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Comment by rflrob | Hacker News Reader

My favorite story of algorithmic pricing gone mad was discovered by a postdoc in my grad school lab, leading to an out of print book being listed on Amazon for over $23 million: https://www.michaeleisen.org/blog/?p=358

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I worked on software that did algorithmic pricing. It was a race to the bottom because some bozo wanted to be on the first page of sellers. So they’d price it one penny under the lowest price. The next seller would match it. Before you knew it, the product was worth dollars or cents. We also had people do it on purpose (we called it price bombing), but that was easy to negate since we filtered out competitors with low ratings. But there went that bozo, price matching and beating the price by a penny…

It was madness trying to code around people not thinking about their effects on the market and still turn a profit. Spoiler: we never did turn a profit on bozo powered listings, because at some point, it’s better to free the inventory space instead of waiting for the bozo to sell their items and let the price climb back up over the course of months or years.

Why does pricing competitively to appear in the front page earn the label “bozo”? Should they prioritise the effects on the market ahead of their own profits or goals?

It sounds like a really interesting story that’s missing a few steps due to space - it’d make a great blog post in detail!

I think it is probably a great illustration of how merchants actually think. The idealized vision of a market induces a seller to act as you say, in reality there is probably a lot of indirect collusion, where people don't undercut each other too much, to not "damage the market", even without explicitly communicating with each other.

There has to be a floor. This is the point where no one is making any money, ever. You can sell below the floor when you’re just trying to make some inventory space because the things you can replace that space with is more profitable. But “bozos” were people who would irrationally price one penny less, even below the floor. Once a couple of them got in the same listing, the value of the item would drop pretty slowly over the course of days or weeks. Especially if their inventory was in the 10-40 range (yeah, we had a way to guess other people’s inventory) and the velocity of the item was 1-2 per week. With the value of the item dropping by a penny every day, we could work out how long we had. Sometimes we would just outright buy their entire inventory just to get rid of them and get the price under control for high value items. People pricing competitively above the floor was fun to write software for. It was the irrational actors that could seriously damage things for everyone.

Now most used books on Amazon cost 1 cent, with $10 shipping costs, because that's the default sort

They make a killing on that shipping too, you’re paying retail rates for shipping, but you better believe they have contracts with DHL, USPS, etc. that is well below retail cost.

I feel pretty smart because I immediately found that same book on eBay for only $8 million

Textbook arbitrage - congrats on the fortune

Unfortunately, I have a feeling that the bid-ask spread on that book is approximately $23 million.

So that’s why I couldn’t flip it

How do you know it was a textbook?

Whenever I see items like that, all I can think is embezzlement or tax evasion - but then again you'd think they would do that on less unique items (like $1200 for playstations).

I actually have that book, bought when it was first published, so long before the Amazon story.

This is great. Thanks for posting.

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