Consumer v. Retailer: Online Shopping Gone Wild

Just consider this recent headline in the Atlantic how online shopping makes suckers of us all, Oh dear. The piece asks could the Internet, whose transparency was supposed to empower consumers, be doing the opposite. This worries me as a working mom. I buy everything, and I mean everything online. I don't like to think that I might be losing. There are

broader implications to this question too. Rob Kaplan, president of the Federal Reserve Bank of Dallas, recently positive that continued low inflation, something that is confounding economists, might be because the Internet is bringing consumers so much transparency about the cost of everything that businesses have to perpetually match or even discount prices to win sales. It may be that business pricing pressure has been fundamentally reduced as a result

of technology, Kaplin told a recent conference. But if that's true, and I'm now questioning whether it is, it appears that business isn't going down without a fight. Let's back up. So, in what are beginning to seem like the old days, there was a one price system, meaning when you walked into a store to buy something, that was the price for you and for any other customer who would happen

to walk in. It turns out there's a whole history as to how the one price system came to exist and a tail in why it's going away and being replaced with something retailers called dynamic price. What Jerry you see Him explains in his recent Atlantic piece is that this new system of dynamic pricing most closely resembles high frequency trading on Wall Street. Prices are never set to

begin with. In this new world, they can fluctuate from hour to hour and even minute to minute, a phenomenon familiar to anyone who has put something in her Amazon cart and bet alerted to price changes. While it's at there. Of course, it's not just Amazon. An investigation by a local TV station found that Target was offering different prices on its app depending on where customers were located inside or outside of an actual Target store. Jerry also writes

this about us. They are content to be fooled into paying more if they can keep the belief that they're paying less, that they have agency and agility to find special, unbeatable deals only for them. Wow. I thought I was doing just that, But maybe I am, because it's indisputably true. At the very same time that we, the consumers, are also getting significantly smarter. Gone are the days where the sellers of goods at all the inside info and control,

or even market leadership. In many cases, you can compare prices in real time. So if sellers are getting smarter and buyers are also getting smarter on the same exponential curve fueled by technology, well who's winning. I'm delighted to have Jerry, you see him here with me to answer all those questions and more. Jerry, who is now a contributing editor at the Atlantic, as a longtime business journalist. He and I worked together at Fortune back in the

glory days. Of the nineteen nineties and early two thousands. So we've known each other for oh, I don't want to count how long, And amazingly enough, we now both live in Chicago, so this episode is being recorded in the Windy City. So we have to start with what happened to the price of pumpkin pie spice as Christmas two fifteen approached? How did you zero in on pumpkin

pie spice? I sort of stumbled upon it. I was looking through a bunch of prices, three charts of different products on Amazon, and this kind of thing didn't exist before. But there's a few services ones called three camels that literally you can see the fluctuations of a price day to day, hour to hour, over the last month, over last year. And I had no idea about this until I read your piece. By the way, some of these you know, charts, it's like looking down in a stock chart.

That one just struck me as funny because it's a seasonal ingredient. We all do it and we all know what it is. So how did you get interested in this story? Anyway? What made you decide to pursue this? Well, it's become kind of a commonplace that as consumers were more empowered than ever with data. We can go to showrooms, we can go to Best Buy and see products that we intend to buy elsewhere. We can know the price

of anything anywhere at any given time through technology. But I and my editor at The Atlantic started to notice there were some weird things going on with Amazon's seeing strategies. At the same time, we also noticed that Amazon had been hiring a lot of economists, and really top flight economists who would sort of disappear into the Amazon world, and so it was kind of like going down a wormhole.

We looked at what's happening with price online, and the deeper I got into it, the more I realized that the whole notion of price that's something that is a fixed price out there, that it's set, you know, how much does it cost is becoming sort of an outdated questioned the fluctuations that retailers have learned to do based

on what they know about our shopping habits. For instance, at four pm in the afternoon, we're all at work, we've had lunch, we get kind of lazy, and they raise their prices because we just get less discriminating at that hour. So you'll see this uptick in the morning, they'll then like lower the price because we're more meticulous.

I think this whole idea is terrifying, and I want to come back to the notion of the royal Amazon played with this, but where there's a character in your story who's really fascinating This guy Guru Harri harror on how did you find him? And who is he? He would be what you call sort of an arms dealer in this an arms dealer, and in this contest is sort of consumer and retailer, or you can think of it. He says, it's more of like a three way battle.

There's Amazon where he used to work, and he's one of the guys who's set up the system that lets other people sell their stuff on Amazon third party sellers, and he started this company called Boomerang Commerce that basically other retailers used to match Amazon's pricing algorithms. And it was kind of my window into like, you know, it's very hard to you can't interview an algorithm, but I went out there to Californi and basically tried to you

found a human algorithm essentially hand grew Harry. Yeah, and he showed me this dashboard and would. It had was this is what a retailer sees, and it had a bunch of rules you can put in, like if Amazon moves its price down, we respond by moving our price down ten percent until it gets too costs or something like that. These were what you're called guardrails, and if you don't put those in, things can get out of hand.

There was there was one book that because of two algorithms interacting with each other, the price got driven up to twenty three million dollars at one I wish, I wish that were one of my books. Well, speaking of whigs. Before coming on here, I went in and checked out the price history of some of your books. Oh well, it's really really interesting and I can't discern any pattern. It's just one of your books. Today. It's offered to

ask prices seventeen ten, that's respectable. It's been as high as thirty five dollars for one day, like maybe four or five years ago. It is available for dollars twenty three cents, which I think someone just stay wow, that is crazy. Okay, but wait, come back to this notion that it's a three way battle. It's not just a battle between the consumer and the retailer. But your guru says that it's actually a three way battle. There's the consumers,

there's the retailer, and there's Amazon. Amazon just has so much data at their disposal, and with that data, it exerts a gravitational pull of all this talent. These really really top level economists are going there and not only using the data to say, like what can we see about? Basically, you know where we should price things and when what hour. In some cases it seems like personalize it to your

own shopping history. If you came from a bargain hunting website and they think you're sort of a bargain hunter, they will sometimes offer you a lower price. Some studies show Amazon says it doesn't do this. Well, that's what I wanted to push on. Amazon says that it's price changes are quote not attempts to gather data on customers vending habits, but rather they're just trying to give shoppers the lowest price out there. What do you think about that?

A few years back they did admit to running price experiments. Price experiments. That's a scary phrase, yes, and so it's kind of weird to think that in buying you know, a seasonal pie ingredient, pumpkin spice, you might being part of a social experiment. And ECON one on one, if you go back, they had the concept of elasticity of demand. Basically, if you raise the price, how much to sales fall off? But retailers for most of existence have just been just

kind of had to guess. Now they can actually, well, let's try at this level, what's measured of demands? What's the optimal? So we've moved from ECON one on one And I never took an ECON class to John Nash as a beautiful mind and game theory, right, Okay, that's that a way to think about it. Yes, they're literally using game theory and some of their and some of their models. Let's back up and go back to some pricing history, which you lay out in your story in

such an interesting way. But how did the price take come into being in the first place? Well, this is an interesting question, and as I was reporting this story, I thought, well, prices have always been fixed, and I thought it was that true, And I went back and it turns out not true. Price tag was invented sometime in the eighteen sixties. Probably it's credited to John Wannamaker.

Wannamakers in Philadelphia is one of the first big department stores, and he was a Presbyterian, but operating in a Quaker city, and Quakers, including another Quaker, was rolling h Macy of Macy's didn't believe in offering different prices to different people. They thought it would because they thought it was immoral.

They thought it was immoral interesting, so Wannamaker opened his quote unquote Grand Depot onto the principle he called one price to all, no favoritism, and this was soon copied not for moral reasons, but for economic reasons by others. In the very beginning of department stores, basically they tried to train everyone in the art of haggling, which is how everything was done up to that point, and in

fact there was no price tags on goods. Sometimes they would have cryptic symbols that would the salesman or saleswoman know what the cost of the good was and what should their sort of walk away point be, and only they could decipher these symbols. But as these stores they found it basically impossible to train thousands of people in the art of haggling. Just as they scaled up and became huger. It allowed them to advertise fixed prices, and

newspapers allowed them to higher floor people. So price tag was a move toward a more efficient economy in a sense, at least at that time. You know, in doing that, retailers sort of gave up a little bit of their power to kind of extract the last farthing that a shopper might be willing to give up on a given day. Right, but maybe they made it back on the shopper who was not so intent or skilled at extracting the last farthing right right, right, which brings us back a little

bit to where we are today. So what does this concept now from moving from the fixed price tag to personalized pricing? How would you explain that concept? I would explain it as there was a sort of a truce that reigned after the invention of the price tag that basically between the consumer and retailers. In fact, there was a French sociologist who had a theory that the marketplace was a battle and a price was the negotiated truce in the outcome. And there was a few sort of

asterisks to this truce. So like you could clip coupons, you know, as a way, if you were more motivated, companies differentiated higher end things lower end things. But basically the people who broke the truth are us, the consumer shoppers. And I was at a shoe store the other day and a woman said, you know, yesterday someone was in here and they were trying on a shoe while they were sitting in there, went online and bought the shoes on AMTMS and just walked out of the store and

walked out of the store that brazen. Did the person atly say sorry to waste No, not even apology. Oh man, I'm feeling sorry for retailers right now. So, I mean, this has a lot you know, just sort of what's going on in storefronts right now and what they call showrooming, walking around with armed with all this information basically sort of strips a lot of places of their pricing power to ask anything above what is the lowest rate out there.

So you see retailer's response as having been driven by necessity. This breaking of the truth began with consumers, and now retailers are fighting back. Is that the right way to think about it? Essentially, yes, And that they're staring back through the screen and comparison shopping us and trying to figure out what is our walk away point? Because there's

something also an economics called the consumer surplus. Consumer surplus is basically money you would have been willing to spend if the price had been higher, but you didn't have to spend it because the price was set at whatever, seven dollars. But the consumer surplus is like if you would have been willing to pay twelve dollars, that's five dollars right there. Does the surplus go to the consumer's wallet or does the surplus just get spent elsewhere because

the consumer sees it as free money, just get spent elsewhere? Right? Yeah, how much of a surplus is it? Actually? Right exactly? Retailers are now trying to find ways to make more of the surplus their own. So one expert said this that in five to ten years, everything you buy will be based on personalized offers everything. Do you think that's true or do you think that's an overstatement? You know, as a great question, and I think in reporting this

the issue of fairness, you know, this comes up. You know, if you're sitting on an airplane and the person next to you is paid less, there's an element in us that kind of objects to that. That said, someone pointed out fairness is sort of a social construct, and it's possible that our notions of this could change. I mean, for instance, with stocks, if someone bought Microsoft stock at forty and you bought it at ninety, you don't hold anything again, right, right, But going back to your pricing

Macy right, who thought it was immoral? How do you think about that? Do you think it's immoral for consumers to pay different prices? For instance, if you buy a Mercedes, should the diapers you're buying for your kid costs more than the diapers somebody who drives Undai is paying. I

don't know. I honestly don't know there is. I think if there's a degree of transparency what's going on, then I think maybe it's fair where I think some of the things that really raise my eyebrows, or where they're doing things and profiling you in ways based on the fact that you have been browsing elsewhere that some retailers

have been accused of doing this. But can it be fair given that when we're talking about retailers manipulating prices, we're not really talking about human head buyers manipulating prices. We're talking about algorithms manipulating prices based on big data, right, So how transparent can it be? Doesn't that fly in

the face of transparency? Yes, yes, and and yes, And actually what kind of troubles me is that when some of these sort of irregularities surface, Amazon and other places can very easily say we're sorry, there was flying on the oitment. There was something bad with the algorithm, the algorithms at fault. It was unintended, and we will never know. Maybe it was, maybe it wasn't, And it almost doesn't matter if it was unintentional. It's a little bit like

the malfunctioning robot. Hell, right off, how is malfunctioning? Doesn't matter why exactly? When reading through this, I was fascinated to find that sometimes Yeaho's Finance did a piece on how clothing prices are affected by this too, and address that's available in a size small might cost more and a size large, And that seems maybe there's a lot of big data going into why that's happening. But doesn't that just seem wrong on the surface, or are we

just are we just living in an old construct? Well, interestingly, the technical economics term for this is price discrimination, which economists use not in the way that you and I mean discrimination, but it's a great question, like is this basically discrimination? There was three researchers from Spain who did an interesting study where they set up three different sort

of phony personas based in different places in the US. Basically, these were like dummy terminals where one of them just did a whole bunch of bargain shopping for you know, a couple of weeks, one of them looked at high end goods, and the third was somewhere in between. And they found indeed that these people got offered different prices even when they typed in on the search engine, like different products would be shown to them. Wow. So I think there is something kind of a haunting and spooky

about the unknowability. It's almost sort of like Heisenberg's uncertainty. If you can't know where the electron is just by the very fact you're looking at it. In some cases, you know, the price could really not exist until you look at it, and the act of looking at it sort of creates the price. So I think there's going to be We're gonna have to think about this a lot that's actually fascinating because it all does once again.

I mean, Heisenberg's uncertainty principle couldn't be more removed from your concept of transparency. Right, The price not existing until you look at it is again the opposite of transparent. And that's the thing we all feel like if we could just understand why right exactly? And here's the thing is, there's studies showing that even when people are shown their own irrational biases, that they still don't adjust, like we are just suckers for seeing twenty percent off thirty percent off.

And you know the work by knomen In Tversky which has been heavily used in this field, that we hate the feeling of loss. We want to avoid that, and when we see the possibility of a deal going away, we experience that as a possible loss. And there's been he studies showing that we are hardwired to jump at the feeling that we've won, even if economically we end

up with fewer dollars at the end. Well, that's part of what MADEI based so compelling, Right you won, which all that it meant was that you were willing to pay more than anybody else. Yes, but you won you write about another fascinating concept that existed in the old world of retail as well. So, but the left digit bias just touch on what that is, the left digit bias.

So in the dark ages before there was any data available, I was talking to an economist used to teach at University of Chicago back in the early nineteen eighties, and they acquired data from the new scanners at the grocery chain Jewel, and he said it overturned a lot of what he'd been teaching in class. For instance, he'd been teaching that the notion that pricing something at two ninety nine or two ninety eight increased sales was a myth.

He says, actually it was an artifact from the days when retailers were suspicious of cashiers taking something out of forced them to make changed so they wouldn't pocket any of money themselves. Well, he says, they got the data, and he says it turned out the effect was huge, that two ninety nine will sell a lot on especially on a car, you know, maybe not so, but on

a can of tuna exactly. And that just basically gets to our kind of limited attention spanner or ability to process that much information where we can't function like a computer. We walk into a store, and so we pay the greatest attention to the most important digit, which is the

one on the left and rose. For years have known that, which is why, for decade or for time, you know, time out of mind, they've known to set the price of milk and eggs quite low because they know that people have a pretty good fix on what that price should be, and so they use that to as a proxy to be like, is this place price well or not? And then knowing that they're not going to be as

comparative scrutinizing numbers of other products as much. So. The interesting point there, too is that it's not like this old world was perfectly fair to consumers. We were getting We were getting scammed in the old world, perhaps just in a different way than we are in the new world. Yeah,

but in a much smaller way, in a much smaller way. Yeah, Yeah, I guess I can see that paying to ninety nine or missing out on the slightly cheaper artichoke at the grocery store is a little bit different than having an entirely different price for an expensive dress presented to you online, right right, Yeah, that makes sense there was another piece of data, more proof that man is not a rational animal in your piece that Amazon would drop prices on

expensive items like TVs on Black Friday, and then that hike the price of the less expensive stuff needed the cables, for instance, needed to connect the TV, knowing that we would not look as closely at we being the consumers, would not look as closely at that. Right Exactly, there's you bought the TV. Now you do the cheaper at all.

But they're maybe the lost margin could be made up hugely just in the price of cables, so they can figure out ways to take advantage of how uneconomic we actually are, how irrational we can be, just on a whole new scale. Now then then the old world. I mean, it's made me think about my own shopping Happit's like

when do I stop? I don't always like to think about that, but but when do we stop and actually think about the price, and when do we just sort of buy, Yeah, that looks right, and you know it varies hugely, and when do you what makes you stop and think when something's more expensive? I mean, if you're buying a house or car, you're not going to be like, oh,

it's it's only ninety nine, that's ten. You know this, right, you know, just all the micro purchases that you do online where you've got your credit card out and yeah, I'll buy this Starbucks. Great example. You know people who then tally up how much Starbucks coffee they've drunk in the past year, and it's like three thousand dollars right right, And they could have paid a month of rent with their Starbucks bill. So to this notion that it's a battle, okay,

I'm going to start with just us and retailers. Who's winning. After you reported this piece, did you feel like, oh, the well educated consumer who's willing to invest time in price shopping can come out ahead in this game, or did you feel like we're screwed. Person who's stuck with me most is someone knows a great This name is Bonnie Patton. She had a Truth and Advertising dot Org and I asked her about her own shopping habits sort of at the end of the interview, just like what

about yourself? And she said, as a general matter, I find it so difficult to determine the actual price of the product that when she's shopping for her kids, she just makes all her decisions at the cashier. She just picks up clothes, doesn't think about price until she gets to the register, and if it comes out to be too much, she says, I don't want it. And then I asked, well, what about for yourself? And she says, well, I don't shop for myself. I mean, what do you mean?

She's like, I don't shop for myself, and she basically explained, like this has gotten so crazy. It's twenty percent off of fifty percent and this adds like ice. She can't handle the math and she just as a result, stopped buying things. For one good practical piece of advice is you just like ignore anything with a percentage symbol after it. Why percentage? Why do you ignore the percentage symbol? Percentage symbols speaks to our like human craving to win at

a deal. But if you looking at a lot of stores, you know everything will be twenty percent off fifty percent off the whole MSRP Manufacturers suggests retail price that increasingly is seen as kind of a joke that the FTC doesn't enforce the rules. I mean, notionally, it has to be sold somewhere at the listed price. But the few times people have looked into it, often that product was

never sold at its quote unquote list price. Okay, but wait before we go back to that, So you're essentially telling me that you came out of this piece thinking the only way to win is to just drop out. There's no oh, wait, win other than just drop out. I guess I'll stop looking at percentages. Okay, I just look at the dollar amount, which is hard and thinking. Sometimes it's a huge percentage savings, but it's it's a tiny dollar amount that you're saving. And I did all

this extra work to save seventy five cents. So if you can, maybe as a consumer, level the playing field a little bit by ignoring percentages, perhaps by checking out what about between the third combatant in this Amazon who wins there? Between retailers and Amazon and US? If you had to rank them in order, what's Amazon? Amazon wins Amazons? So how does this play out? I mean, in the end,

what retailers are trying to do? And I found this fascinating survey here that retailers argued only three percent of retailers believe their current model is going to remain sustainable in the next five years. So they're trying to do this to survive two right, and you can see back to your point about economic irrationality and see how this doesn't win for them if they're just slashing prices in response to what Amazon's doing. So how does that aspect

of it shake out? Well? Guru at Boomerang Commerce had a really interesting and from a retailer's standpoint, scary chart. The title of it was I think the crushing point, and it was that's frightening. But it was a chart that showed like years from nineteen ninety till now, and it mapped different categories like similar electronics, books, toys, and the percent of those sales that move online and what did show and then it lists bankruptcies in each sector.

So Circuit City that got the toys are us so called category killers who are now being killed themselves. It happens around the twenty five percent mark, so twenty five percent of sales are online and in that industry, and that means the retailers start to go bankrupt. Yes, because the consumers at that point have so much power and so much power to comparison price online, comparison shop online,

that it's just um. It usually sets off a vicious cycle, like they start cutting prices, cutting back on staff, cutting back radio, shack trapping, this kind of cycle. They offered really cheap batteries for a long time, but that just killed their margins. And meanwhile, you're taking away all the things that would drive people to a physical store in the first place, like some customer service, you know, human touch. You know. So freetailers are gonna win at this game

or have a chance. It's going to be online. They're they're not going to win in a physical setting. Well, I wouldn't go that far. I don't know. I don't know. I mean, if the past present anything is that we don't know what's coming in the past. It passed this prologue. Who the hell knows, right, Yeah, exactly, you know. But I talked to one interesting company called Everlane, and so they did this thing where they were like, we're gonna

be radically transparent about our costs on our website. They say, well, we're making this pashmina shawl, and it's the price is increasing, but that's because of the following things are happening in Mongolia, and so that's why we're increasing the price. They don't do discounts and their hope and the CEO who I talked to was, you know, he was hopeful that this might work. He was sort of skeptical. Okay, if he used the word hope and hopeful, I hope it's not

a strategy. Who said that, Well, is this? Is this? So is everlain just the lone resistance and doomed resistance to this or or do you think they've got a chance. Well, there's been other cases where you see, like pay what you want models, radio hit, Radiohead did that early with one of their albums and yeah, and the findings on that are sort of interest, you know, like some people will actually pony up what they consider to be a fair amount of money. Maybe it's not unlike being in

a museum. Whether it's a suggested donation. I have no idea if that's sustainable or doable thing. But it's being tried, so you're not really making any bets between who comes out on top. It's just all a moving puzzle right now. Yes, but it sounds like if you had to place your bets in one place, it would probably be on Amazon. Yes, yes, So do you see are there markets where it's different where consumers have more likelihood of coming out on top.

And are there markets, whether it's for online goods where you're more likely to be suckered? Does it vary by category of purchase? For example, if clothing is maybe more emotional and perhaps I don't know, electronics are less emotional, that might be totally wrong. Would be for me, but maybe not for everybody. Yeah, I think the more it's

a commodity and less specific. I mean, if it's a coat that you're only going to see at this one store, then we're probably less price sensitive to something than like getting the TV, where there's a lot of places we can get a TV. And what do you think happens on the legal side? Have you seen any did you hear of any cases being around this concept of discrimination or is it a murky area legally? Thus far it

is a murky area legally, to say the least. There was a famous gaze back in two thousand and seven, or the California man bargain hunter who he thought he had scored big when he found a patio set on overstock dot Com. When I showed up at his house, he's unpacking it and he noticed is a price tag on it. But it was a nine hundred ninety nine that it was on sale at overstock for four forty nine. Walmart price was two forty seven. That was on the price tag. Oops. Yeah, so o our bargain hunter doesn't

feel so good at this point. Yes, so, in fact, he had not scored the deal he had thought. He sued and actually won in a California judge awarded him six point eight million dollars in civil damages. Wow. Yeah, but these cases are fairly rare and it takes like a lot of In that case, they got access to internal emails of the company, were it made cleared that

they were aware of what was going on. But it comes back to this point you made earlier about the MSRP or manufacturer suggested retail price even in the old world, not being all it was cracked up to be, right exactly. Yes, so well, thank you. I think I'm going to be far more frightened and aware in my online shopping from now on. And thank you for coming on, thanks for having me. Okay, Well, that Overstock lawsuit raises an interesting prospect. Maybe we can win back the money we're losing to

newly empowered retailers by filing lawsuits. I'm kidding, of course, but the questions raised by this are pretty disturbing and even profound. How can we keep ourselves from being yes suckered by retailers? Can most retailers find a way to compete with Amazon? And is this brave new world what any of us would consider fair? My takeaway there are no easy answers. Stay tuned and shop smart. Makia Killing is a co production of Pushkin Industries and Chalk and Blade.

It's produced by Ruth Barnes and Laura Hyde. My executive producers are Alison McClain, no relation in making Casey. The executive producer at Pushkin is Mia Loebell. Engineering by Jason Rostkowski. Our music is by Jed Flood. Special thanks to Jacob Weisberg at Pushkin and everyone on the show. I'm Bethany mcclin. Thanks so much for listening. Find me on Twitter at Bethany mac twelve and let me know which episodes you've most enjoyed.