Researchers crack the Amazon price puzzle

From Northeastern University.

From Northeastern University.

We have mixed feelings about online megaretailers like Amazon.

Their predatory pricing kills community-based businesses and reduces labor to role of automata.

But on the other hand, those same predatory prices are virtually irresistible, especially in a society where worker paychecks are steadily losing ground.

But once you’re seduced by the low prices, the rule of caveat emptor still applies.

That’s because the low price you see often isn’t the lowest you can get.

And now some academics have cracked the puzzle of just how to get that lowest price.

From Northeastern University:

You need a new Chrome­book com­puter, so you go online to Amazon and start your search. You click on an attrac­tive item on the product page—an Acer 11.6-Inch, CB3-111-C670. Up pops the computer’s price ($188.88, new, last Friday morning) and, to the right, the ubiq­ui­tous “buy box,” beck­oning “Add to Cart.” You oblige.
Had you looked more closely, you might have done better.

New research [open access PDF] led by Northeastern’s Christo Wilson, assis­tant pro­fessor in the Col­lege of Com­puter and Infor­ma­tion Sci­ence, reveals that Amazon is much more likely to fea­ture sellers in the buy box who use an auto­mated prac­tice called algo­rithmic pricing, even though their prices may be higher than those who don’t. Algo­rithmic pricing read­justs product prices in real-time using com­puter algo­rithms, reacting to vari­ables such as com­peti­tors’ changing prices and sellers’ inven­tory levels. The research was presented at the 25th Inter­na­tional World Wide Web Conference.

That Acer is a case in point: A tiny link below the buy box takes you to 107 other sellers whose prices for the same new machine start at just $149.

When you go to a page on Amazon, what you’re seeing is typ­i­cally not the lowest price avail­able,” says Wilson. “For example, we found that 60 per­cent of sellers using algo­rithmic pricing have prices that are higher than the lowest price for a given product. Now, 70 per­cent of the time they only raise the price by $1, but there are many cases where the price increase is on the order of $20 to $60. So you really have to take that extra step and click through to the list of all sellers for a given product if you want to find the lowest price.”

Pick your strategy

If algo­rithmic pricing sounds too sophis­ti­cated for inde­pen­dent sellers, it’s not: For a fee, any one of Amazon’s more than 2 mil­lion third-party sellers can easily sub­scribe to an auto­mated pricing ser­vice through com­pa­nies such as Sellery, Feed­visor, and Repri­ceIt, becoming so-called algo sellers. They then set up a pricing strategy by choosing from a menu of options like these: Find the lowest price offered and go above it (or below it) by X dol­lars or Y per­centage, find Amazon’s own price for the item and adjust up or down rel­a­tive to it, and so on. The ser­vice does the rest.

Read the rest, after the jump. . .

Amazon has a rel­a­tively low number of algo sellers—from 2 to 10 per­cent,” says Wilson. “But they cover almost a third of the best-selling prod­ucts offered by out­side mer­chants, so the impact is large.”

The researchers arrived at their find­ings by ana­lyzing the algo­rithmic pricing strate­gies of the 500-plus third-party sellers on Amazon who offered any of the 1,640 best-selling prod­ucts over a period of four months. Need­less to say, the con­stant tracking of com­peti­tors’ changing prices led to remark­able volatility.

On average, the prices of about one-third of the prod­ucts the researchers tracked—333 out of 1,000—changed at least once a day, prices of 170 prod­ucts changed more than three times per day, and 50 changed more than eight times per day. “The prices of prod­ucts offered by algo sellers were almost 10 times more volatile than prod­ucts with no algo sellers,” says Wilson.

The buy box black box

Amazon uses its own pro­pri­etary algo­rithm to select who gets in the buy box on any given page at any given time—or, as Wilson puts it, “which seller is going to be ordained and put onto the page.” But he and his col­leagues gleaned some hints.

A low price is part of the mix, but so are per­centage of pos­i­tive reviews and having Amazon Prime status. Con­sid­ering feed­back does ben­efit cus­tomers, says Wilson, but there are limits. “Sup­pose that you have 99 per­cent pos­i­tive feed­back and I have 95 per­cent pos­i­tive feed­back. Our research shows that you can charge a sig­nif­i­cantly higher price than I can and you will still be selected for the ‘buy box.’”

Bottom line, he says, “this is very much a winner-take-all system. If you’re that one lucky seller who gets the ‘buy box,’ you make all the sales. So if you want to be com­pet­i­tive for the top-selling prod­ucts, you pretty much have no choice: You have to be an algo­rithmic seller.”

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