If you are an Amazon Seller, you have realized the potential of the platform. But inevitably also the pains of it. One of these pains is price wars.
With most professional amazon sellers using repricing software, it’s enough for one competitor to apply a rule to undercut the lowest price by one cent. The race to the bottom is inevitable. This is true even if all other sellers decide to match the lowest price.
Game Theory Changes the Game
You can’t choose your competitors and you can’t control which strategy they will use, but you can study their behaviour. You can anticipate their next move and select the optimal strategy for yourself.
This is where game theory comes in…
There is a way to use Game Theory to your advantage, choosing the right repricing strategy to optimize your price and avoid price wars.
Selling on Amazon is described as “Non-cooperative” game in Game Theory. This means the competition is governed only by the decisions you and the other sellers make. For example, if your competitor’s strategy is to match your price (being the lowest price), and you decide to increase your price, the result is you both sell at a higher price.
What do Amazon Sellers & Prisoners have in common?
Prisoners and Amazon Sellers currently act as if there is always only one rational option. The only option that doesn’t offer the absolute best outcome but also the only one that avoids the absolute worst outcome.
The reason for this behaviour is that they apply a “non-cooperative” strategy. They try to do what’s best for them in the short term.
This behaviour relates to the mathematical phenomenon of the “Prisoner’s Dilemma”.
For prisoners, this would mean that they have one chance to either betray their partner or not. Where betraying would mean a lesser sentence. And not betraying would mean keeping the long jail time they already have. The outcome is they always betray their partner.
Amazon sellers not lowering their price could mean never winning the buy box. Beating the lowest price by a few cents could mean winning the buy box for a while. But eventually, the other sellers will also lower the price and in the end, you will all be selling at your minimum price.
Amazon sellers act this way, even though they have more than only one price change to make.
On Amazon, price changes happen all the time, sometimes hundreds of times per day. Any price change you make will most likely be followed by your competitor adjusting their price according to their repricing strategy.
Selling on Amazon is, in reality, more like an “Iterated Prisoner’s Dilemma”.
Knowing any price change you make is going to be followed by more price changes by your competitors, the preferred strategy is a cooperative “socially optimal” strategy. A cooperative strategy will produce a higher payoff than the selfish repricing behaviour of “drop a penny below…”.
How to Apply a Cooperative Strategy to a Selfish Competitive Environment?
There is a way to automatically apply the best strategy for each specific situation. When you sell on Amazon, your goal should to get the Buy Box share you are “entitled” to while keeping the price high instead of racing to the bottom.
- Detect the strategy of your competitors
- Apply the best strategy for the situation and make price changes accordingly.
- Share the Buy Box at the best possible price for you. Your competitor may also sell at a higher price, making this a Socially Optimized strategy.
If your competitors are matching your price, you will have to share the Buy Box with them. The optimal strategy for you would be do so at the highest possible price. Choosing any other price will result in having the same Buy Box share but at a lower price.
About Seller Snap
Seller Snap has developed a proprietary, AI-powered, Game Theory repricer and an Advanced Analytics solution. The Game Theory repricer is fully automated and guarantees the best possible performance, no matter how the competition changes.
Add to that the ability to customize repricing methods for specific scenarios and a clear view of your most important KPIs (including sales & profit, Buy Box-share and competition data). This turns Seller Snap into one of the best solutions available for Amazon sellers today. Find out more at sellersnap.io.
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