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Why Am I Paying $60 for That Bag of Rice on Amazon.com?

Dynamic pricing algorithms on Amazon aren’t just about supply and demand

Photo: Emanuele Cremaschi/Getty Images
This article was originally published on The Markup
This article was originally published on The Markup

How Does Dynamic Pricing Work?

Dynamic pricing (or algorithmic pricing) relies on algorithms that can synthesize lots of information about the marketplace and then change the price of something based on what’s happening hour to hour or even minute to minute. Dynamic pricing is already common for items like plane tickets and hotel rooms. As the supply gets smaller or if there’s more demand — a big conference is going to be in town that weekend, for example — then prices go up. If demand goes down because, say, a pandemic has stopped people from traveling, then prices drop.

Can Dynamic Pricing Benefit Consumers?

Dynamic pricing can facilitate more competition by accurately reflecting the market and lowering prices for consumers. American Airlines started using dynamic pricing in the 1980s to compete with budget carriers. “There’s no doubt consumers benefited from that,” says John Morgan, a professor at UC Berkeley’s Haas School of Business, who studies pricing in online markets. Those new, lower prices made air travel a possibility for many more people.

Can Dynamic Pricing Hurt Consumers?

One big worry about dynamic pricing is that it could be used for intentional collusion and price fixing or that it could accidentally lead to price fixing when vendors set their algorithms with similar goals. One study even found that artificial intelligence pricing systems learn how to collude and may even be better at doing so than humans.

How Can I Make Sure I’m Paying a Reasonable Price?

During the COVID-19 pandemic, some countries have decided to regulate their markets. France set price controls for hand sanitizer to avoid price gouging. The United Kingdom relaxed collusion laws, allowing supermarkets to set prices on essential items.

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