Amazon was encouraging customers to go into brick-and-mortar bookstores on Saturday, and use its price-check app (which allows shoppers in physical stores to see, by scanning a bar code, if they can get a better price online) to earn a 5 percent credit on Amazon purchases (up to $5 per item, and up to three items).
Amazon seems to be using decentralized market intelligence to undercut the competition. Good for consumers but bad for bricks-and-mortar retailers, as Richard Russo explains. But the logic can equally go the other way. Firms can use market intelligence to maintain high prices. If Firm A can immediately observes Firm B’s price cut (and vice versa), it can match the price cut immediately. This can eliminate the incentive to cut prices and hence allow firms to maintain high prices. A local example:
Over a four-year period beginning in the summer of 1996, the two dominant supermarket chains in the Chicago area charged virtually identical prices for milk, attorneys in a class-action lawsuit accusing Jewel and Dominick’s of price-fixing charged Friday in opening arguments.
So closely aligned were the chains’ pricing structures for the staple that whenever one changed milk prices the other would match it within days, the attorneys alleged….
For example, he said the chains lacked competitive behavior, indicated by a July 1996 memorandum by Dominick’s officials outlining an arrangement with Jewel in which Dominick’s employees would be permitted inside Jewel stores to check prices.
Can Dominick’s and Jewel now use iPhone apps to implement a collusive scheme without hiring employees to visit each other’s stores? There is a large mass of anonymous consumers. The firms offer discounts via apps. It would be in consumers’ interests to collude with each other, reject discounts and refuse to use the apps. But with a large mass of anonymous consumers, collusion is impossible to enforce. The firms can trigger a free-rider problem or prisoner’s dilemma amongst consumers so everyone uses the apps to get discounts. The market intelligence so gathered can be used by the firms to collude. As a consumer, this is the Orwellian nightmare I fear, the reverse of Richard Russo’s.
(Hat Tip: Mort Kamien told me about the milk case years ago. Perhaps he testified against the supermarket chains?)