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.

Comments

Falling to near zero??

[bhlowe]

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...

Re:Falling to near zero??

[jpmorgan]

And if they do, it's still good for the buyers, and the sellers aren't likely to make the same mistake twice.

With algorithmic pricing, the Amazon marketplace is just operating as an automated dutch auction. It's how markets should behave: raw supply and demand, with no collusion or other market distortions propping up prices.

Re:Falling to near zero??

[N0Man74]

Floors are good, but so are ceilings.

Amazon’s $23,698,655.93 book about flies

Re:Falling to near zero??

[jrroche]

With algorithmic pricing, the Amazon marketplace is just operating as an automated dutch auction. It's how markets should behave: raw supply and demand, with no collusion or other market distortions propping up prices.

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.

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??

[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: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.

Re:Falling to near zero??

[JBHarris]

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.

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.

So what?

[Lev13than]

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.

Won't happen. Here's why:

[Qbertino]

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 ...