Monday, November 27, 2023

Tim O'Reilly on algorithmic tuning for exploitation

Tim O'Reilly, Mariana Mazzucato, and Ilan Strauss have three working papers focusing on Amazon's ability to extract unusual profits from its customers nowadays. The papers are: The core idea in all three is that Amazon has become the default place to shop online for many. So, when Amazon changes their site in ways that make Amazon higher profits but hurt consumers, it takes work for people to figure that out and shop elsewhere.

The papers criticize the common assumption that people will quickly switch to shopping elsewhere if the Amazon customer experience deteriorates. Realistically, people are busy. People have imperfect information, limited time, and it is effortful to find another place to shop. At least up to some limit, people may tolerate a familiar but substantially deteroriated experience for some time.

For search, it takes effort for people to notice that they are being shown lots of ads, that less reliable third party sellers are promoted over less profitable but more relevant options, and that the most useful options aren't always first. And then it takes yet more effort to switch to using other online stores. So Amazon is able to extract extraordinary profits in ways less dominant online retailers can't get away with.

But I do have questions about how far Amazon can push this. How long can Amazon get away with excessive advertising and lower quality? Do consumers tire of it over time and move on? Or do they put up with it forever as long as the pain is below some threshold?

Take an absurd extreme. Imagine that Amazon thought it could maximize its revenue and profits by showing only ads and only the most profitable ads for any search regardless of the relevance of those ads to the search. Clearly, that extreme would not work. The search would be completely useless and consumers would go elsewhere very rapidly.

Now back off from that extreme, adding back more relevant ads and more organic results. At what point do consumers stay at Amazon? And do they just stay at Amazon or do they slowly trickle away?

I agree time and cognitive effort, as well as Amazon Prime renewing annually, raise switching costs. But when will consumers have had enough? Do consumers only continue using Amazon with all the ads until they realize the quality has changed? When does brand and reputation damage accumulate to the point that consumers start trusting Amazon less, shopping at Amazon less, and expending the effort of trying alternatives?

I think one model of customer attrition is that every time customers notice a bad experience, they have some probability of using Amazon less in the future. The more bad experiences they have, the faster the damage to long-term revenue. Under this model, even the level of ads Amazon has now is causing slow damage to Amazon. Amazon execs may not notice because the damage is over long periods of time and hard to attribute directly back to the poor quality search results, but the damage is there. This is the model I've seen used by some others, such as Google Research in their "Focus on the Long-term" paper.

Another model might be that consumers are captured by dominant companies such as Amazon and will not pay the costs to switch until they hit some threshold. That is, most customers will refuse to try alternatives until it is completely obvious that it is worth the effort. This assumes that Amazon can exploit customers for a very long time, and that customers will not stop using Amazon no matter what they do. There is some extreme where that breaks, but only at the threshold, not before.

The difference between these two models matters a lot. If Amazon is experiencing substantial but slow costs from what they are doing right now, there's much more hope for them changing their behavior on their own than if Amazon is experiencing no costs from their bad behavior unless regulators impose costs externally. The solutions you get in the two scenarios are likely to be different.

I enjoyed the papers and found them thought-provoking. Give the papers a read, especially if you are interested in the recent discussions of enshittification started by Cory Doctorow. As Cory points out, this is a much broader problem than just Amazon. And we need practical solutions that companies, consumers, and policy makers can actually implement.


satyajit said...

I see a lot of attention on Google's paper about long term effects, but I think it's pretty obvious that even Google doesn't really believe its conclusions. The problem is that in the "really" long term, it's difficult to predict what will drive a company. Platforms will eventually die (or wither away) and user's will move onto something else. So companies that are now behemoths are (probably rightly) focussing on earning enough cash now to either buy/come up with the next big thing.

In amazon's specific case, the other e-commerce platforms are usually worse in most dimensions that users care about.

Greg Linden said...

Hi, Satyajit. I agree that Google has gone back-and-forth over time about how much they care about the long-term.

Search, most importantly, some years puts huge effort into search quality and overall customer experience and some years jacks up the ad load. Right now, under Sundar Pichai, they appear to be focused on hitting quarterly revenue and profit targets whether or not that means jacking up ad load and reducing search quality, so very short-term indeed.

But I think that is just since Pichai has been CEO. It also relies on Google's dominant market share in search, which is dangerous for the company to overuse. I have some hope Google will swing back the other way again as that's been what's happened in the past, creeping up the ad load over years, then deciding to buckle down and invest in a good customer experience again for long-term growth. We'll see.

Greg Linden said...

Oh, and on your comment on other online shopping sites often being worse than Amazon, I'm not sure I agree that's true in my experience. But where I do agree is that it's foolish that Walmart and Target executives copy Amazon (e.g. scammy third-party sellers, poor packing of shipped packages, not offering lower prices) rather than competing on being obviously better than Amazon to consumers. For years now, Walmart has looked like an inferior also-ran to Amazon, which is silly given Walmart's ability to be something else.

We see a similar thing with Bing, where execs seem convinced that they should be an inferior also-ran rather than trying to be better (by, for example, running far fewer ads and offering better privacy) and so stay in distant second place to Google. Or in cloud, where Google Cloud execs refuse to compete on lower prices and so Google Cloud is stuck in distant third place.

Generally, I think you're hinting at that lack of competition is a huge part of the problem. The few competitors that do exist often copy each other, limiting choice further. As O'Reilly's papers and also Cory Doctorow's writing argue, a more competitive market with better alternatives for consumers could be a big part of the solution. Without other good options, consumers can be stuck and enshittification can go on for a long time.