Is the internet the great price equalizer or anything but?
A new university study finds that, while the general belief is that online comparison shopping helps you find the lowest prices, it may not be so if you’re browsing from the wrong zip code.
The study found:
- Online retailers exhibit substantially less uniform pricing than offline retailers;
- Online price differentiation across competing chains in narrow geographies was also found to be greater than offline retailers.
Researchers at MIT Sloan Business School and IESE Business School tracked 88 items at online grocers, including Amazon Fresh and Walmart Grocery, across 30 zip codes and then compared the prices to physical stores.
In one study from early 2019, a 12-pack of Coca-Cola sold by Amazon Fresh cost $6.99 for residents of a zip code in Manhattan’s Upper West Side and Harlem versus $4.99 in Cambridge, MA.
Online prices were also found to often change within a few hours. Amazon was found to respond to nearly three-quarters of Walmart’s price changes, often within hours.
The study further found greater price differences for the same 12-pack of Coca-Cola from different online grocers than at physical stores across an area. “This is surprising because a consumer can easily check competitors’ prices, which you would think would lead to greater transparency and convergence of prices. Yet, this only happens occasionally,” said MIT professor Roberto Rigobon in a statement.
Online grocers are taking advantage of algorithm pricing that continually adjusts prices based on factors like availability, pricing at competitors and individual shopping behavior. Online grocers can also change prices digitally much easier than physical grocers that must switch out price tags on store shelves. The price adjustments were found to be less related to demographics, such as higher prices landing in wealthier zip codes, but to the sensitivity of consumers to prices.
Researchers said consumers are aware that algorithmic pricing influences quoted prices for airline tickets and ride shares, but that they don’t expect such variable or dynamic pricing for products such as groceries. “Online retailers are taking advantage of our ignorance, and it’s up to consumers to stay alert if they care about getting the lowest price,” said Prof. Rigobon.
- The Pricing Strategies of Online Grocery Retailers – National Bureau of Economic Research (NBER)
- Buyer Beware: MIT Sloan study shows surprising algorithmic-driven price variations among online grocers – MIT Sloan/PRNewswire
- Do retailers need to make price optimization a priority right now? – RetailWire
- Should uniform pricing be the norm for large chains? – RetailWire
DISCUSSION QUESTIONS: Is being able to tailor a wide variety of algorithm-driven prices to consumers online beneficial for retailers? Will consumers get used to variable pricing online or do you see the potential for a backlash?