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Why Do Gas Station Prices Constantly Change? Blame the Algorithm by: Sam Schechner May 09, 2017

TOPICS: Pricing, Pricing Strategy, Technology

SUMMARY: Artificial intelligence is a technology that will change many industries. Now it is changing pricing. Setting prices evolved over time. Low margin businesses like gas stations used to engage in prices wars dropping prices close to wholesale costs until a competitor began raising prices again. Gas stations using artificial intelligence to set prices change prices multiple times throughout the day and make changes that could seem counter intuitive. For example, if a competitor across the street lowers prices, the algorithm might raise prices recognizing people might not want to wait in line for a lower price. The pricing methods use extensive data. There are some who think antitrust rules will need to be rewritten because the algorithms do not meet the legal definition of collusion. It often seems consumers end up paying higher prices.

CLASSROOM APPLICATION: Amazon uses data to price and sell, but now other retailers are using technology to help raise and lower prices in response to data and the results of algorithms that use artificial intelligence. AI can help gas stations set prices and adjust them throughout the day. For example, prices might be higher at the end of day. This kind of pricing works at gas stations because it is a high-volume business of a fairly uniform commodity. The algorithms can learn to adapt and use extensive data that would be beyond the ability of an individual to collect and incorporate. The results in Denmark for several stations were compared for stores that included a control group. The conclusion was the software averaged margins that were 5% higher. The algorithms can take into account consumer behavior and other data in addition to prices. Humans remain in control and they have different strategic goals. Despite this there may be challenges in the future to AI pricing and changes to antitrust laws and regulations.

QUESTIONS:  1. Describe how retailers and gas stations used to make pricing decisions and explain how that could lead to price wars. 2. List the kinds of data and information incorporated into AI pricing. Why does the data include more than just historical prices (include a web search definition of “algorithm” in your answer)? 3. Have you or a friend or family member ever seen gas prices change quickly up and/or down in the same day? Tell us about it… 4. Explain how the algorithms change and adapt to set gasoline prices? 5. Evaluate the results for those stations using the AI pricing algorithms by discussing how prices changed and the financial results for the gas station.