Price is what you pay - value is what you get

Parents shopping for the Christmas must-have toys, such as the Furby toy, may be paying more online than in their local retail stores. The price of a product, for example, on Amazon’s UK website can change more than five times a day as aggressive ‘third-party’ sellers capitalise on this year’s most popular Christmas toys. As the supply of a product falls, such as for in-demand Christmas toys, prices tend to increase.

Third-party sellers on Amazon change their prices depending on the demand for a product and in some cases customers are being charged substantially more than the manufacturer’s recommended retail price. Recent demand for Furby toys exceeded availability and as a result the price of a the Furby on the UK Amazon site soared from £71.70 to £84.95 within six hours, despite having a recommended price of just £59.99. The Nerf N-Strike Elite Hail Fire, a toy gun, priced at £43.99 on Wednesday, rose to £49.11 on Thursday, while the same product was on sale at a major supermarket chain for £33.74. The Lego Friends Olivia’s House rose from £89.99 to £92.49 – more than £20 higher than the manufacturer’s recommended price.

Consumer groups say that while shoppers visit Amazon in the hope of getting a bargain, they may not realise that they face large price fluctuations among third-party vendors who sell products on the Amazon site:

Most popular toys are being sold for a higher price than the manufacturer recommends
Third-party sellers on the Amazon website change their price depending on supply and demand
As online retailers prepare for Cyber Monday, customers search for the best deals
Amazon says it does not price its own goods in that way

Methods for automatic planning and price optimisation are becoming increasingly important in retailing. Third-party sellers on Amazon use complicated algorithms to price items according to supply and demand. The methods are based primarily on regression analysis for estimating price elasticity combined with reinforcement learning.

American software company Teikametrics provides services to third-party sellers. Chief executive Alasdair McLean-Foreman told a UK newspaper:

‘In the same way that you have stock-market trading techniques, we’ve built the same type of software for retailers. You might not want to sell now; you might want to wait until a competitor who is willing to sell at a very low price has sold out.’

However, other retailers said some soaring prices for the most popular items are ‘outrageous’. Customers can attempt to battle against the fluctuating online prices by using websites such as decide.com, which track items on Amazon and notify people when the price goes down. Mike Fridgen, chief executive of decide.com, said:

‘Prices can change dozens of times in any given day and that is very confusing for customers. So we’re also using data and algorithms to help consumers fight against that to get a better deal and let them decide when to press the trigger at the best price.’

Two million merchants and individuals use Amazon’s platform to sell goods, and new data-mining software developed for banks means that some can automatically adjust their prices every 15 minutes. So-called ‘robo-pricing’ means that sellers can set their prices below those of their competitors. Using third-party software, Amazon sellers can set rules to ensure their prices are always, for example, $1 lower than their rivals. More complex algorithms can analyse data to set pricesat a level most likely to secure a prominent position on the site.

However, it can also lead to malfunctions: a genetics book, The Making of a Fly, was inadvertently offered for more than $23 million in 2010, according to blogger Michael Eisen. In more serious cases, prices have fallen to very low levels, risking merchants running out of stock or going bust. Amazon has banned the setting up of fake accounts specifically to drag prices down so that merchants can buy up rivals’ stock and attempt to monopolise a market.

Similar algorithm-based trading was responsible for a 2010 period of stock market instability. Prices fell to almost nothing and then surged back within the space of 20 minutes.

Budget airlines also use price algorithms. Oren Etzioni was on a plane with some friends when he realized they had all paid less for their tickets than he did. When, he came home to his computer lab at the University of Washington, got his hands on some fare data, and plugged it into a few basic prediction algorithms. He wanted to see if they could reliably foresee changes in ticket prices. It worked and not only did the algorithms accurately anticipate when fares would go up or down, they gave reasonable estimates of what the new prices would be.

Etzioni’s prediction model has grown far more complex since then, and the company he founded in 2003, Farecast, now tracks information on 175 billion fares originating at 79 US airports. The database knows when airline prices are going to change and has uncovered a host of other secrets about air travel, including some of the following:

The lowest price tends to hit between eight and two weeks before departure. Buying tickets farther in advance usually doesn’t save money.
The rule fails during peak demand: Friday departures for spring break, and Sunday returns during the summer, Thanksgiving, and Christmas. For these, now is never too early.
50% of reductions are gone in two days.
Behavioural economists call it framing: If last year’s $200 flight is now $250, you’ll probably find that too dear and won’t buy. Everyone else is thinking the same thing. So when airlines hike the price of a route, they often have to cut rates later to boost sales.
Flights on Friday, Saturday, and Sunday can easily cost $50 more than those midweek.
At the end of holidays, there’s usually a stampede to the airport. One more day can lead to substantial savings
Price drops usually come early in the week

The row over fluctuating prices has come on the back of investigations by consumer watchdogs over the process of ‘personal pricing’, where airlines and online retailers are accused of monitoring shoppers and their habits to charge personally tailored prices. This is not a new accusation. Amazon, for example, found itself in troubled waters as long ago as 2000, when it was found to be charging regular customers more than first-time buyers, who were believed to be less brand-loyal. There are also suspicions that airline prices change according to the numbers looking at the price for a flight and whether an individual shopper has previously checked this particular fare. Customers have found that prices have risen after they have checked a price, but when ‘cookies’ (software that tracks browsing history) are deleted, the fare returns to the original price. The sale of data on consumer buying habits to focus marketing offers is also under investigation by data protection agencies.

IB Style questions

1. Define the following terms:

E-commerce
Retailer

2. Explain the potential areas of conflict between Amazon’s stakeholders
3. Analyse the relationship between price elasticity and sales revenue
4. Evaluate the ethical and marketing issues asociated with Amazon’s use of third party sellers

Sources:

Image: Flickr