Jerry Kaplan explains how Amazon take advantage of the fact that they know a whole lot more about buying patterns than the average consumers, and this sort of information asymmetry is the real crux of their business plan. Many websites are tracking and studying our behavior and in a way they help you by presenting products and information that they think that they believe based upon your browsing history and other characteristics are going to be of great interest to you. But there’s also a darker side to that activity. While that may add great convenience to you the truth is that that also permits them to look at questions like what do they estimate you’re willing to pay for that product?
A lot of people think mistakenly that you’re supposed to charge the same price for a product to everybody. That’s not the case. You can’t discriminate based on certain criteria – race, religion, sexual preference. But it’s perfectly fine for me to charge this guy more than that guy because I think he’ll pay more and just look at airplane tickets as a perfect example of that sort of thing. When taking those kinds of decisions on websites. Amazon is a fantastic example of incorporating very sophisticated machine run algorithms that are designed to manage the overall behavior of the group of people who are visiting that website. They will cut you the least slice of pie, small slice of pie that they can to get you to send you to do what they want you to do in order to maximize the profits of the corporation. The machine learning algorithm is analyzing time of day and the characteristics of what you bought in the past and how you’ve respond to different kinds of incentives, where you came from and what kind of browser you’re using to adjust the price to just the point where you’re going to buy at the highest possible price.
As a customers purchasing from Amazon you adhere to certain statistical properties. So as a group you don’t have that freedom because it can be managed by the entity on the other side. Amazon is a wonderful company but it is basically one giant machine learning algorithm. It is designed to do what’s called arbitrage. It knows what it can buy things for. It knows what it can sell things for. And it can adjust the profitability in that zone in order to maximize sales, in order to maximize profits. And it can do so in a way that is far more efficient than has ever been possible in retailing before.