Amazon Pricing Algorithm

I only recently discovered ProPublica and their free datasets. One that caught my eye was a file that compiled the top selling products on Amazon by their price and seller. The article that was produced using this dataset, “Amazon Says It Puts Customers First. But Its Pricing Algorithm Doesn’t” says Amazon uses default features for affiliated sellers, but not for third party sellers. Mainly, they don’t display the shipping price for Amazon affiliate sellers, but they do for third parties. People who are not wary to this will default to buying Amazon goods despite the total price being higher than displayed. This is nothing new in economics. People are busy and they can’t always be paying attention to prices. Firms use that fact to make a profit.

So how much is the difference between the Amazon affiliate sellers versus your small online merchant? Using the same dataset from the article, I made some histograms showing the difference in display price versus the total price (price + shipping). For the Amazon goods, you should expect, on average, another $7.69 to the sticker price.

And for consistency, here is the third party histogram. There is no difference between the sticker price and the actual price because Amazon’s algorithm chooses to display the full price.

However, this doesn’t mean Amazon goods are always more expensive than third party goods. Even with the shipping cost, Amazon goods can be cheaper. The main point is prices are misleading on purpose because the firm’s goal is to maximize profit, not consumer surplus.

Github code