On Friday the New York Times ran an article on how online retailers constantly adjust prices to match their competitors. Their ability builds on many tools from computer science, from networks to algorithms, not unlike airlines and hedge funds. But is this good for the consumer?
Suppose I work for bestbuy.com and have a television priced at $500, which matches the price on amazon.com. If I lower my price to $450, than I can expect Amazon to do the same. I've gained little from lowering the price, only $50 less dollars than I had before. Likewise Amazon has little incentive to lower their price. This hypercompetition can actually lead to collusion without colluding. Hal Varian talked a similar theme of price guarantees in a 2007 Times viewpoint.
In practice, companies still lower their prices but as networks get faster, algorithms get smarter and more people shop online, we might actually see higher prices and less competition, which I believe is already happening with the airlines.
Is there another example where the outcome isn't good for the consumer? Consumers are happy to pay $50 less.
ReplyDeleteAirline prices are going up due to increases in fuel price and airport taxes, not hyper-competition. Many airlines are barely breaking even, so it is difficult to argue that they are artificially inflating the price. In fact, Air Canada recently cancelled some of its scheduled flights so that they could charge more for the remaining ones. Clearly, they can't have much control over the prices that their tickets sell for if they have to do this.
ReplyDeleteYou may or may not have seen this related (hilarious) story before:
ReplyDeletehttp://www.michaeleisen.org/blog/?p=358
where the price of a biology textbook reached 23 million dollars due to competitive algorithmic pricing...
The point of competition is to get the price of a good equal to its cost of production (and distribution). You assume Amazon and Best Buy can always match each other -- you assume their costs are the same. If that's true then quite right, there's no possibility of real competition between them. If one does have a cost advantage, then it can permanently lower its prices and it will sell more units and make more money. The rate of information flow through the system doesn't change anything.
ReplyDeleteI always just wonder, how the great hedge fund organization, Renaissance Technologies achieved great heights in the midst of extreme international competition and remained stable even in the years of recent economic breakdown by employing mathematical equations and complex optimization techniques.Almost a half of their research employees are PhDs and I don't often read about the techniques used by them to achieve such feat. Can anyone clarify my doubt about the machine learning concepts and mathematical theories used by them? I am a big fan of this organization and Prof. Simmons himself.
ReplyDelete>Likewise Amazon has little incentive to lower their price.
ReplyDeleteIf they can get away with pricing a good lower than their competitor can afford, they have an excellent incentive - to drive the competitor out of the market. If they can't, then the good is obviously priced as low as possible. Then the reason they're all colluding on price is that the perfect market price has been found.
I believe this is esentially Carl's point.