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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.
Amazon you actually buy/sell something, while stocks are imaginary shits used to make a buck.
I didn't read the article, but presumably the traders wouldn't allow their sale price to drop below the cost of the item plus the marginal expense to sell on Amazon.... so if anything, the prices will drop to at or near the cost of the item... Which is good for buyers, bad for resellers...
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.
I'd like to see what happens when the sellers stop fulfilling orders. Plus how long before someone brings out a sniping tool for customers to purchase items when at the bottom of the curve?
wouldn't someone think to put minimums on this? Much like you specify a maximum on your e-bay bid?
Seems to me if you just set the price of the item to never fall below cost you're never going to have a flash crash... at least one that will bankrupt you.
Each vendor needs to add "is it worth it to let others control our prices" logic to its auto-pricers.
Is it worth it to let a widget normally priced at $10 to drop to $5? to $1? to $0.01?
Except for deliberate loss leaders and other promotional items, you may want to set your short-term "floor" to be somewhere around your actual costs and your long-term "floor" to be a bit higher.
If a competitor undercuts you below where you are willing to let your program auto-price and he keeps it there, you may want human intervention.
Knowledge is how to play a game, intelligence is how to win, wisdom is knowing what game to play.
As long as Amazon forces the sellers to honour the price, then I don't see a problem. Pure market forces will balance the risk/reward for dynamic prices - if one or two consumers get lucky, then that's the cost of doing business.
The biggest mistake that the exchanges made following the flash crash was to cancel the errant trades - if you fuck up the pricing, you need to deal with the consequences. Getting rid of downside risk removes half the equation and blocks any incentive to play smart.
When you have nothing left to burn you must set yourself on fire
The problem is that this actually seems to work the other way. There are reports of certain obscure books being priced at over $1,000,000 because of how this software is actually used in practise.
Who, other than the retailers, care if there is a "flash crash?" Presumably if they lose enough money on flash crashes they will stop with the algorithmic pricing.
Likewise, if I find algorithmic pricing makes prices unattractively high, I'll shop somewhere else. There has to be someone out there selling a product similar to what I want, without the algorithmic gouging.
In short, I think this is one case where we can trust the market to operate correctly.
[Sir Garlon] is the marvellest knight that is now living, for he destroyeth many good knights, for he goeth invisible.
I look forward to finding some great deals on Amazon because of this, it's the sellers own fault if they sell it cheap. I don't see any problem with it, when we are talking about selling physical goods on Amazon.
That was so perfunctory.
Put some feeling into it next time, or don't bother. Can't believe you're making a mod waste valuable points on that lackluster attempt at trolling.
Pure bullshit FUD. Unlike the stock market where losses and gains are infinite and millions of transactions happen automatically every second, the retail market has hard limits and although there are a large number of transactions they are 100% controlled by slow moving consumers. Businesses are not going to sell a product at a loss. That's business 101 and those are concrete limits that are already coded into their algorithms.
I could see a flash explosion or whatever you want to call it where the prices go up to insane levels but then the slow moving consumer has plenty of time to reject those high prices.
This article sounds ridiculous (no I didn't read it).
I've seen these tools used on every type of public online market, from Amazon to WoW's AH. On the former, the more surprising thing was the usage of delivery prices as the actual prices and the item prices as merely a means of getting on top of the board.
think of the gay nigger whales...
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If you think about this for 1min, you will realize that all the sellers have to buy the stuff themselves from somewhere. Obviously they will put in a limit so the price will never go so low that they would make a net loss. An since the buy-prices are not depending on the amazon-sell-prices, no such "flash crash" could possibly ever happen. Of course I do not expect some journalist to think for 1min before writing an article.
But if I buy a paperback copy of "Fifty Shades of Grey" for only $0.10 due to a flash crash in autogenerated stock prices, I metaphysically lose, society loses, civilization loses. The seller still wins, Mephistopheles wins, evil triumphs.
intellectual property law is philosophically incoherent. it is your moral duty to ignore it or sabotage it
This already happens in reverse. Sellers algorithmically set prices, but instead of going lower they go a bit higher. The end result is books that cost millions of dollars.
It also happens without algorithms. Try grabbing a random book off your shelf and see what it's worth on Amazon. Chances are it's worth $0.01 there, because supply is way higher than demand and everybody trying to undercut each other has sent prices to the bare minimum.
Would be nice to have a cron job that detects when the price hits 0.
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From the TFA:
However, some sellers are also creating fake accounts with extremely low prices in an attempt to automatically pull down the price of rival products so that they can buy up their competitor’s stock.
It seems to me that that is a matter for law enforcement. Since they would not actually sell those products in good faith. 'Fraud' is the operative word.
As for an Amazon flash crash. I mean, okay, maybe. But what is the big deal if the price of a Dixon stereo tanks artificially? I mean except, perhaps, for the sales executive in charge of that department. He might get a bollocking or lose his job. However, if a blue chip stock price crashes in some kind of algorithm-fueled artificial negative feedback loop, billions can be lost... and thousands of jobs. So to a "flash crash on Amazon" I say, "Meh." That is, unless it helps me cadge a good deal on a Nexus.
"No fear. No envy. No meanness." Liam Clancy
At least, our office just glances at the current prices and then sets ours a dollar lower. We don't use any fancy third party tools. We find the product, find the price, and undercut it. Our stuff usually sells within 24 hours this way. Then again, we're just selling used IT equipment, one old scanner at a time.
Occasionally living proof of the Ballmer peak.
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.
So what?
If you stalk "deal" sites, you'll happen upon too-good-to-be-true deals once in a while. (Pricing glitches, inadvertently stackable coupons, whatever.) Most of the time, when you jump on them, your order is simply cancelled. Amazon won't let themselves lose big here.
Loved this when I read it the first time. Book prices go up to a million dollars because of this. http://www.michaeleisen.org/blog/?p=358
Paul: Father... father, the sleeper has awakened! - Dune
A little history:
I was the first to automate price wars on amazon marketplace. (True thing.)
A friend had just joined marketplace with a freshly founded internet media sales joint after it opened and two weeks in was adjusting prices of his sale books manually. Like, seriously, clicking through 200 items a night and entering new prices. I told him to stop that nonsense and built an automated scraper, parser and some other tools in Python that would parse the actual websites for each of our articles ISBN and compare our prices to those of the competition (this was before the days of publicly available Amazon APIs), readjust our pricing to the cent accordingly and upload the freshly generated updates once all 200 000 items were parsed.
Orders went from 3 - 5 per day to 120 - 150 per day. My buddies were packaging books and CDs all day while I was sitting there grinning and petting my script and ama-bot setup (still those right here in my project folder :-) ). We made 700 000$ of revenue the first year. A few months in competitors started to do the same - no suprise, the concept is quite obvious to any computer or programming guy - and a ruinous price-war started. My friend went out of business a year later. We could have fine-tuned the automated price adjustments like the marketplace vendors are doing today, such as upping the price of an item only you have got in stock, but after a few bad business decisions my friend didn't want to continue. That was all back in the early 2000s (2003-2004ish).
On the issue discussed:
Before a Flash Crash can happen on sites like amazon marketplace, the vendors involved will either die a painfull death before or finetune their algorythims to a much more complex model. Those still alive and well today have done the latter, and even if updates occur every 15 minutes, I'd bet money that they are still watching the sales and revenue with the appropriate tools and with their own eyeballs, because you can lose thousands within minutes if you don't. You can automate a lot, but you can't automate day-to-day business decisions, especially in such markets.
Bottom line:
Crashes don't happen here, only individual foreclosures for those who don't watch out well enough.
My 2 cents. .... Aaaah, the memories ...
We suffer more in our imagination than in reality. - Seneca
until everyone is selling at cost and all but a couple players eventually have to shut down
Or at least withdraw some product lines. Or a seller might not go for the absolute lowest price on a particular item but instead shoot for breadth of available products, allowing discounts on combining multiple products into one shipment.
whereupon the few remaining players can finally raise prices
Causing the sellers that had withdrawn some product lines to reintroduce those product lines.
Start a company.
That's not for everybody. For one thing, it costs money to learn how to run a business (MBA). For another, I get the impression from several recent Slashdot stories that a lot of startups end up killed by exclusive right trolls, with a legal team unable to bear the cost of being buried in motions.
A flash crash would be great. These sellers are despicable for using this sort of technology and I would love to see them hoisted on their own petard.
Automated buyer watching algorithms could hasten the death of this sort of sales tactic. Assassin buyers and suicide sellers.
Funny you suggest that example...
On Sunday I bought (buy now) an expensive item from a seller whose listing claimed they had four of the item in stock.
On Monday eBay and paypal allowed the seller to back out of the transaction by claiming that they are out of stock. eBay simply does not punish storefront sellers who do not honor their pricing.
So all I have to do is set up a website that sells gold for $1000 an oz, let the spider see and respond to it then buy gold on Amazon in bulk? Cool.
if ( new_unit_price = (unit_cost + min_margin) ) { return (unit_cost + min_margin); }
Because everyone automatically undercutting their competitors by a few cents over and over
I do consider cost, but if it's in the ballpark, I buy from the highest rated reseller that's closest to me (decreass shipping time). At no time do I buy from a low-rated seller.
A few cents (or dollars) doesn't impact my buying decisions in the Amazon Marketplace. One has to assume that all buyers always buy the lowest priced item to make this death-spiral hold up, which isn't so.
My God, it's Full of Source!
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Hopefully the people writing the algorithms put minimum prices on things. With stocks there's no clear minimum price that you'd want to cap trading at, but selling physical goods, you don't want to drop your price below what it actually cost you to provide the good. If you have to sell at a loss to undercut your competitors, you probably want to let them take the sale. You're not going to make it up on volume.
And if the algorithms go crazy and prices on everything drops to zero? Well, good for the buyers! Bad for the sellers, but they should have been using non-stupid algorithms. I doubt the failure of a bunch of Amazon affiliates will be that significant to the rest of the word
This is nonsense. If companies are willing to post below the price they are paying (considering things like loss leading customer acquisition which seems unlikely in this scenario) they are dumb and the software developers they employ are dumb. A simple "if the price is I paid to acquire this, stop offering downward" would stop this. Nonsense.
" I have no tag line. "
In a stock market flash crash, the people harmed are not necessarily the people causing the harm.
In the Amazon case, the people harmed are EXACTLY the people engaging in the behavior, so, if they screw up, they pay for it.
Nothing wrong with that.
Some differences between the stock market and Amazon book prices;
- People have no lost millions of dollars on one sale of a book,
- Since there are only a few books at the low price the damage can not reach the billions range,.
- People do not base their opinion about the health of a company on the price of a book as they do on the price of a stock.
- The price of a book is not reported as an economics indicator like stock prices; people do not get frightened by low book prices.
So no, book pricing is very different from stock market pricing. The worst thing that can happen due to low book prices is that people who use this stupid algorithm will make very little money.
Here are a few other things to think about;
- Selling below a reasonable price just loses money for sellers. If they do it long enough they will go out of business.
- Selling above reasonable prices means the book will not sell and the seller goes out of business.
- Amazon will enforce the sale price or they will ban the seller. Yes one can open another account but then there is no seller rating.
Here is a quote from the second article referenced;
That doesn’t necessarily mean those same tools, deployed in the service of pricing goods on Amazon, will cause a widespread implosion in prices; but it could lead to the occasional weirdness, such as a novel selling for much more (or much less) than anyone would reasonably pay for it.
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 [April 5]
The world will not end.
"We're sorry, due to a pricing error, we are unable to honor the price you were quoted on xx/xx/xx for xxxx priced at $xx.xx. Your payment has been refunded and the transaction has been reversed. Again, we apologize for the issue and any inconvenience it may have caused.
Sincerely,
Some Random Amazon Marketplace Seller"
Please look at this csmonitor article:
http://www.csmonitor.com/Business/2011/1221/The-most-expensive-items-on-Amazon/Amazon-Instant-Video-600
I also have a snapshot of "overflowing" amazon adding two items mentioned in the article:
https://lh6.googleusercontent.com/-eL2NEftMXDY/TvI8zP5O5BI/AAAAAAAASw4/hnuN7kq8RY0/s1440/amazon+quadrillion.png
This is because one seller bids to keep his price x% above the current price and the other decides to always have his price 10% or some number less than the current highest bid. Amazon pricing by third parties at this point is plain absurd.
Most of these algorithms have a max price or min price, so I don't think this is correct
under "you may also read" all articles listed talk about "evolution", how is this article anyway related to evolution>?> oO