When shopping on Amazon should you trust the retail giant’s recommendations? The excellent reporters at ProPublica think not. They conducted an extensive analysis of the Amazon algorithm that selects the best deal for customers and found it wanting. In fact, they found it was biased in favor of retailers who use Amazon’s fulfillment services……rather than who offered the best price or best service. If you’ve not heard of ProPublica, you should check them out; we think they are doing some of the best reporting on the Internet and have been doing so for almost a decade.
These algorithms are important. While algorithmic pricing can make merchants more competitive, it also creates new challenges. Examples have emerged of cases where competing pieces of algorithmic pricing software interacted in unexpected ways and produced unpredictable prices ,as well as cases where algorithms were intentionally designed to implement price fixing . Unfortunately, the public currently lack comprehensive knowledge about the prevalence and behavior of algorithmic pricing algorithms in-the-wild.
Like Google’s search engines, Amazon’s selection formula figure in decisions large and small, from whether a person qualifies for a mortgage to the sentence someone convicted of a crime might serve. The weightings and variables that underlie these equations are often closely guarded secrets known only to people at the companies that design and use them. With more than 300 million active customer accounts and more than $100 billion in annual revenue, Amazon is a shopping giant whose algorithm can make or break other retailers. ProPublicalooked at 250 frequently purchased products over several weeks to see which ones were selected for the most prominent placement on Amazon’s virtual shelves — the so-called “buy box” that pops up first as a suggested purchase. In about 75% of transactions, Amazon placed its own products and those of companies that pay for its services in that position even when there were substantially cheaper offers available from others. That turns out to be an important edge as most Amazon shoppers end up clicking “add to cart” for the offer highlighted in the buy box. (note: Amazon gives customers a chance to comparison shop, with a listing that ranks all vendors of the same item by “price + shipping.” It appears to be the epitome of Amazon’s customer-centric approach. But there, too, the company gives itself an oft-decisive advantage. Its rankings omit shipping costs only for its own products and those sold by companies that pay Amazon for its services.)
ProPublica’s isn’t the only analysis that has raised questions about Amazon’s algorithm. A team of academics at Northeastern University recently took a close look at Amazon marketplace algorithms and found them to be troubling. Among their findings are:
- Sellers they identified as using algorithmic pricing receive more feedback and win the Buy Box more frequently, likely suggesting higher sales volumes and thus more revenue than non-algorithmic sellers. Furthermore, we observe cases where algorithmic sellers change prices tens or even hundreds of times per day, which would be difficult for a human to maintain over time especially one attempting to manage many products simultaneously—but is trivially automated.
- It is challenging for non-algorithmic sellers to compete with algorithmic sellers, which suggests an arms race that may terminate with all serious sellers adopting automation. The Buy Box algorithm exacerbates the disparity between algorithmic and non-algorithmic sellers, as it creates a largely winner-take-all marketplace where the Buy Box winner receives the vast majority of sales.
- Amazon’s algorithms opens the door to intentional and unintentional market distortions. Although we do not observe any of these issues in our data, there are documented cases of algorithms pushing prices to unrealistic heights and being used to implement price fixing . We view our efforts to detect dynamic pricing as the first step towards long-term monitoring of algorithms in markets, with the ultimate goal of increasing transparency of these practices.
Ultimately, they found that algorithms didn’t necessarily help customers find the lowest or best deals.
In response to the ProPublica expose, Amazon is quoted as saying: ““With Prime and Super Saver Shipping (which requires no membership and ships orders above $49 for free), the vast majority of our items — nine out of 10 — can ship for free. The sorting algorithms the article refers to are designed for that 90 percent of items, where shipping costs do not apply.” In short, about 90% of items ordered on its site don’t have shipping costs because they’re either ordered by Prime members or by people using Super Saver Shipping, which requires no membership and ships orders above $49 for free. So Amazon views its Prime members as being more motivated by convenience than by price.
We will offer a more comprehendible quote: “Don’t necessarily rely upon Amazon’s Buy Box recommendations. Amazon offers an excellent marketplace, but its recommendations should be treated with some degree of skepticism. Do your own comparison!”