Human Machine Interaction in Pricing

This paper investigates the interplay between human oversight and algorithmic pricing at Zalando, one of Europe’s largest e-commerce companies. Although algorithms set most product prices, human decision-makers can override them. This dual approach creates a trade-off: while humans may introduce valuable domain knowledge and address algorithmic flaws, they can also bring biases or overly simplistic strategies that reduce efficiency. The study uses data from two large-scale experiments, involving over 700,000 products, to analyze the effects of human interventions on profitability and commercial outcomes.

The first experiment focused on products where human interventions were predicted to perform poorly, based on a profit margin forecast. By blocking these interventions, the company achieved a significant increase in profits, illustrating the potential harm of poorly informed overrides. The findings also revealed that human pricing strategies often rely on uniform discounts across markets, failing to capture the nuanced adjustments possible with algorithmic tools.

The second experiment expanded the analysis to the full product assortment, testing the effects of indiscriminately blocking all human interventions. While this approach reduced revenues and had no significant impact on profits, a closer examination showed that high-quality human interventions—those predicted to enhance performance—contributed positively to profitability. This underscores the heterogeneity in intervention quality and the need for a more targeted approach.

The study concludes that neither fully autonomous algorithmic pricing nor unrestricted human intervention is optimal. Instead, combining algorithmic predictions with selective human input can maximize outcomes. By using algorithms to predict the quality of human interventions, companies can block inefficient overrides while leveraging expert knowledge to improve overall performance. This framework offers insights into optimizing human-machine collaboration in pricing and beyond.