Tag: internet shopping

Last year, an academic discovered that the only two firms on Amazon selling new copies of a classic biology textbook were charging well over $1 million (plus $3.99 for shipping!). Furthermore, when he checked the next day, prices had risen even further to nearly $2.8 million! Intrigued by this strange pricing behaviour, he started to investigate the prices further.

In oligopoly markets with a small number of players, firms must make strategic decisions taking into account how they expect their rivals will react. One option in today’s online market places is for firms to use computer algorithms which automatically adjust their prices according to the prices their rivals are charging. The results of his investigation suggested that this was exactly what was causing the prices for this textbook to be so high.

One of the firms appeared to adopt a pricing rule which set its price at 0.9983 times the price of the other firm. This seems to make sense – this firm wants to undercut its rival in order to be more likely to sell its copy. However, if both firms operated under this strategy, we would expect to see prices falling over time (see also). In contrast, the strategy of the other firm appeared to be to price 1.270589 above its rival’s price. Why would it want to try to make sure it was always more expensive that its rival? The academic’s plausible explanation was that:

“…they do not actually possess the book. Rather, they noticed that someone else listed a copy for sale, and so they put it up as well – relying on their better feedback record to attract buyers. But, of course, if someone actually orders the book, they have to get it – so they have to set their price significantly higher – say 1.27059 times higher – than the price they’d have to pay to get the book elsewhere.”

Put both of these pricing rules together and prices will continuously rise over time! This was exactly what the academic observed for over a week, until human intervention appears to have returned prices to a more sensible level.

As Tim Harford discusses in his recent blog post, it had been hoped that online market places would result in very low prices because the high degree of price transparency increases competition. Clearly the prices Amazon was initially charging for the textbook didn’t support this theory and even after human intervention prices would seem to be well above marginal production costs. However, as the blog post goes on to explain, we should not necessarily expect price transparency always to lead to low prices. Economic theory shows us that in oligopoly markets, when a small number of players interact repeatedly, they may be able to collude tacitly on high prices. Furthermore, a high degree of price transparency may help such collusive behaviour because it makes it easier for firms to detect cheating by a rival.

Amazon’s $23,698,655.93 Book About Flies (SCREENSHOT) The Huffington Post, Steven Hoffer (26/04/11)


  1. What are the key features of competition between book sellers on Amazon?
  2. What price setting rule would the two firms have to use for prices to continuously fall over time? Provide an illustrative example.
  3. What are the pros and cons for a firm of relying on a computer algorithm to set its prices?
  4. How might a firm program its price setting algorithm if it wanted to collude tacitly with its rivals?
  5. Can you think of any other explanations for the pricing strategies that the two Amazon sellers adopted?

Is this a problem you find when you go shopping? Maybe that’s because the shop that sells it has closed. A report by the Local Data Company has revealed that one in eight shops stand empty on Britain’s high streets, after the recession saw vacancies shoot up by 24% in the second half of 2009. The number of empty town-centre shops climbed to 17,880 in the second half of 2009, equivalent to 12% of the 149,000 shops covered by the research.

Margate in Kent and Wolverhampton in the Midlands were two of the worst-hit areas, where vacant shops stood at 27% and 24% respectively. Take a stroll down a high street in almost any city or town in the UK and you are bound to see ‘Shop for let’. We’ve seen Woolworths and Borders close down and Threshers’ parent company collapse. But these stores have largely remained empty.

Empty houses have also been a problem as the number of repossessions increases. Statistics show an average of 126 people a day were thrown out of their homes in 2009. What is the explanation behind this?

An obvious answer is the recession. As shops felt the strain of low demand, some were simply unable to cope and they shut down as a result. At the same time, new firms were reluctant to take the risk and enter the market during an economic downturn – and who can blame them?

However, are there other reasons why Britain’s high streets are seeing more and more empty shops? The following articles look at the reshaping of our high streets and some of the explanations behind it.

Empty Shops
Shops ‘empty due to recession’ The Press Association (11/2/10)
UK recession has left one in eight shops empty Telegraph, Graham Ruddick (11/2/10)
Bradford second worse for empty shop premises Telegraph and Argus, Will Kilner (11/2/10)
25% of town shops now empty Express and Star (11/2/10)
British town centres in crisis, conference told Reuters, Sinead Cruise (10/2/10)
Empty shop numbers continue to rise in UK Property Week, Laura Chesters (10/2/10)
Empty shops caused by more than recession Startups (12/2/10)

Empty Homes
Buy-to-let: Landlords blow as tenants struggle to pay Telegraph (11/2/10)
Housing Minister says repossession is the ‘best thing’ for homeowners Telegraph, Myra Butterworth (11/2/10)
Home repossessions at highest since 1995 This is Money (11/2/10)


  1. What are the main factors behind the high number of empty shops? Use a demand and supply diagram to illustrate these factors.
  2. In the Startups Article, the BRC Director says: “High street shops are often battling big bills for business rates and rents, parking and access difficulties, as well as failure to manage and invest in the area.” Illustrate this on a diagram and explain how this effect has contributed to empty shops.
  3. To what extent is more internet shopping the main cause of the problem? Why is it cheaper to run a business via the internet than on a high street?
  4. Why have some cities and towns been more affected than others?
  5. Is there a link between empty shops and repossessions?
  6. What more could the government and local councils do to try to encourage businesses to set up on the high street?