Patrick Watson asks whether the internet, whose transparency was supposed to empower consumers, is doing the opposite

Patrick Watson asks whether the internet, whose transparency was supposed to empower consumers, is doing the opposite

By Patrick Watson*

American stores are dropping like flies. More than 8,600 retail locations could close their doors in 2017, according to a recent Credit Suisse report.

On the other hand, people are still shopping, just in different ways. And the shift from brick-and-mortar stores to “online malls” has many consequences we don’t even understand yet.

For example, it’s becoming clear that online retailers aren’t shy about using our own data against us. What do you call a market in which the price you pay depends on who you are?

Shopping the Shoppers

On the surface, online shopping seems to favor shoppers. It’s easy to compare prices, shipping cost and time, sales tax, and other factors to get the best deal. Retailers have to offer lower prices to make you buy, right?

Well, maybe. Last week, I read a fascinating Atlantic Monthly article by Jerry Useem: How Online Shopping Makes Suckers of Us All.” It’s about the sophisticated ways online merchants adjust and even personalize prices to maximize revenue. A quick excerpt:

“I don’t think anyone could have predicted how sophisticated these algorithms have become,” says Robert Dolan, a marketing professor at Harvard. “I certainly didn’t.” The price of a can of soda in a vending machine can now vary with the temperature outside. The price of the headphones Google recommends may depend on how budget-conscious your web history shows you to be, one study found. For shoppers, that means price—not the one offered to you right now, but the one offered to you 20 minutes from now, or the one offered to me, or to your neighbor—may become an increasingly unknowable thing. “Many moons ago, there used to be one price for something,” Dolan notes. Now the simplest of questions—what’s the true price of pumpkin-pie spice?—is subject to a Heisenberg level of uncertainty.

Which raises a bigger question: Could the internet, whose transparency was supposed to empower consumers, be doing the opposite?

In other words, online retailers are now comparison shopping us. Amazon and others are learning how to dynamically adjust prices based on where you came from, what you bought in the past, where you live, what time of day it is, and even the current weather in your zip code.

Dynamic Pricing

If you ever took an economics class, you know about the law of supply and demand. It’s how the market sets prices. Low supply and high demand lead to higher prices. High supply and low demand push prices down. That applies whether the goods are groceries, books, stocks, or anything else. Every product has an equilibrium price.

Online retailers are pushing this idea to its limits. They’ve figured out that consumer demand is both individualized and dynamic.

Not every person demands a product with equal intensity. Maybe you really want that history textbook because you are enrolled in a class that uses it. You will pay more than someone who just wants to accessorize their living room.

Your demand also changes with time. You want the book more now than you did last month, before you enrolled in the class. You won’t want it at all after the semester ends.

Since the emergence of online malls, it’s become much easier for retailers to manipulate your demand. They used to do this with limited-time discounts, buy-one-get-one offers, etc. But they all had a common basis in the product’s “list” price, which didn’t change very often.

No More Equilibrium

Just like stock prices change by the minute, online shopping is moving toward a similar pattern… but even more chaotic.

Stocks still have consolidated tickers—everyone can see the most recent price and decide whether to trade or not.

In retail, the concept of a “list price” may lose its meaning entirely. Your price for a widget will be different from my price, and both our prices could change again in a few minutes.

Who wins in that environment?

A free and open market ought to be a more efficient one, if everyone has access to the same information at the same time. But that isn’t the case now, and it may be even less so in the future.

“Equilibrium” in this context may mean we never know what the true value of a given product is. We’ll only know how much we paid.

However, I think the “digital malls” connecting online retailers and customers will perform well as the new environment takes shape.

Amazon is one such company. Many other retailers use the Amazon web platform and its logistical network to power their online sales.

My co-editor Robert Ross and I recently recommended another online retailing technology provider in Macro Growth & Income Alert. We told subscribers how to sell put options for both current income and a chance to buy the shares at a lower price.

That’s only the latest in what should be a string of opportunities as consumers and retailers adjusts to a new landscape. It will be a wild but interesting ride.


*Patrick Watson is senior economic analyst at Mauldin Economics. This article is from a regular Mauldin Economics series called Connecting the Dots. It first appeared here and is used by interest.co.nz with permission.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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15 Comments

Is it just me, or did anyone else get to the end of this and wonder why they had bothered to read it?

the point of the article was to let us know how it worked. You might know already, but lots don't

The thing is can we as consumers use this against the sellers? One thing I notice a retailer like Amazon can only control the price to me if I have no where else to go. If they think I'll pay $20 more but its $15 cheaper at the next online store they have lost a sale. If Im looking for a widget then I'll have several different techniques to try, straight google, places like pricespy etc.

Leaves me wondering however if aliexpress does the same thing......interesting stuff.

It does suggest a next highly successful app / comparison site will be one that shows the price of goods when coming from different geographies.

VPNs and freight forwarders (friends or companies) could then provide some interesting options for online shopping.

Ahh kind of pointless statement:

“Equilibrium” in this context may mean we never know what the true value of a given product is. We’ll only know how much we paid."

What you paid IS the true value of the product, to you. This is just taking supply and demand theory to a more granular level.

Which is important to optimize profits at an appropriate level of customer satisfaction

Book a return flight originating in New Zealand and you pay more than you would for the same but originating from the other end. Just shows they know their market - which is that New Zealanders are suckers at smart consuming.

No its more like they have a monopoly so can do what they want. In this case if it was me I'd be prosecuting them.

Sat on a flight recently and the girl next to me paid AUD960 Brisbane to Chch return. I on the other hand had paid NZD480 Chch to Bris return.....I booked and paid for mine a week to 10 days out and this girl had booked and paid for hers 7 months out.......both of us had seat plus bag no meals......

Probably just wanted the seats filled.

My parents often book last minute, saves a huge amount.

I suppose it's foreseeing a world where price benchmark sites ( https://pricespy.co.nz/ ) are no longer accurate and become irrelevant. Where my browsing history and stored cookies indicate my love of artisan cheese, I then go to do my weekly shop online at Countdown and cheese is more expensive for me than my neighbour.

If you take it to the extreme's, with no bricks and mortar and the fear every e-commerce shop has dynamic pricing who's to say what the RRP or base price is for an item.

On the plus side it would do away with Briscoe's / Harvey Norman's / Kathmandu 90% off sales that happen every other week

Per my comment above, with the option of VPNs the likes of pricespy might expand to encompass pricing for different geographies. VPNs could then provide a value proposition of allowing their users to shop from different geographical hubs.

Seems to me the retailers are getting too smart. Joe public will then just go bugger this we're not going to play your game.
Needs more KISS principal.

I, too, struggled with the main themes of this article and I will, at some point read the reference article in the Atlantic to see if it changes by view.
My web based shopping experience (and my real life, brick and mortar shopping experience) seems to differ greatly from what is stated in the article. I don't doubt the author's contention that the software exists to set prices based on who am I, but I see no evidence of this in NZ. Instead what I see is the prolific use of "dumb" software to target me. Take my experience the other day, which is typical. I went online to look for a fleece top. Found a price range from $40 to $120. Bought the $40 one. I now get inundated by adds offering me the $120 fleece top. Really? If the software is smart enough to base price on who I am, it should be smart enough to know that I'm not going to pay a ridiculous price like $120 when the same quality items sells for $40. Maybe the people that need more transparency are the business owners who need to know when they are pricing themselves out of the market. My feedback to advertisers? Question the value of the targeted ads you pay for.
Now to the question of supply and demand. I agree that supply and demand should work wrt pricing. So should volume and I see few examples of this when shopping in NZ. The theory goes, that if I, as a retailer, buy large volumes of a product, I should receive a cheaper price and can pass that along to the consumer. I rarely see that at work in NZ. Take my favorite example, dog food. Animates, a large chain in New Zealand, sells a bag of dog food for $20 more than my vet (small, independent, low volume). Why is that? Some may say this is supply and demand at work. The demand at the vet is lower, so price needs to be lower. Could be the reason, but I doubt it. I'm more inclined to take the view that the owners of Animates think it's customers are stupid or lazy or they think they still live in the pre-internet. opaque world of captive audiences, where checking prices involved driving around to stores to find out who had the best price.
Ok, I've gone off track here a bit, but in conclusion, transparency works. Want to target me based on who I am? Bring it on. I'll continue to do comparison shopping and use the transparency of the web to facilitate this.