Online shopping: The hidden price
Updated: Mar 24, 2021
Khadra Mohamed explores why algorithms used by online retailers face regulation by the Competitions and Market Authority (CMA) and what potential regulations may mean for consumers and businesses.
When choosing items to buy online, many of us are bombarded with signs saying ‘selling out fast’ or ‘23 people looking at this now’ which online retailers hope will give us the push to click ‘checkout’. These signs are operated via an algorithm. Essentially providing misleading information, they have faced review by the Competition and Markets Authority. Furthermore, these algorithms ultimately affect every step of online shopping. When searching for an item, search results may favour specific brands or deals. The CMA has recognised these tactics to be disproportionately affecting consumers and has concluded that regulation is needed.
Algorithms and collusion?
While algorithms and personalised data collection are key tools in online shopping, the absence of regulation and transparency is a cause for concern. Research by CMA has suggested algorithms can result in higher prices for consumers. This is facilitated by collusion between businesses on typical consumer spending habits and browsing data. Algorithms dictate which products are pushed to the top of search results and can be used to exclude competitors resulting in collusion implicitly. This level of interference paints a dark picture of online shopping.
There are 3 main ways in which algorithms can reduce competition between retailers:
If companies are using the same third-party price-setting software, key information can be shared amongst retailers to inform price deviations.
Algorithms can collude implicitly which reduce the burden of firms communicating with one another.
The software rapidly responds to competitors’ price deviations.
All 3 ways result in sustained high prices. For many retailers, algorithms are indispensable to their business model. Therefore, it is clear that feasible regulations and adjustments are needed to ensure there is a balance between consumers’ interests and rights and businesses’ interests.
Algorithms in action
Buying plane tickets and booking a hotel? Chances are the top deals you are seeing are a manipulated version, where the ranking is based on the amounts of commission paid to the site. This search manipulation misleads consumers and impairs their ability to complain or challenge the substandard service they may receive. Furthermore, for consumers it is difficult to detect the effects of algorithms, which undermines consumers’ confidence and shows how this is an area that needs intervention quickly.
The unregulated use of algorithms poses a threat to small businesses who may not have the resources to pay for use of algorithms or personalised advertising, resulting in wide disparities in the engagement of small businesses. Unregulated use of algorithms can hinder and restrict competition between firms and result in smaller firms being pushed out. Similarly, the unregulated use of algorithms provides an opportunity for consumer confidence and transparency to be undermined, specifically when consumer choice is manipulated or limited.
Personalised recommendations are beneficial, as they can help you find a similar product to the one that was too expensive but what about when they are used to make you pay disproportionately more? The Financial Conduct Authority (FCA) found that home and motor insurance companies utilised algorithms and personalized data collection to pinpoint which consumers were most likely to renew and increased prices accordingly, essentially engaging in anti-competitive behaviour. This use of personalised data seems to be a clear misuse of pricing power and seems to be built on the notion that many loyal consumers will not fight or challenge high prices and raises the question of how many consumers have been affected. While the Financial Conduct Authority recognised that consumers shouldn't have to negotiate at every renewal to avoid high prices in its 2019 report, there continues to be a lack of regulation to protect consumers’ interest.
There are several questions left unanswered: for example, how will customers know that they are essentially paying more due to an algorithm and if they are, what rights are they entitled to? These questions can only be answered via cohesive market investigation to gain a clearer picture of trends alongside a platform where consumer complaints can be dealt with effectively.
Consumers can take several precautions to combat price and search manipulation by deleting cookies, use an incognito browser to first check the price and block third party cookies. Another method is to use multiple browsers. For example, you can browse on Microsoft Edge, and then purchase using Chrome, so that the site will see you as a first-time shopper.
Now more than ever, there needs to be strict regulation and intervention to ensure all consumers are treated fairly and transparency is maintained.
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