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How The Rise of E-commerce Contributes To Inflation

ecommerce inflation
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EDITOR'S NOTE: There used to be a time (perhaps not too long ago) when the element of price was a competitive mechanism. Having the capacity to maintain or even lower prices when competitors raised them often meant more sales and possibly a greater chunk of market share. Now, according to Axios, that’s no longer the case, at least for e-commerce. The article claims that e-commerce is driving inflation; that stores are raising prices because consumers, dazed by the $100 cost at the pump, don’t seem to care that prices are positively dynamic; that QR codes make it easier for sellers to raise prices now that the fixed “menu” cost is more or less obsolete. Is that really the case? Or are e-commerce vendors better equipped to “react” to prices? In other words, is this the beginning of what we typically see in a hyperinflationary environment, where prices undergo changes every month, and then week, then day, and finally every hour?

Blame the rise of e-commerce for (at least some of) the inflation we're seeing. We no longer live in a "Price is Right" world where any given item has a knowable true price that is broadly unchanged from day to day or from store to store, Axios' Felix Salmon writes.

  • Instead, prices are constantly fluctuating and unpredictable — which makes them much easier to raise.

Why it matters: Prices, like phone numbers, are things we don't need to remember — we can look them up on the internet if we need to know them. As we pay less attention, however, we become less price-sensitive, giving companies more scope to raise prices.

How it works: Historically, it has been difficult for merchants to change prices. Economists talk of "menu costs" — if a restaurant wants to raise its prices, it needs to reprint all of its menus, often at significant expense.

  • If the restaurant menu is a QR code, on the other hand, raising prices is just a matter of changing numbers on a single web page. That's why e-commerce outlets generally change their prices much more frequently than physical stores do.
  • Physical stores are now following suit: E-ink displays at supermarkets can change as frequently as a price on Amazon, while a single item from a single restaurant can have a whole range of different prices depending on where and how it was ordered.

Where it stands: It's becoming increasingly hard to know what anything is supposed to cost. Prices sometimes seem as though they're the product of a random number generator: Here a loaf of bread is $29, and there the five-volume Jasper Johns catalogue raisonné is $199. If you paid face value for your concert ticket, you're in the minority.

The bottom line: Most prices are dynamic these days. Until recently, that worked in consumers' favor, as merchants competed to offer the lowest price. Now, it's working against us, as they attempt to maintain or even increase their margins in the face of higher costs.

The American public, dazed from its most recent $100 trip to the gas station, increasingly barely blinks at the latest improbable price for, say, a 10-minute Uber ride. We might not be able to afford it, but we pay it anyway.

Originally published by Axios.

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All articles are provided as a third party analysis and do not necessarily reflect the explicit views of GSI Exchange and should not be construed as financial advice.

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