Algorithmic Pricing: How It Affects Your Daily Life

Algorithmic pricing is a business practice that exists today, of which most consumers are unaware. However, this method of utilizing advanced algorithms

Algorithmic pricing is a business practice that exists today, of which most consumers are unaware. However, this method of utilizing advanced algorithms to determine the ideal pricing structure for products is now more popular than ever. What is algorithmic pricing, and how does it affect your daily life? Is it better for consumers, or is driving prices skyward? Here's everything you need to know about algorithmic pricing

Traditional Price Setting Methods

For centuries, prices were set by the vendor based on individual factors such as their local demand and supply. This way of setting prices manually involved analysts and managers communicating their scenarios which later would evolve into automatic pricing algorithms and Excel spreadsheets.

Today, pricing algorithms are used by a massive selection of industries. These powerful systems provide businesses with the ability to instantly set prices based on various factors. As such, these protocols are now in use across a huge selection of markets including e-commerce, entertainment, advertising, insurance, sports, travel, and utilities markets.

How Does Algorithmic Pricing Work?

Algorithmic pricing takes several factors and combines the data to achieve preset goals such as increasing profit margins. These systems often utilize probabilistic and statistical information regarding market conditions as part of the equation. Additionally, these algorithms will monitor supply and demand, competitors' pricing, inventory, holidays, and even weather conditions.

Pricing algorithms are easy to operate once created and they can be run at regular intervals throughout the day. For example, Amazon's algorithmic pricing is constantly altering product costs based on numerous factors. In theory, this approach should lead to more competitive pricing. However, the market appears to be veering off onto another course.

History of Algorithmic Pricing

Algorithmic Pricing has been around since the 1980s. It was first introduced by American Airlines as a way to set seat pricing based on seating supply and demand. If you have ever taken a flight, then you have encountered this system in use. Notably, the airline industry pioneered algorithmic pricing which helped it to spread to other markets.

Source – Algorithmic Pricing Airlines

Many companies have experimented with algorithmic pricing in the past. However, the technology wasn’t the same as today, and the methods could seem a bit crude to consumers, who often felt like they were being unfairly taxed. A perfect example of this scenario was a failed venture by Coca-Cola, where they attempted to have a vending machine that charged more based on the temperature outside. Needless to say, the project was a huge flop that led to consumer backlash.

Nowadays, the online market is the powerhouse, and algorithmic pricing has found new life and capabilities in the digital world. Today's large online retailers dominate the market. They all utilize some form of AI-powered algorithmic pricing to maximize profits. As such, there is growing concern related to algorithmic price collusion.

AI Changed Everything

The use of powerful computer algorithms helped pricing strategies improve greatly but nothing boosted the tech's capabilities more than AI integration. Artificial intelligence systems such as machine learning algorithms are capable of monitoring massive amounts of data in real time, learning from the information, and providing unique responses based on the plethora of data computed.

Notably, AI integration has improved algorithmic pricing capabilities across several dimensions. For one, it's now much cheaper to operate and integrate these tools. AI systems don’t require supercomputers to run. As such, they are readily available to businesses via cloud systems.

Additionally, these systems can utilize a massive amount of data, including supply and demand, competitors’ activities, delivery schedules, and even logistical delays due to weather conditions. All of this data allows the AI to determine optimal prices in real-time.

Benefits of Algorithmic Pricing

The benefits of algorithmic pricing are obvious. For one, it enables a company to set pricing using preset coding rather than human intervention. As such, it's ideal for uniformity and response time. Additionally, the system can be set up to maximize profits based on demand and other vital factors, allowing businesses to set prices promptly, often leading to fluctuations throughout the day.

Drawbacks of Algorithmic Pricing

There are many reasons why algorithmic pricing seems like it could help to drive competition and lower prices for consumers but those factors are seen by many as simply a ruse. In almost every instance that an algorithmic pricing algorithm is introduced, the prices for consumers begin to increase. In some instances, products can double and triple throughout the day.

The integration of rival price checking has led many analysts to conclude that algorithmic pricing leads to price collusion. When AI algorithms monitor competitors' pricing to set their own, it should result in lower costs for consumers. However, if all the competitors are using similar pricing algorithms, price collusion occurs as the system seeks out an equilibrium for the market.

Algorithms Go Wild

Another concern regarding algorithmic pricing is its inconsistency. There have been many instances where these algorithms couldn't compute some unusual data point which resulted in insane price gouging. A good example of this occurring was the time when a textbook on Amazon saw its price rise to $24 million. Hopefully