Rising inflation: How sellers’ algorithms – not just greed – are helping to drive up the prices of the goods we buy online
Algorithms, rather than human greed, may play a role in driving prices to unprecedented levels when shopping online.
Consumers have wondered in recent months about some of the exorbitant prices of a range of products.
With shortages ranging from mundane shopping items to hotel rooms, it appears to be a seller’s market.
There are, however, situations where “algorithmic pricing” is to blame.
According to Dr Derek Bridge, from the Department of Computer Science at University College Cork, this is where two companies sell the same product, but using different selling strategies, with each approach backed by its own algorithm.
“ABC Company might wish to write down the value of XYZ Company by selling the product at 99% of the price charged by XYZ,” Dr. Bridge said.
“Company XYZ, on the other hand, could rely on a good reputation and estimate that it can sell 10% more than ABC. Let’s say that ABC sets the price at €1; a little later the algorithm of XYZ notices this and sets its price for the same product at € 1.10 Later, the ABC algorithm notices this and thus changes its price.
Although ABC’s new price for the product is 99% of XYZ’s price, XYZ will offer its new price at 110% of that price, which will increase the price again.
According to Dr. Bridge, prices can rise at a rapid rate. “It takes less than 10 rounds of tit-for-tat changes before the product doubles in price,” he said. “If nothing is done, the price of the product continues to rise as the algorithms continue their work, resulting in ridiculous prices.
The blame for this does not lie with the algorithms, but with those who designed the algorithms, and some unusual conditions have to line up for this to happen.
This would not be the situation when consumers buy hotel rooms or airline tickets, which are sold in installments, Dr Bridges said.
“Rooms and seats in later tranches generally have higher prices than those in earlier tranches,” Dr. Bridge said. “Algorithms don’t set prices, they just administer policies.”
The exorbitant prices we are seeing for many products are mainly due to companies seeking to recoup losses incurred due to Covid-19 and the war in Ukraine.
“As we emerge from the pandemic and face war in Europe, in some cases companies are charging what they can get away with in situations where demand exceeds supply.”
According to Alan Smeaton, professor of computer science at DCU.
“Algorithms have started to use a form of artificial intelligence known as neural networks (computer systems modeled on the human brain), which are even more precise, but are like black boxes in that we only see not how they actually work,” Prof Smeaton said.
“It’s like teaching someone to drive a car and explaining what to do at junctions, then you send them to France, where the roundabouts have different rules and the driver doesn’t know what to do. .”
There have been famous cases where prices have slipped, such as the science textbook with a $24 million price tag set on Amazon, but such cases are rare, says Dr. Aonghus Lawlor, assistant professor of computer science at the ‘UCD. “Most countries are experiencing similar price inflation and the causes are not related to e-commerce algorithms,” he said.