How online algorithms could be making you pay more

online shopping with dollar signs
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How often do you find yourself in the following scenario? You're shopping online and by the time you pick something out, add it to your cart and finally go to pay, the price of your item has increased.

Sometimes you get lucky and the price might drop. Even so, why would the price tag change at the speed of a click? Two words: Pricing algorithms.

Pricing algorithms are computer programs that look at factors such as supply, demand and the prices competitors are charging, and then adjust the price in real time, NPR reported. This can sometimes lead to prices fluctuating several times over the course of a single day.

"A key thing about the algorithm is that given different inputs, like, say, time of day or weather or how many customers might be showing up, it might decide on a different price," Harvard economics professor Alexander MacKay told NPR.

Algorithms that adjust prices are thought to be good for competition, offering the lowest price, making markets more efficient and benefiting consumers. However, concern is growing that other aspects of pricing algorithms could actually reduce competition and increase prices, MacKay wrote in a paper he co-authored in the National Bureau of Economic Research.

When multiple businesses use pricing algorithms, they know that decreasing their prices causes rivals to decrease prices, which could set off a never-ending chain of price decreases. MacKay says this makes price competition obsolete.

"Why try to start a price war against a firm whose algorithm will see my price change and immediately undercut it," he told NPR.

It's not just online markets, either. MacKay says pricing algorithms are now being used to set prices for gas stations, airline tickets, hotels, entertainment, and ride sharing.

Is there anything you can do to prevent falling victim to higher prices because of algorithms? Not exactly. You could try price-comparison tools, but there's no guarantee your efforts would pay off because the changes can happen so quickly.

And perhaps even worse, MacKay says pricing algorithms are only going to get more common unless there is some kind of regulation to limit the practice.

"Firms are trying to maximize profits and they're trying to do it in a way that's legal and competitive," he told NPR. "It's sort of in your best interest to adopt an algorithm to be able to consistently undercut your rivals to maintain a market share advantage."

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Featured Image Photo Credit: Getty Images