Algorithmic pricing predates online retail

From Misbehaving, by Richard Thaler, pg 134. Social norms hindered it in this instance. Why could the same not true be true of online retail? 

The CEO of Coca-Cola also discovered the hard way that violating the norms of fairness can backfire. Douglas Ivester, aged fifty-two, appeared to be on his way to the job of chairman when he abruptly resigned after a push from several board members including legendary investor Warren Buffett. Although several actions contributed to his downfall, one speech in Brazil attracted the most attention. At a press conference, Mr. Ivester was asked about tests Coke was running with vending machines that could change price dynamically. He replied: “Coca-Cola is a product whose utility varies from moment to moment. In a final summer championship, when people meet in a stadium to have fun, the utility of a cold Coca-Cola is very high. So it is fair that it should be more expensive. The machine will simply make this process automatic.” As the Wall Street Journal stated in a story about his downfall, Mr. Ivester seemed to have a “tin ear.” An editorial cartoon captured the feelings of the general public perfectly with an image of a customer walking away from a Coke vending machine with a can in his hand, looking back to see an arm reaching out of the machine and picking his pocket.

4 thoughts on “Algorithmic pricing predates online retail

  1. I’m not sure where “Algorithms” comes in with this example. There was no “algorithm.” In this example, it was simply the axiomatic, 19th Century throwback to utility maximization. While there is a formula: Marginal Utility (x) divided by Price of (x) = Marginal Utility of (y) divided by Price of (y), that’s not an algorithm per se – it does not establish a set of mathematical “rules.” Instead, it relies purely on axioms: that which does not need to be proven. Marginal Utility establishes assumptions – not “rules.”

    Mr. Ivester was simply following the (algebraic) utility maximization formula that had (probably) been taught to him in business school, which had been taught since at least the Marginal Revolution.

    This may be an ontological difference, however, in my work in Economic Sociology, I find that the “play book” of economics (especially as a tool of legitimization by neoliberalism) is important for Sociologists to parse. While Sociology (rightly) looks at social location & social forces, Homo Economicus has no social location, and is never impacted by the social. Is Homo Economicus real? Of course not – but it is the protagonist in the economics & neoliberal “play book” that has an extreme impact in everyday life.

  2. Interesting question.

    Maybe because this case of price discrimination was very visible, and online is less so? For instance, even if I know that most people on a plane paid a price different to the one I paid, I have no way of knowing if I paid more or less than them.

    I think it also depends on how much control you think you have. So, in the case of the plane tickets, I know that if I had booked earlier, I too could have got a lower price. But I chose not to. Which is why the ‘pink tax’ is so infuriating (in my view, of course).

  3. That interesting, I guess the key question is if social norms can trump technological possibility, what factors make it likely that this will or won’t happen in each case? The opacity of online shopping is definitely the key one I think. Really interesting point about control, will think further

  4. Surely the algorithm are the rules which govern the variable pricing? I’d line to read more about how the machine actually worked

    V interesting thanks & now agree, am enjoying Thaler’s book on history of behavioural economics more than I anticipated. Interesting overlaps with sociological critiques of classical economics.

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