Algorithmic Pricing On Amazon 'Could Spark Flash Crash' 274
DerekduPreez writes "Sellers on Amazon's retail site are increasingly using high-speed algorithmic trading tools to automatically set prices, which could lead to a malfunction similar to the 2010 flash crash. According to the Financial Times, prices on Amazon's website change as often as every 15 minutes, where sellers are using tools traditionally developed by data miners at banks to ensure that their prices are always below their rivals'. Third-party software is allowing sellers to detect a competitor's price and automatically undercut that price by, for example, £1. However, this could lead to a situation similar to the U.S. flash crash, where algorithmic trading was blamed for stock prices falling to near zero and then bouncing back within 20 minutes." At Slashdot's sister site for Business Intelligence, Nick Kolakowski has some more information on this possibility.
Re:Problem? (Score:5, Informative)
Well, that depends how and when the prizes are determined. If you are browsing a page with article of, say, $2, and it costs $20 as you enter the shop, you're just mislead.
Apart from that, our economics are based on a stabilizing situation. If something is sold too cheap, it will be corrected in due time. If something is sold too expensive, that would be corrected also. In that equilibrium, consumer and producer would meet half-way their self-interest. So in the end, the price is "right".
High-speed trading is an unstabilizing situation, meant to just suck money out of a trade. From a consumer's point of view, the price is now always wrong. Nothing of value is bought with it, and the customers pay dearly for that nothing.
Re:Falling to near zero?? (Score:5, Informative)
Floors are good, but so are ceilings.
Amazon’s $23,698,655.93 book about flies [michaeleisen.org]
Re:Falling to near zero?? (Score:5, Informative)
I've no idea if that's even true; It just makes sense that it would happen.
Re:So what? (Score:5, Informative)
That's called dynamic pricing, and Amazon did it at one point [slashdot.org].
Of course, the problem with dynamic pricing is it relies on the ignorance of the user. As discovered in that article, if you use a different browser or not logged on, it would display a different price than when you went to check out.
And with the proliferation of smartphones and tablets, it's possible someone might browse Amazon and buy on their PC, and realize the price is different. You'd basically need to give everyone a personal ID code to ensure whatever screen they look at shows their own price. Which breaks the moment someone else looks up the item and gets a different price.
Dynamic pricing only works when the user is treated in aggregate (e.g., a vending machine that alters prices based on outside temperature but everyone pays the same), or the user cannot inform themselves of alternative pricing.
It should also be differentiated from preferential sorting - where a person who buys premium products will do a search and be shown the premium products first, then the cheaper ones down the line. Done right, preferential sorting can make a search engine seem "good" at finding stuff the person wants without having to wade through listings of cheaper stuff they don't want.
Re:Big difference. (Score:4, Informative)
In general, Austrians take only one axiom (that humans act in attempts to better their lives), while other schools of economics take several.
Additionally, Austrians recognize the inability to run full-detailed simulations of the economy which give reliable results (The Calculation Problem). I feel if I elaborate any more on the matter, I will do injustice to the Austrian school (I am rude of tongue).
If you would like to learn more about the Calculation Problem with regards to Mises and his explanation of it, I'd recommend reading about it here. [mises.org] I will affix a warning to my previous sentence, that if you are of a delicate political or economic nature, such that you cringe, despair, or evince a developed opinion with regards to the usage of words like 'Socialism', as most Americans are either for or against, you may pass over, or otherwise read the linked text with colored vision; if you are the kind of person is easily inflamed or are prone to confirmation bias, you may save yourself some time and emotional distress by avoiding the reading of the linked text.
Re:Falling to near zero?? (Score:5, Informative)
People who bitch about government regulation behing high barriers to entry are usually just whiny bitches who couldn't succeed in the first place.
This is not true in my experience. Often times people have been making a perfectly viable living doing a certain thing, and then excessive regulation pushes them out of the market so the big players can take over. Larger players are the ones with the lobbyists to help define the red tape, and the money/lawyers to spend on navigating it.
Go try to harvest oysters or clams in a Florida harvesting area. The startup capital is a bucket and some mud-boots. The regulatory hoops you much jump through to get that shellfish harvesting certificate are insane. The direct costs paid to the State are only a couple hundred dollars, but you have the cost of inspections (for the "washing facility", aka a sink), the cost of training, the cost of the government mandated tags that denote the area, condition, and purpose of the shellfish (different requirements for raw, on the half-shell oysters vs the ones for cooking vs ones for freezing vs ones for personal consumption), then the cost of yearly assessments. These costs can easily add up to dozens of thousands of dollars, and are considerably higher than the startup costs.
With all due respect, people that say things like that don't seem to have any experience doing something that is regulated, and therefore talk out of their ass.
110,000 Independent Gas Stations (Score:4, Informative)
The gas station example is specifically not horseshit. The number of independent gas station owners dropped dramatically after a number of insane regulations that required $100K's of dollars of unnecessary retrofitting.
From the WSJ:
Until the past five years or so, many gas stations were owned by the big energy companies. But most have since sold off their portfolio of stations to focus on more profitable areas, such as wholesale fuel sales.
Since 2008, for instance, Exxon Mobil Corp has sold more than 95% of the roughly 2,000 stations it owned, and it plans to sell the rest by year-end. Chevron Corp had 491 company-owned stations at the end of 2011, down from 1,348 in 2001.
Most U.S. gas stations are owned by tens of thousands of individual operators, many of whom have one or more locations. These independent station owners typically buy their fuel from distributors for the major fuel wholesalers like Exxon Mobil and Chevron. The regional distributors own or hire tanker trucks that go from the so-called racks at gasoline terminals to storage tanks at the individual stations.
The station owners, in turn, set their gas prices for consumers so that the average markup, or gross margin, on gas is typically around 15 cents or 16 cents a gallon.
Because consumers these days use plastic even for spontaneous small purchases such as gas, snacks and smokes, the station owners say their margins are eroding.
Frank Reluzco, owner of an Exxon station, auto-repair business and convenience store in Frederick, Md., said that roughly 90% of his sales are paid by credit card today, compared with about 75% five years ago. "It costs so much to fill a tank right now; no one's going to carry around that much cash."
Increased competition from supermarkets and warehouse clubs is also a challenge. Issaquah, Wash.-based Costco Wholesale Corp added its first gas pumps alongside one of its stores in Tucson, Ariz., in 1995.
Pain at Pump Is Hitting Gas Stations [wsj.com] [April 5]