Algorithmic Pricing On Amazon 'Could Spark Flash Crash'

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.

Problem?

[Bigby]

And that is a problem, why? Just like in the flash crash, some people lost money and some people got big deals. If you don't want it to affect you, don't get involved. In both cases, it hurts the organizations and institutions more than an individual trader/buyer/seller.

Re:Problem?

[space_in_your_face]

From TFA: Jack Sheng of eForCity, which sells electronics on Amazon, warned of the dangerous impact algorithmic pricing could have on the retailer’s prices: “If something is mispriced down to $1, your inventory can be cleaned out in no time.”
I hope you put a minimum price on every item for which an algorithm decides the price. If so, I don't see the problem if someone "clean out your inventory". It means a lot of sales at a price you agreed...
OTOH, if you didn't put a minimum price, you just get what you deserve.

Re:Problem?

[darkwing_bmf]

This is the kind of problem that is solved with natural selection. The companies too stupid to put in a minimum price will go out of business and the remaining companies will be stronger.

Re:Big difference.

[Anonymous Coward]

Go read an Austrian economics book. Speculation is useful and voluntary. It's nothing at all like gambling unless you think betting on red changes the odds that red will come up in an honest casino.

Re:Falling to near zero??

[Bob9113]

Because everyone automatically undercutting their competitors by a few cents over and over until everyone is selling at cost and all but a couple players eventually have to shut down because they can't afford to run a profitless business forever, whereupon the few remaining players can finally raise prices ... isn't effectively collusion or a market distortion.

Your comment is exactly correct, but I get the feeling you are trying to be snarky. You also fail to mention the next step after the remaining players raise prices: New competitors enter the market, undercut the would-be oligarchs, and the process starts all over again. The lower the barriers to entry (and with Amazon, they are very low (except that Amazon is the sole supplier (but I digress))), the lower the cost for the new competitors to jump in.

Eventually, equilibrium is reached at the point where the cost of entering the market plus the time value of the startup money is just covered by the profit over the average lifespan of a new entrant. It is a naturally self-regulating system that seeks the optimal market price of consumer goods and constantly adjusts for the changing time value of money. Pretty cool stuff, right?

Re:So what?

[timeOday]

I like to accumulate things in my Amazon "shopping cart" sometimes over a period of weeks until I have enough for free shipping, or finally decide whether I really want something. But I have found this increasingly nonproductive as prices jump all over the place constantly. Most of what I put in my basket is "no longer available from seller" or the price goes up a little a few days later.

I'm not saying I've being cheated, but I'm enjoying Amazon less as it's becoming less of a storefront and more of a bazaar-type experience, with wildly varying shipping costs and return policies from item to item. I might as well go on ebay, or else a more conventional storefront like newegg if I don't want the hassle.

Re:Falling to near zero??

[s73v3r]

New competitors enter the market, undercut the would-be oligarchs, and the process starts all over again.

Except this isn't guaranteed to happen. And should someone try it, the oligarchs are established players in the market, with access to far greater amounts of resources than the startup. Hell, most of the time one of the oligarchs just buys the startup.

Re:Falling to near zero??

[s73v3r]

The scenario you're describing is usually only common when there are HIGH BARRIERS TO ENTRY, which, more often than not, are CREATED BY GOVERNMENT REGULATION.

Horseshit. People who bitch about government regulation behing high barriers to entry are usually just whiny bitches who couldn't succeed in the first place. Government regulation is rarely among the most significant barriers to entry, unless you're talking about something extremely dangerous or destructive, like strip mining or nuclear power. The biggest barrier to entry is more often than not, startup capital required, and the presence of existing players who would be able to put their prices lower than yours and push you out of the market.

Re:Falling to near zero??

[dell623]

Even if the price of selling in the market is low, the price of production, especially the capital costs are often not low. And once players are driven out of the market, the capital costs need to be paid all over again for any new entrant. Which means that the monopoly or duopoly parties can temporarily cut prices to make it uneconomical for any new parties to enter the market. And so no new competitors enter the market.

So no, it's not a naturally self regulating ideal system. At least everyone stopped pretending any marxist/socialist system is 'ideal', somehow free marketeers can still get away with making that absolutist claim.

Re:Big difference.

[Anonymous Coward]

Austrian economics is fairly common among crackpots, such as Ron Paul.

Re:Big difference.

[Anonymous Coward]

It's also popular with Nobel Prize winners.

Re:Falling to near zero??

[bhlowe]

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. Yes, big oil companies more easily afford larger regulatory expenses, but the regulations resulted in less competition and higher prices at the pump. But independent gas stations used to be the norm, now it is the exception... and oil companies and regulations make it difficult to compete--making it, for instance, illegal to purchase gasoline from another state, or requiring that a gas station owner buy gas from a particular refinery.