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How Online Shopping Makes Suckers of Us All

28 April 2017

From The Atlantic:

As christmas approached in 2015, the price of pumpkin-pie spice went wild. It didn’t soar, as an economics textbook might suggest. Nor did it crash. It just started vibrating between two quantum states. Amazon’s price for a one-ounce jar was either $4.49 or $8.99, depending on when you looked. Nearly a year later, as Thanksgiving 2016 approached, the price again began whipsawing between two different points, this time $3.36 and $4.69.

We live in the age of the variable airfare, the surge-priced ride, the pay-what-you-want Radiohead album, and other novel price developments. But what was this? Some weird computer glitch? More like a deliberate glitch, it seems. “It’s most likely a strategy to get more data and test the right price,” Guru Hariharan explained, after I had sketched the pattern on a whiteboard.

. . . .

The right price—the one that will extract the most profit from consumers’ wallets—has become the fixation of a large and growing number of quantitative types, many of them economists who have left academia for Silicon Valley. It’s also the preoccupation of Boomerang Commerce, a five-year-old start-up founded by Hariharan, an Amazon alum. He says these sorts of price experiments have become a routine part of finding that right price—and refinding it, because the right price can change by the day or even by the hour. (Amazon says its price changes are not attempts to gather data on customers’ spending habits, but rather to give shoppers the lowest price out there.)

. . . .

It may come as a surprise that, in buying a seasonal pie ingredient, you might be participating in a carefully designed social-science experiment. But this is what online comparison shopping hath wrought. Simply put: Our ability to know the price of anything, anytime, anywhere, has given us, the consumers, so much power that retailers—in a desperate effort to regain the upper hand, or at least avoid extinction—are now staring back through the screen. They are comparison shopping us.

. . . .

“I don’t think anyone could have predicted how sophisticated these algorithms have become,” says Robert Dolan, a marketing professor at Harvard. “I certainly didn’t.” The price of a can of soda in a vending machine can now vary with the temperature outside. The price of the headphones Google recommends may depend on how budget-conscious your web history shows you to be, one study found. For shoppers, that means price—not the one offered to you right now, but the one offered to you 20 minutes from now, or the one offered to me, or to your neighbor—may become an increasingly unknowable thing. “Many moons ago, there used to be one price for something,” Dolan notes. Now the simplest of questions—what’s the true price of pumpkin-pie spice?—is subject to a Heisenberg level of uncertainty.

. . . .

The Quakers—including a New York merchant named Rowland H. Macy—had never believed in setting different prices for different people. Wanamaker, a Presbyterian operating in Quaker Philadelphia, opened his Grand Depot under the principle of “One price to all; no favoritism.” Other merchants saw the practical benefits of Macy’s and Wanamaker’s prix fixe policies. As they staffed up their new department stores, it was expensive to train hundreds of clerks in the art of haggling. Fixed prices offered a measure of predictability to bookkeeping, sped up the sales process, and made possible the proliferation of printed retail ads highlighting a given price for a given good.

Companies like General Motors found an up-front way of recovering some of the lost profit. In the 1920s, GM aligned its various car brands into a finely graduated price hierarchy: “Chevrolet for the hoi polloi,” Fortune magazine put it, “Pontiac … for the poor but proud, Oldsmobile for the comfortable but discreet, Buick for the striving, Cadillac for the rich.” The policy—“a car for every purse and purpose,” GM called it—was a means of customer sorting, but the customers did the sorting themselves.

. . . .

Thomas Nagle was teaching economics at the University of Chicago in the early 1980s when, he recalls, the university acquired the data from the grocery chain Jewel’s newly installed checkout scanners. “Everyone was thrilled,” says Nagle, now a senior adviser specializing in pricing at Deloitte. “We’d been relying on all these contrived surveys: ‘Given these options at these prices, what would you do?’ But the real world is not a controlled experiment.”

The Jewel data overturned a lot of what he’d been teaching. For instance, he’d professed that ending prices with .99 or .98, instead of just rounding up to the next dollar, did not boost sales. The practice was merely an artifact, the existing literature said, of an age when owners wanted to force cashiers to open the register to make change, in order to prevent them from pocketing the money from a sale. “It turned out,” Nagle recollects, “that ending prices in .99 wasn’t big for cars and other big-ticket items where you pay a lot of attention. But in the grocery store, the effect was huge!”

The effect, now known as “left-digit bias,” had not shown up in lab experiments, because participants, presented with a limited number of decisions, were able to approach every hypothetical purchase like a math problem. But of course in real life, Nagle admits, “if you did that, it would take you all day to go to the grocery store.” Disregarding the digits to the right side of the decimal point lets you get home and make dinner.

Link to the rest at The Atlantic and thanks to Nirmala for the tip.

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12 Comments to “How Online Shopping Makes Suckers of Us All”

  1. Don’t the prices of certain things always go up just before, or as, demand increases? Like gasoline in summer (partly due to blending, partly due to???), I’d be surprised if the prices for certain items didn’t go up near well-known peak-demand times. That’s not a great example to use to open an article about set vs. variable pricing.

    • The article noted that this is happening – just not on the time scales that we are used to. Like a lot of things in this brave new world, prices are being adjusted on a minute-to-minute basis, not days, or weeks, or seasons.

      However, I think it is rather obvious that the “profit maximization” algorithms being used by many e-tailers are far too sensitive, and are using inappropriate time spans for analysis of the price/demand ratios. Many of them are likely losing net profit over the long term – which is still what counts the most.

      • However, I think it is rather obvious that the “profit maximization” algorithms being used by many e-tailers are far too sensitive, and are using inappropriate time spans for analysis of the price/demand ratios.

        Not sure how that is obvious.

        Price changes over a short time period eliminate many changes in variables that can affect purchases over a longer period.

        This works best for high volume items. The seller can actually construct a demand curve from the data.

  2. Never mind how easy it is to delete your browsing cookies/history, or even try a different browser to see if there’s a price difference. (And I’d expect this more for airline fares and hotel rooms than I would something as easy to notice as the price of Bobby’s Baked Beans on Amazon.

  3. A few years ago I noticed that eBay gave me different “buy it now” prices depending on what web browser I used. I don’t know if they were going off the browser ID or cookies.

    The difference in prices was around 5%; not huge, but noticeable.

  4. Sooner or later, you reach a certain point where trying to save a few bucks on a given product—indeed, on every given product—costs more in terms of effort than the actual amount you probably save is worth.

    XKCD puts it this way.

  5. I find it ironic that pricing is reverting to a bazaar where every price is negotiable and only the naive accept the posted price. Reminds me of the negotiation between Vizzini and Westley in Princess Bride.

  6. Of course, something else this is similar to is the stock market, as prices are always fluctuating there, too. And the stock market has been, at least for a few decades, considerably more automated than markets for ordinary goods. (Witness all the stories of this stock market crash or that being caused by a computer glitch or someone hitting the wrong button.)

    Is there a connection, do you suppose? Hmm.

    • The big difference between securities markets and those for other goods is that both bids and offers are automated in security markets. In markets like Amazon, only the offers are automated. That gives Amazon complete control of prices.

      • Well, there are sites like camelcamelcamel that will at least semi-automate bids—they’ll tell you when the price falls below the amount you specify, so you can wait ’til then to buy.

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