In an increasingly digital world, the idea of machines setting prices may sound mysterious. However, behind the headlines, algorithmic pricing in retail offers tangible benefits and lower costs for consumers in ways that traditional pricing models simply can’t.
Pricing algorithms are systems that recommend what offers to make, usually based on data about market conditions such as supply and demand and customer preferences. They are a digital evolution of traditional couponing strategies. Where consumers once had to wait for coupons and opt-in to find many discounts, now algorithms can identify the conditions where a discount is most effective and offer the savings to customers quickly.
When used strategically, this emerging tool helps retail businesses to operate more efficiently, respond to market conditions and ultimately pass on timely savings to shoppers. This approach is already creating wins for consumers in some concrete ways:
Algorithms Drive Competition Between Retailers
One of the most powerful consumer benefits of algorithmic pricing comes from its ability to intensify competition among businesses. In the highly visible world of online retail, where a quick search can reveal dozens of sellers for the same product, algorithms are constantly monitoring prices and adjusting accordingly.
- E-commerce Marketplaces: E-commerce marketplaces are using these tools to keep prices low. For example, Amazon as a seller for its own products frequently adjusts prices. It also offers tools to help sellers on its platform give the best offers possible, which on highly competitive products may entail frequent price adjustments. Meanwhile, Walmart uses algorithmic pricing to uphold its “Everyday Low Price” strategy by continuously monitoring rivals’ prices and making strategic adjustments to maintain its low-price leadership, too. Best Buy’s Price Match Guarantee is supported by AI-powered tools for frequent adjustments and forecasting demand shifts. This creates a continuous battle where retailers are consistently vying for consumers by offering them the lowest price. For shoppers, this means more competitive prices and, often, better deals.
- Online Retailers Broadly: This competitive effect isn’t limited to the biggest players. Smaller shops also leverage algorithmic pricing tools to keep tabs on the market, using features from companies like Shopify or Etsy to help them. If one store offers a discount, others can quickly follow suit, creating a more dynamic and consumer-friendly pricing landscape than would be possible with manual price adjustments.
Expanding Access and Affordability
Beyond direct price reductions, algorithmic pricing can expand access to goods and services for a broader range of consumers.
Some forward-thinking public transit agencies now use algorithms to offer discounts to lower-income riders during off-peak hours. Programs like San Francisco’s Clipper START card, for instance, provide half-priced bus and rail fares to eligible individuals, effectively expanding access to essential transportation for those who need it most. It uses means‑tested algorithms to determine riders’ eligibility and apply a consistent discount.
Similarly, apps like Too Good To Go tout “AI-powered discounting” to help consumers purchase surplus food at reduced prices from local businesses, effectively combating food waste while providing affordable meal options.
Should Policymakers Get Involved?
Recently, these innovations have attracted the attention of some policymakers who want to ensure companies are protecting consumer welfare while using new tools. Some have proposed restricting or even banning the use of algorithmic pricing.
However, existing laws cover many of their concerns already. For example, the Sherman Antitrust Act already makes price-fixing illegal. Whether collusion is orchestrated by humans in a smoke-filled room or facilitated by software, agreeing with competitors to fix prices remains a clear, often criminal, violation. The DOJ’s ongoing case against RealPage demonstrates that existing laws are already equipped to address collusion via algorithm. Additionally, charging different prices based on protected class data, such as race, age, gender and others, is also already prohibited by current law.
Over-regulating algorithmic pricing risks chilling price competition and innovation, particularly for small businesses. Ambiguous regulations could create significant uncertainty, making businesses hesitant to offer discounts with the help of algorithmic pricing tools, for fear of inadvertently violating complex rules or inviting the ire of bureaucrats. Such regulations could disproportionately burden smaller firms with compliance costs and potentially force companies to disclose trade secrets or private consumer data, hindering their competitiveness and stifling the very innovation that drives market efficiency and consumer benefits.
Algorithmic pricing offers substantial advantages for shoppers and drives more traffic for businesses, large and small. Policymakers must be wary of tying up these benefits with unnecessary, burdensome red tape. By increasing competition and enabling more flexible pricing, algorithms can help companies build markets where savings are more accessible, services are more available and real bargains for consumers are often just a click away.
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