However, DDP will lead to a zero-sum optimization in today’s market conditions. A.T. Kearney anticipates that DDP will lead either to a zero-sum optimization (as every market player feels forced to adopt DDP) or even to a strong increase in destructive price competition and consumer distrust. Here’s why:
Automatic price matching means instant retaliation. Retailers believe they can grab some share by heavily discounting a hot item. But if all major players are matching within minutes or hours, no seller gains anything because punishment is immediate. A DDP market test (Figure II) in a highly competitive industry revealed that after a price adjustment, prices are matched within two hours; price declined by 50 percent in less than 48 hours, and, hence, drove a loss for all players. Evidence suggests that in an automatic price-matching world, prices are aligned across all major markets (as shown in a previous post).
Figure II – Immediate punishment - game theory at work
Automatic price matching is not perfect. If automatic price matching was perfect, most players would quickly abandon price-aggressive moves because they would always lose. However, matching and sustaining large-volume online price scans over thousands of SKUs across multiple web sites for different geographies and numerous times a day is easier said than done (even for a short list of Key Value Items). Smart competitors could still blind retailers and/or feed false pricing information using the trace of large volume scans on their web logs. One does not need the famous Turing test to spot price matching robots (as evidenced in Figure III).
DDP drives consumers to aggregators and hurts brand power / stickiness for companies. In the past, consumers were forced to live with price differentiation for perishable inventory such as hotel rooms and airline seats. Consumers fought back by routinely using aggregators / price comparison sites like booking.com because those sites give them at least an illusion of price transparency. Now aggregators dominate the global customer interfaces in the travel industry and their growing loyal customer base and brand power is challenging legacy travel providers. DDP is already making price trackers like Keepa.com (which focuses only on Amazon) quite popular.
Customers don’t like price differentiation. A recent survey by Rogator showed that if Amazon differentiated prices depending on whether the customer uses a PC or a smartphone, 54% of Amazon customers and 81% of non-Amazon customers said this would be a reason to stop buying from Amazon. But even if prices “only” change over time and are not differentiated by customer, the question remains: Is the kind of random pricing illustrated in Figure IV the price and brand image you want?
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