July 9, 2012

Amazon Utilizing ‘Robo-Pricing’ To Constantly Change Prices

Michael Harper for redOrbit.com - Your Universe Online

Like any other merchant, those who do business on Amazon.com always want to have the lowest prices possible. However, when you´re competing against millions of other merchants, it´s hard to stay up-to-date with your prices. This is where some advancements in high-speed trading tools come into play. Using a similar technology, Amazon offers a third-party software which allows merchants to automatically undercut their competitors by a predetermined amount. Prices on Amazon.com can change as often as every 15 minutes. As such, this software can help merchants stay competitive, even if they aren´t able to constantly monitor their storefronts.

While this seems like a good idea in theory, this so called “robo-pricing” has become a source of contention for many who use the service. According to a report in the Financial Times, some users are complaining that they not only have to compete against Amazon´s prices, but that Amazon also has access to their sales information and prices, thanks to the data mining software. Using the third-party software, Amazon merchants can set rules to ensure they´re always below a competitors price. For example, a merchant can set a rule to always be $1 below their competitor. Therefore, whenever their competitor changes their price, the merchant´s price will automatically be changed to be $1 less.

Like any piece of software, however, there´s also the chance of an occasional glitch. Take, for example, the case of the $23 million book about Genetics, The Making of a Fly.

Originally published in 1992, The Making of a Fly is now out of print. Last April, a student went to buy the book from Amazon and noticed something odd. Amazon showed there were 17 copies of the book for sale: 15 of which were used and priced at $35.54, 2 of which were new and priced at $1.7 million (+$3.99 shipping). As detailed by blogger Michael Eisen, two merchants were selling a copy of the book and, using the third-party software to remain competitive, got caught in a seemingly unending upwards spiral. Amazon finally took notice of the situation and fixed it, but not before the price had been raised to $23 million.

A bit more troublesome, this same algorithm is also to blame for the 2010 “flash crash” when U.S. stock prices fell to nearly zero before returning to normal 20 minutes later.

Though meant to give merchants an ability to be ever relevant with their Amazon pricing, robo-pricing has also allowed some sellers to create false accounts which set their prices abnormally low in order to drive the competition down. Once their competition is crippled, the merchant´s legitimate store is able to reap the rewards. Though this kind of behavior is against Amazon´s rules of conduct, it is still a cause for concern for many merchants.

This kind of algorithmic approach to e-commerce could cause some to go bust before they realize a problem exists.

Speaking to the Financial Times, Jack Sheng of eForCity, an electronics seller on Amazon, attested to this ever-present danger.

“If something is mispriced down to $1, your inventory can be cleaned out in no time,” he said.

As for Peter Lawrence, author of The Making of a Fly, he can now proudly proclaim that the world´s number one online retailer once valued his book at $23 million, plus $3.99 shipping.