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How Amazon uses "surge pricing," just like Uber

Last Updated Jul 24, 2017 10:08 AM EDT

Consumers looking for the best deals on everything from clothing to TVs have been well trained to price-check online, often starting at e-commerce behemoth Amazon (AMZN), which trumpets its aim to match "the lowest prices." But beware.

So-called "dynamic pricing" has long bedeviled travelers by jacking up the cost of air fares and hotel rooms, and now it's becoming common among online retailers. That technique, also known as surge pricing, could dramatically drive up the cost of items you want to buy online.

Jason Jacobs, founder of a company called Remodeez, learned this lesson the hard way. Every time the shoe deodorizer he sells is written up in a major market publication, the retail price soars on Amazon, he said. In the most recent instance, the $9.99 suggested retail price nearly doubled. Jacobs suspects that Amazon's pricing algorithms push up prices as demand spikes. 

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Amazon declined to speak on the record about how and when the site might hike prices, providing only a written statement that said, in part, "The world's prices fluctuate all the time."

"Consumers think they're getting gouged -- and they think it's me," Jacobs said, noting that he gets no benefit from the higher price and actually suffers with lower sales volume. "If it happened once or twice, I might think it was coincidence. But seven times?"

Amazon's prices fluctuate so frequently that the price-tracking site Camelcamelcamel.com checks prices for hot items there three-to-four times per day. The online retailing giant accounts for nearly a third of all e-commerce transactions in the U.S.

"For some products, that's not enough," said CamelCamelCamel founder Daniel Green. "We wish we could do hourly price checks, but we're monitoring 50 million products. This is the best we can do."

Amazon is reportedly being investigated for deceptive pricing practices (as part of the Federal Trade Commission's look into the company's purchase of Whole Foods) that allegedly inflate past prices to make it appear consumer are getting a more impressive bargain. Amazon has denied those allegations.

Dynamic pricing, however, isn't illegal. It's economic theory in action. Economists have long contended that in a perfectly competitive environment, the price of goods and services will automatically adjust to the point where supply and demand are in equilibrium. That is, until there are an equal number of willing buyers and sellers. 

Thus, if an item is in high demand (or short supply), the price is likely to rise. If an item is overstocked or unpopular, the price falls. But in brick-and-mortar settings, changing prices on a moment-by-moment basis, as the theory suggests, is impractical. 

"The problem with dynamic pricing offline is cost," said Peter Fader, professor of marketing at The Wharton School at the University of Pennsylvania. "You would have to go to all those little shelf facings and change them."  

The time and staffing required to do that is so overwhelming that it simply wouldn't make sense to change prices to address short-term spikes (or drops) in demand.

The online world has no such restrictions. Prices can be changed instantly with the bits and bytes of an algorithm. Indeed, most e-tailers have computerized their regular repricing of products. As online consumers buy an increasing amount of something -- from shoes to movie tickets -- the practice will become even more pervasive, experts maintain. 

That approach may even find its way into brick-and-mortar stores. Notably, Fader said Amazon's budding retail store network doesn't display prices on shelves, enabling the company to change prices as dynamically in physical stores as it does online.

This presents real challenges for price-conscious consumers, said Jack Gillis, director of public affairs at the Consumer Federation of America. Although the practice can land consumers bargains on overstocked items, it can also boost the price of popular products. 

Worse, because prices can change from moment to moment, it's hard to ensure that the product you bought this morning couldn't be purchased for less a few hours later.

"As dynamic pricing grows, pulling the trigger on the price for a certain service or product becomes more of a gamble than an informed decision," said Gillis. 

For consumers, the best advice is to be aware and patient, experts said. Although Jacobs' shoe deodorizers spiked in price to over $18 after a Buzzfeed story recommended the product, a few weeks later the price fell back to it's normal $9.99.

"Patience will always help you," said CamelCamelCamel's Green. 

So will detailed price-comparisons. If you copy the make, model and any other necessary particulars of a product you want to buy on Amazon, you can plug those details into Green's site and see just how much the product's current price differs from the prices it has been offered at for the past six months. 

Assuming your purchase isn't urgent, you can sign up for a price alert, and the site will email you when the product's cost drops into your target range. 


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