Amazon effect could change monetary policy

More frequent price changes for goods and a rise in the consistency of pricing due to the growth of online retailers may be affecting inflation, according to an academic paper presented on Saturday to some of the world’s top central bankers.

“In the past 10 years online competition has raised both the frequency of price changes and the degree of uniform pricing across locations,” said Alberto Cavallo, an associate professor at Harvard Business School, who analyzed how so-called multi-channel retailers – those with brick-and-mortar and online outlets – such as Walmart Inc have reacted to the rise of Amazon.com Inc.

Algorithmic pricing technologies are widespread among both types of retailers and the transparency of the internet has also reduced pricing disparities, he said in the paper delivered to the annual conference of central bankers in Jackson Hole, Wyoming.

These results are consistent with intense online competition, characterised by the use of algorithmic or “dynamic” pricing strategies and the constant monitoring of competitor’s prices,” Cavallo said.

He then looked at price-points for identical goods across different locations, and found that online strategies had very little price discrepancy across different geographical areas.

What it reveals is that the rise of online retail has added an element of transparency, which “imposes a constraint on brick-and-mortar retailers’ ability to price discriminate across locations”.

The net effect is that the big online players — in response to changes elsewhere in the economy — are able to a) use their database to tweak prices more frequently, and b) apply those changes across bigger shares of the market.

So if the cost of oil rises by X which increases shipment costs by Y, an online giant such as Amazon can immediately shift its pricing accordingly.

“For monetary policy and those interested in inflation dynamics, the implication is that retail prices are becoming less ‘insulated’ from these common nationwide shocks,” Cavallo said.

A number of Fed policymakers have raised the prospect that relatively low levels of US inflation in recent years in the face of a strong economy may be due to the ability of companies like Amazon to keep a lid on overall prices.

Cavallo also found retailers more responsive to changes in other factors as well.

“Fuel prices, exchange-rate fluctuations, or any other force affecting costs that may enter the pricing algorithms used by these firms are more likely to have a faster and larger impact on retail prices than in the past,” he concluded.