Retailers are using artificial-intelligence software to set optimal prices, testing textbook theories of competition; antitrust officials worry such systems raise prices for consumers
The Knaap Tankstation gas station in Rotterdam, Netherlands, uses a2i Systems artificial-intelligence pricing software. Photo: Knaap Tankstation BV
ROTTERDAM, the Netherlands—One recent afternoon at a Shell-branded station on the outskirts of this Dutch city, the price of a gallon of unleaded gas started ticking higher, rising more than 3½ cents by closing time. A little later, a competing station 3 miles down the road raised its price about the same amount.
The two stations are among thousands of companies that use artificial-intelligence software to set prices. In doing so, they are testing a fundamental precept of the market economy.
In economics textbooks, open competition between companies selling a similar product, like gasoline, tends to push prices lower. These kinds of algorithms determine the optimal price sometimes dozens of times a day. As they get better at predicting what competitors are charging and what consumers are willing to pay, there are signs they sometimes end up boosting prices together.
Advances in A.I. are allowing retail and wholesale firms to move beyond “dynamic pricing” software, which has for years helped set prices for fast-moving goods, like airline tickets or flat-screen televisions. Older pricing software often used simple rules, such as always keeping prices lower than a competitor.
These new systems crunch mountains of historical and real-time data to predict how customers and competitors will react to any price change under different scenarios, giving them an almost superhuman insight into market dynamics. Programmed to meet a certain goal—such as boosting sales—the algorithms constantly update tactics after learning from experience.
Ulrik Blichfeldt, chief executive of Denmark-based a2i Systems A/S, whose technology powers the Rotterdam gas stations, said his software is focused primarily on modeling consumer behavior and leads to benefits for consumers as well as gas stations. The software learns when raising prices drives away customers and when it doesn’t, leading to lower prices at times when price-sensitive customers are likely to drive by, he said.