Consumers flock to Amazon for its low prices, but the bargains may be all in their heads.
According to a study by Boomerang Commerce, Amazon takes advantage of price psychology. By dynamically changing the prices of certain items, Amazon can give the impression of undercutting its competition.
According to Business Insider, Boomerang Commerce was founded by former Amazon employee Guru Hariharan. The company creates software that tracks prices on shopping sites that compete with its clients and then recommends price changes.
The study found Amazon frequently offers huge discounts on its most popular products, but makes more profit on less popular items by increasing prices.
"Amazon may not actually be the lowest-priced seller of a particular product in any given season," the report read, "but its consistently low prices on the highest viewed and best-selling items drive a perception among consumers that Amazon has the best prices overall — even better than Walmart."
For example, Boomerang found a popular $350 Samsung TV was price-tested for six months before Amazon cut the price to $250 on Black Friday. At the same time, Amazon increased the price of an HDMI cable people might want to buy with the television.
In another example from Boomerang, Amazon sold its most popular router for 20 percent less than Walmart’s price, but a less in-demand model was 29 percent more expensive.
Although price perception strategy is a common tactic, Amazon may use it more frequently because of the size of its business. “Amazon is doing it at scale, with what is estimated to be 10 billion pricing changes across the holidays,” Hariharan told Re/Code. “Some retailers are doing it every three months.”