Are Online Shopping Algorithms Colluding the Prices?

By CIOReview | Wednesday, June 5, 2019

FREMONT, CA: While shopping online, it’s rare to witness a change in the price of a product within a short period. But as of recent, the trend is changing. The retailer’s pricing algorithm might be the underlying reason for the altered price.

When deciding a product’s price, marketers consider the cost of similar products and the value of the product to the buyer. But recent technological advancements have transformed the conventional methods. Pricing algorithms are setting the price of products within a digital setup. The algorithms collude with each other for maximizing profit that will be against the consumer’s interest.

Earlier online shopping led to a competitive environment that forced marketers to keep the prices at check. But with the current revenue management pricing systems, online retailers can predict demand using market data and set prices accordingly for maximum profit.

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Hospitality and tourism industries are extensively using these algorithms primarily because the hotels have fixed price and perishable inventory, like food. The revenue management system allows the hotels to deduce ideal room rates based on the available market with the help of sophisticated algorithms.

The primary threat to the consumer’s interests come with dynamic pricing. It allows the algorithms to instantly adjust the price of goods or services as a reaction to the slightest change in supply and demand. The practice has led to consumers to become comfortable with the idea of instant price fluctuations, even several times a day.

The algorithms use machine learning (ML) to learn the economic dynamics of the market, to understand supply and demand, and consumption patterns. They also track the price points of other sellers and instantly increase the price of a product if another firm does so.

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Monitoring competitor’s prices and responding to price change is a common and legal practice among the businesses. But with algorithmic pricing systems, marketers are setting prices to unreasonable levels. From the business perspective, it’s a great way to maximize profit and create a non-competitive market environment as all the players are using the same algorithm, while the consumers have to pay the same irrespective. Moreover, non-competitive market discourages innovations as the marketers are assured of the profits, which will result in lower productivity and lesser economic growth.