Report: Amazon made $1B with secret algorithm for spiking prices Internet-wide

Report reveals details about Amazon's secret algorithm redacted in FTC complaint.

See full article...

 

[r0twhylr]

Given that Nessie is a completely mythical creature, I am skeptical about the research.

The allegation is basically that Amazon has changed its pricing structure as a consequence of what its competitors are doing and thereby messed up the competitors pricing algorithms.

This is exactly what happens in the world of physical stores and has done so for a very long time. Amazon is unlikely to know exactly how its competitor pricing algorithms work and will be taking educated guesses, much as companies have done so about competitor profit margins for decades (if not longer).

The question is whether such behaviour is illegal. That depends on whether Amazon has a dominant market share which in turn depends on how you define the relevant market - if online retail a separate market from physical retail either generally or in specific products.

I would be more confident about the result if the case was in UK/EU rather than US but even in the UK/EU it is not necessarily an abuse of a dominant market position to price match to competitors but in most cases it will be an abuse to lower your price below a competitor such that you are not longer making profits on those products or have a profit margin well below market norms

If I understand it correctly, the allegation is more like Amazon gaming the pricing that its competitors see, driving their prices up, and making Amazon look good in comparison.

 

[QuantifiableQuoll]

I don't understand how this is different than what any other business does. We all price compare each other, large or small.

The FTC has redacted huge swathes of the complaint, but this quote may be key to understanding the case:

"Amazon requires sellers to keep prices off Amazon as high or higher than prices on Amazon."

This is totally putting aside the other algorithmic aspects, which we're all in the dark about, but if the FTC can show that sellers are being forced to fix prices against their will, that's still a form of collusion.

 

[ExPatCA]

I could REALLY use an example of how this supposedly works, even if it has to be hypothetical because the actual algorithm isn't known or is too complex.

I agree. Article needed a better explanation on how it functioned.

 

[redtomato]

Fascinating to see the different attempts at explaining it. Also to see the number of people who read amazon’s side and come away thinking eh it’s not such a bad thing.

I would also like an analogy / explanation of Amazon’s mode. Preferably involving cars as is traditional on Ars.

I’ll take a stab. Imagine a lot of garages and car repair shops. They sell car repair parts. Amazon is the national hub that sells these car parts to local garages for resale, and also sells them in its own shop. If a garage sells an item at a discount, Amazon goes and stares at them. It puts up large signs saying ‘buy this part at Amazon!’

Amazon only does this when garages sell items cheaply. Thereby teaching garages not to sell items cheaply. Long term this strategy allows Amazon to keep its own prices high. (This strategy also motivates garages to end their discounts early because they fail to generate the expected new sales.)

Small garages do not have the resources or the sale to do this successfully, but Amazon does. Hence it is successful for them.

Thus ends my feeble car analogy. Yes it’s feeble, that’s another Ars tradition.

 

[Snark218]

Sometimes I wonder if these in-house counsels actually believe what they're saying because this is hilarious to me:

That is a wild quote. Stupid or maliciously disingenuous? Porque no los dos?

 

[TimeToTilt]

If a customer is willing to wait four months, do they get the item at that price?

I have bought them a few times and only once did I get the item.

A lot of them time this is stuff Amazon hasn't had in stock in years. I found a really really hard to get dvd anime box set brand new. They suddenly had it backstocked at half MSRP when they hadn't had any in 4 years.. after a week that stock disappeared probably because my repricer ignored them.

 

[Smashing Young Man]

I remember well when Amazon was almost universally adored for their fast shipping and customer service. That had no hope of lasting as they took the predictable route of maximizing profits to please their shareholders.

 

[e^ipi+1]

This is a straw man argument, in that matching low prices elsewhere is not the problem.

Amazon raises prices everywhere by forcing sellers to agree to a "Most Favored Nation" agreement. This means that the seller cannot offer the same product elsewhere at a price lower than on Amazon, even though it would be profitable to do so because of Amazon's very high commissions.

So Amazon can raise its commission as high as it likes to meet profit goals, knowing that prices elsewhere will be forced to follow. With no choice, consumers are then forced to pay that high price. This is what happens when one company is able to forge an effective monopoly on the market.

Exactly. Amazon could match other sites’ discounted prices by choosing to reduce their commission, but instead they keep their commission high and (allegedly) pressure vendors to raise prices on any sites that take a lower commission, preventing the savings from being passed on to consumers.

 

[Zoc]

I would also like an analogy / explanation of Amazon’s mode. Preferably involving cars as is traditional on Ars.

I don't think that's quite it. From the actual study: "In this framework, an attacker learns to endogenize competitors’ algorithms and then derive a strategy to artificially increase its profit at the expense of competitors. Facing a drastic loss of profits, competitors will eventually intervene and revise or turn off their pricing algorithm. To disincentivize this intervention, we show that the attacker can instead unilaterally increase both its profits and the profits of competitors. This leads to a collusive outcome with symmetric and supra-competitive profits, sustainable in the long run."
My car analogy: Carmaker A uses its superior computer smarts to figure out how Carmaker B (with inferior computer smarts) sets its prices, then Carmaker A uses those smarts to trick Carmaker B into setting prices just high enough for Carmaker B to make enough profit for it not to panic and make discounts (which would lose both carmakers money, since they price match), while ensuring that Carmaker A still makes the most money of anyone.

 

[House of Propane]

Fascinating to see the different attempts at explaining it. Also to see the number of people who read amazon’s side and come away thinking eh it’s not such a bad thing.

I would also like an analogy / explanation of Amazon’s mode. Preferably involving cars as is traditional on Ars.

I’ll take a stab. Imagine a lot of garages and car repair shops. They sell car repair parts. Amazon is the national hub that sells these car parts to local garages for resale, and also sells them in its own shop. If a garage sells an item at a discount, Amazon goes and stares at them. It puts up large signs saying ‘buy this part at Amazon!’

Amazon only does this when garages sell items cheaply. Thereby teaching garages not to sell items cheaply. Long term this strategy allows Amazon to keep its own prices high. (This strategy also motivates garages to end their discounts early because they fail to generate the expected new sales.)

Small garages do not have the resources or the sale to do this successfully, but Amazon does. Hence it is successful for them.

Thus ends my feeble car analogy. Yes it’s feeble, that’s another Ars tradition.

Interestingly, auto parts as an industry has been severely disrupted by Amazons low prices and quick delivery. Napa/Autozone charges high prices but does “hot shot” local part delivery to repair shops.

These auto parts stores will straight up not sell something sold at Amazon and producers try hard to keep their parts off Amazon as a result

 

[Yarrum]

This is a straw man argument, in that matching low prices elsewhere is not the problem.

Amazon raises prices everywhere by forcing sellers to agree to a "Most Favored Nation" agreement. This means that the seller cannot offer the same product elsewhere at a price lower than on Amazon, even though it would be profitable to do so because of Amazon's very high commissions.

So Amazon can raise its commission as high as it likes to meet profit goals, knowing that prices elsewhere will be forced to follow. With no choice, consumers are then forced to pay that high price. This is what happens when one company is able to forge an effective monopoly on the market.

Though isn't this a different issue, as there are two methods of selling on Amazon:

Marketplace - Seller sets the end price, and these prices are subject to the MFN clause ensuring the price the seller sets on Amazon is no higher than the price they charge on their own site. (Though this doesn't seem to be a Worldwide thing - here in the UK I was shopping for computer parts last month and third party prices were higher on Amazon than their own websites).

Direct Sales - Amazon buy at wholesale and sell direct, where Amazon control the final price and seems to be these sales that this article and algorithm is about - with Amazon using the algorithm to determine their prices which affects Amazons profit. (A MFN clause would only affect the price Amazon buy at not the price offered to customers).

Also whilst Amazon may be dominant in online sales, that isn't the case when you factor in all retail, so their isn't that much scope for Amazon to push prices up as you'd still have the option of buying goods from physical stores where Amazon don't have the power to adjust prices higher.

 

[Collin155]

Only a Billion extra in Rev? Seems sort of low.

 

[plastic bag]

This is almost certainly because they discovered a new method or algorithm that was either more profitable, harder to detect, or both.

I was gonna say its because they suspected the FTC to be on to them, but maybe I'm overestimating how worried Amazon generally is of the FTC.

 

[poochyena]

"Amazon requires sellers to keep prices off Amazon as high or higher than prices on Amazon."

I see that as an issue. I've never seen that though, as I have always seen sellers selling their items for less on their own store than on Amazon.

 

[jonsmirl]

Only a Billion extra in Rev? Seems sort of low.

So when they turned it off, did revenues fall by a billion? According to Amazon's annual report numbers, no. Revenues kept increasing. I also don't see anything saying if Nessie actually made a profit or lost money.

 

[Biceps]

I predict a 1 million dollar fine and a slap on the wrist.

Came here to say the exact same thing. Until we start punishing corporations in multiples of the amounts they steal from consumers, they are going to continue to pull stuff like this, while promoting the criminals implementing the ideas.

 

[Biceps]

I see that as an issue. I've never seen that though, as I have always seen sellers selling their items for less on their own store than on Amazon.

Yeah, it's a textbook monopoly move straight out of the Standard Gas & Oil playbook. I've certainly seen parity between Amazon pricing and pricing elsewhere, but never realized that is what was going on until I heard about it on NPR last week.

 

[schnackenpfefferhausen]

Seems like nothing more than applying game theory.

Amazon might just be better at it..

 

[Photon_plumber]

Like Walmart, I stopped buying any durable goods from Amazon awhile back, knowing full well their country of origin. Coffee, ramen, pet treat, etc are about all I get these days.

 

[cbf123]

What I had heard was that they were targeting sellers on Amazon. If the sellers' products were sold on other websites for less, they would no longer be given the "buy now" button on Amazon. Since this results in a huge decrease in sales on Amazon, and for many sellers Amazon is a huge fraction of their sales, the sellers then have to get the other website to raise prices or even stop listing on the other site.

So rather than actually competing on merits, they punish sellers for offering deals elsewhere.

 

[Average Liberal Slatie]

Sometimes I wonder if these in-house counsels actually believe

My wife is the principal assistant general counsel for an algorithmic trading house and her job is to advance her employer's interests, within the law and regulatory frameworks, regardless of her personal beliefs. That's just what lawyers do. She's the main person that interacts with the SEC and FINRA so it's literally her job to be the advocate for the company.

So interpret that how you will.

 

[Toastr]

I have no idea how Amazon's secret sauce (algorithm) works. But I do feel their prices match and often come in lower - than other retailers. Of course, a lot of it is due to not needing to maintain real stores and hiring salespeople. But so long as Amazon competes with everybody esle, I don't think I would automaticallyd deem Amazon's business secrets as 'criminal'. If anything, airline pricing is probably just as opaque?? Again, my interest is that our various government oversight agencies do their job to ensure 'fierce and fair' competition and 'full and fair' disclosure.

What?
A government oversight agency literally just showed you that Amazon, without any disclosure whatsoever, deployed algorithms specifically designed to ensure that other retailers couldn't price things lower, costing you money. And your response is to be upset at the oversight agencies?

 

[brad0]

This is almost certainly because they discovered a new method or algorithm that was either more profitable, harder to detect, or both.

Yes, I noted that the quote

"The project ran for a few years on a subset of products, but didn’t work as intended, so we scrapped it several years ago.”

Seemed to almost exactly match a line from one of the Jason Bourne movies where the CIA Deputy Director reports to a congressional committee about operation Treadstone and wants to hose down a potential investigation.

 

[gridlach]

I get that consumers have potentially been harmed as well as less savvy businesses - but attempting to make the argument that one-sided actions run afoul of traditional anti-competitive collusion rules seems like a stretch of the law.

Edit: Collusion is like tango - it takes two.

Indeed a tango takes two, but only one partner needs to be leading the dance - or even alive. We're near Halloween, so I feel like I can post a picture of Ophiocordyceps unilateralis. Amazon's a gently swaying mind-control fungus in the FTC's case (though no one is alleging that they left their competitors rotting on a twig - at least not short term!)

There's genuine debate and uncertainty about the precise mechanics of the price-fixing here. That aside, the question of collusion comes down to whether the legal definition rests on supposed competitors adjusting arrays of prices in lockstep, or additionally on proof of their mutual intent to do so. The FTC seems to be arguing that you can get the effect of collusion without all parties having consented to it. I'm willing to buy that argument.

edit: extra “that” snuck in

 

[Flipside79]

I canceled my prime subscription about a year ago and was a heavy Amazon user. Over time I realized Amazon rarely made good on its delivery times, and there were often problems with the products I received, and the review system could no longer be a trusted in any way. Shipped and sold by Amazon used to mean something, but not anymore.
Outside of the first month or so, I can’t say I even think about Amazon, and only browse the site if I am trying to find information on a product I plan to buy locally or from another online retailer(I often go directly to the manufactures site for a better deal). Local and online retailers have upped their games, especially post COVID, and I find their prices, products, and shipping times far more reliable. Sure I don’t have a one stop shop for everything, but overall I am far happier with my purchases and like continuing to support the retailers that support my local community.
Of course Amazon is still a massive market force, but retailers have adapted and survived, and I see them slowly clawing back market share over the next decade.

 

[Zoc]

My wife is the principal assistant general counsel for an algorithmic trading house and her job is to advance her employer's interests, within the law and regulatory frameworks, regardless of her personal beliefs. That's just what lawyers do. She's the main person that interacts with the SEC and FINRA so it's literally her job to be the advocate for the company.

So interpret that how you will.

I interpret it as her being a person that values her own wellbeing above that of others, in other words, a cancer on society. That they how you will.

 

[Autapomorphy]

Like Walmart, I stopped buying any durable goods from Amazon awhile back, knowing full well their country of origin. Coffee, ramen, pet treat, etc are about all I get these days.

You might want to stop and reconsider that racism.

For all the cheap junk I've seen, I can't recall the last time it was junk because the manufacturing was poor. Instead, it always seems to be that the product designer was given the job of minimizing cost. It's manufactured in China because skilled manufacturing labor is cheaper there. It actually takes really good quality control, for example, to cast plastic parts where the designer has specified such thin walls to save material as that leaves no margin for variation.

You get a quality result when the product is designed for quality, regardless of the location of manufacture. As an example, look at stuff from SmallRig, a Chinese company that designs and manufactures parts for camera rigs. They design for quality because it reflects on their brand. When I'm attaching accessories to my camera with machine screws, the perfect fit makes it apparent that they do top-notch machining. That fit requires a high level of control in both the machining and anodization processes.

When Americans stop buying junk because it's a few dollars cheaper, the product designers will stop being told to design for low cost above all else, and the quality of products will improve.

 

[panton41]

You might want to stop and reconsider that racism.

These Chinese manufacturers who make crap are being encouraged by the government of their nation. It's not racism when you're talking about the policies of a nation-state.

You're probably one of those people who bleat "anti semitism" when someone criticizes the government of Israel for allowing yet another illegal settlement in Palestine.

 

[Oliver Weichhold]

I predict a 1 million dollar fine and a slap on the wrist.

That'll teach them!

 

[Amateur Nerd]

My wife is the principal assistant general counsel for an algorithmic trading house and her job is to advance her employer's interests, within the law and regulatory frameworks, regardless of her personal beliefs. That's just what lawyers do. She's the main person that interacts with the SEC and FINRA so it's literally her job to be the advocate for the company.

So interpret that how you will.

I interpret it as her being a person that values her own wellbeing above that of others, in other words, a cancer on society. That they how you will.

(bold mine)

Doing stuff against personal beliefs leaves a mark. Doing so for a longer time will take its toll, eventually. Unless the person doesn't really hold those beliefs.

 

[Bacterially Sound]

Sadly, the online world does not lend itself very well to competition.

 

[graylshaped]

There is a concept in retail and other industries called yield management. It affects hotels and airlines, among others. If there is an empty room or airplane seat, they lower the price. It's tough to turn on the TV these days without seeing a Trivago commercial, for example. Or Priceline, or many other resellers.

It is not anti-competitive, and most larger companies in these industries use algorithms to monitor and set prices based on demand, up to and including looking at competitors. Amazon certainly is not lily-white, but the FTC seems to be ignoring widespread practices that have existed for decades.

 

[Amateur Nerd]

Only a Billion extra in Rev? Seems sort of low.

Not sure why Amazon is even bothering with complex algorithms to game the market.

With so many people pitying Amazon for the "low" additional revenue they could make more money with a simple GoFundMe.

(/s?)

 

[betam4x]

I'm not sure how I will live without purchasing a GWIFQUAY usb hub, or my FNQWIK dehumidifier, but I am no longer buying from Amazon whenever I can help it.

Hey now, that FNQWIK dehumidifier gets the job done F*n quick!

I only use Amazon for the rare occasion I need something same day. I have been working to break that habit.

 

[redtomato]

I have bought them a few times and only once did I get the item.

A lot of them time this is stuff Amazon hasn't had in stock in years. I found a really really hard to get dvd anime box set brand new. They suddenly had it backstocked at half MSRP when they hadn't had any in 4 years.. after a week that stock disappeared probably because my repricer ignored them.

I may have run into something like this or other algorithmic shenanigans. I tried to buy a house thermostat (Amazon link to item) just now, which was advertised at a very good price on Amazon. Put into basket no problem. When I try to complete my order & pay for the item, I get big red text:

"There was a problem with some of the items in your order. [ITEM] cannot be shipped to the selected address."​

This is Amazon UK and my address is London, it's absolutely not a case of being remote or far away. I tried with some family addresses around the UK, and all the delivery addresses were denied. Google says it happens from time to time to other buyers and to other third-party sellers on Amazon. Smells like pricing shenanigans given that Amazon otherwise has no problem with indicating on the item page when things are out of stock or low on stock.

 

[guevera]

My wife is the principal assistant general counsel for an algorithmic trading house and her job is to advance her employer's interests, within the law and regulatory frameworks, regardless of her personal beliefs. That's just what lawyers do. She's the main person that interacts with the SEC and FINRA so it's literally her job to be the advocate for the company.

So interpret that how you will.

My wife is principal marketing chief for a company that specializes in selling crack to school kids. Her job is to make sure more school kids smoke crack in general, and that they choose her company's crack over the competitors, while ensuring that our distributors aren't targeted for any federal heat by encouraging the no snitchin culture in the hood. Interpret that as you will.

At a certain point, one is responsible for the actions one takes and enables professionally. At that point, the defense of zealous advocacy within the legal and regulatory framework is not longer a defense for immoral actions. I don't know exactly what that point is, career-wise, and it's likely situation-dependent, but it seems likely to be sometime before a lawyer becomes assistant general counsel.

Love the UN, btw.

 

[guevera]

Why is so much of obvious public importance being redacted from a lawsuit filed in open court? I'm really leery of secret evidence in a courtroom, it feels like a very basic bright line that shouldn't be crossed.