Amazon’s Robo-Pricing: The ghost in the machine
- 9 July 2012
Buying items on CDs to car parts website Amazon is child's play. Select the item, and in a few clicks, it is winging its way to your door. It's simplicity of use plus the variety of goods on offer on the site and the associated Amazon Marketplace that has powered the brand to an easy number one in world online sales.
It's trusted. But would customers have as much confidence in the site if they knew that prices can change every 15 minutes? But this is the case – thanks to algorithm-powered programs similar to those used by automated bank trading rooms.
And would they place so much faith in Amazon and its Market Place of two million suppliers large and small if they knew price changes were not dominated by supply and demand factors but by rival retailers – including Amazon itself – reacting to prices charged by other stores?
Pricing absurdities zap trust
This algorithmic model is leading to tensions between independent traders on Amazon Marketplace and Amazon itself, according to the The Financial Times. And it has led to pricing absurdities including one book priced at nearly $24m as well as websites competing to grab sales of a non-existent book – with some customers asking what degree of reliance they can have on both the prices they see and the availability of the item.
The Financial Times says: "The "robo-pricing" has become a source of tension as Amazon competes with its clients but has access to their sales information and greater experience of data mining."
Amazon Market Place is the fastest growing segment of the online retailer's business so this is an issue for Amazon investors.
Amazon's computerised pricing tools have more than a passing resemblance to the high speed automated trading tools which have been blamed for sudden spikes in stock and commodity prices such as the Flash Crash in 2010.
One such Amazon spike occurred in April 2011 showing that prices can move up as well as down. Techdirt reports that the Amazon price of a new copy of an out of print biology book entitled "The Making of a Fly" moved up as two retailers took part in a mad automated auction upwards. While the book could easily be found second hand for about $35, each bookseller selling new copies automatically moved prices upwards to catch up with their rival but charged, a dollar or so less. The algorithm figured that if the price had reached $20,000,000 with one, the other could undercut at $19,999,999, , grabbing all the sales irrespective of the absurd price. Eventually, one store quoted $23,698,655.93 for a book whose used price had not changed.
The near four-fold increase in a print on demand book
Blogger Carlos Bueno decided to test Amazon earlier this year with a book he had written which was print on demand only. No retailer held stock. The price was $14.95. Then he found a shop selling it at $55.63 – nearly four times as much.
He thought: "Silly bots must be a bug. After all, it's print-on-demand, so where would you get a new copy to sell? Then it occurred to me that all they have to do is buy a copy from Amazon, if anyone is ever foolish enough to buy from them, and reap a profit." But then more computer pricing brought in more retailers, including one based in the UK, who started to compete downwards so the book fell below the price he was selling the on-demand copies.
"They made up the loss on the quoted price with high "shipping and handling" fees," he says.
Setting up a phoney store
Others point to the consumer confidence-zapping way in which some retailers quote very low prices but then high postage and packing charges. And some sellers have – despite Amazon rules – set up phoney stores that keep undercutting the real ones. This can break these genuine rivals as they have to keep offering stock at ever lower prices while harming customers who cannot understand why items on the phoney sites are always "out of stock."
Israeli tech blogger Victor Rosenman points out that third party sales are growing faster than Amazon's self-generated turnover. Third party sellers represent 36% of Amazon sales ($17bn in annual figures), growing at 65% year on year – retailers like the mix of explosive potential on the back of a top brand. His firm Feedvisor has launched what is claimed as the First Algorithmic Repricing Solution for Amazon Marketplace.
So there could now be competing algorithms deciding on pricing.
More on Mindful Money
Sign up to our daily newsletter and you could win an Amazon Kindle Touch.
- Greece submits proposal to stave off Grexit fears
- British American Tobacco ordered to pay £5.5bn damages to smokers: what it means for investors
- As many as 3,000 families a year forecast to lose Inheritance Tax break
- Drivers warned they must notify their insurer if they modify their vehicle or risk invalidating their policy
- Hargreaves launches ready-made portfolios for investors not seeking advice
- Men named 'Duncan' and women called 'Charlie' are most likely to crash their cars
- Pension freedoms dash for retirement cash collapses, as savers want to examine their retirement options
- Greece's debt deadline looms
- The top five most bizarre caravan insurance claims
- Mortgage approvals see biggest monthly leap since 2009