone seems to agree that the law, which last month survived a challenge in federal court, is a significant step in the nationwide push to regulate how businesses use their customers’ data.

“It certainly is a big deal,” said Goli Mahdavi, a lawyer at the firm Bryan Cave Leighton Paisner who focuses on artificial intelligence and data privacy. “Algorithmic pricing bills are probably the next big battleground in A.I. regulation.”

Lina Khan, the former chair of the Federal Trade Commission and a member of Mayor-elect Zohran Mamdani’s transition team, said in an interview that the measure would offer an “absolutely vital” tool for authorities scrutinizing personalized pricing.

But Ms. Khan added that the practice was threatening to “fully creep across the economy,” and that there was a “ton more work to be done” at the state and federal levels to regulate it.

There are bills pending in at least 10 states that would either ban personalized pricing outright or require disclosures, like New York. State lawmakers in California, a hotbed of A.I. development and regulation, and federal lawmakers in Washington are considering broad bans on the practice.

The push comes as technological advancements have drastically changed the internet and digital marketplace.

In 2012, the travel site Orbitz caused a stir by telling The Wall Street Journal that it had sent Mac users ads for pricier hotels than it had sent P.C. users, apparently reasoning that those with more expensive laptops could afford to spend more on vacation. (Orbitz later abandoned the practice, according to Expedia, which acquired the site a decade ago.)

Now, with technology becoming ever more complex and pricing models ever more sophisticated, Orbitz’s computer strategy looks almost primitive.

A report published by the Federal Trade Commission in January found that retailers could track consumer behavior as subtle as movement on a mousepad. The commission described a shadowy third-party market for some products, and warned that retailers often used customers’ personal information to set prices.

Still, it is hard to measure the extent to which large companies are deploying personal data, and some deny doing so.

The New York law is poised to shed light on a widespread practice that is written into digital code and playing out “in the shadows” of the internet, said Lee Hepner, a lawyer with the American Economic Liberties Project, which advocates tough antitrust enforcement.

But Chad Yoes, who once oversaw pricing at Walmart and co-founded the retail brokerage and consulting group Waypoint Retail, said he believed large retailers’ use of personalized pricing was generally limited to rewards programs. He said some retailers attracted customers with coupons based on their personal data, a practice that he believed would be inhibited by the new law.

“Fundamentally it’s going to start breaking trust between retailers and consumers,” Mr. Yoes said, adding that he thought the use of personalized pricing was far more widespread on social media apps than on retail sites.

Justin Kloczko, a researcher with Consumer Watchdog, a Los Angeles-based consumer protection nonprofit, said it may be hard for customers to know when they are being targeted. That may make them less likely to report violations, in turn making it more difficult for the authorities to enforce the law.

But, he argued, there are plenty of signs that companies are trying to “read people’s minds” to squeeze more money out of them.

Mr. Kloczko described an example from his own life: Uber and Lyft quoted him higher prices to ride from Chicago’s suburbs to O’Hare International Airport than they offered his wife, who requested the rides at the same time.

An Uber spokesman, Ryan Thornton, acknowledged this week that the company had started displaying a disclosure to New Yorkers as required by the new law.

But in an email, Mr. Thornton denounced the law as “poorly drafted and ambiguous.” And he maintained that Uber did not consider anything beyond geographic factors and demand in setting prices. Lyft did not reply to a request for comment.

Before the law took effect, the National Retail Federation, a national lobbying group, tried to block its enforcement, filing a lawsuit on First Amendment grounds in federal court. The complaint cast the law as overly broad, described exceptions carved out for some retailers as arbitrary and denounced the required disclosure as “misleading and ominous.”

Retailers, the group argued, use personalized pricing to drive prices down, not up, by supporting customer loyalty programs.

“I wish I understood what harm exactly lawmakers think they are solving,” Stephanie Martz, the chief administrative officer and general counsel of the National Retail Federation, said in an interview.

Unmoved by the group’s arguments, Jed S. Rakoff, a federal judge in Manhattan, allowed the law to move forward.

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