Since time immemorial, the success of a merchant was largely determined on how skillfully he sized up the naïf or the swell entering his shop. Fixed retail pricing was an innovation of the 20th century, perfect for the mass market era when merchants no longer could know each customer well.

“Through most of history, pricing has been personalized and dynamic,” says Erik Brynjolfsson, co-director of the Center for eBusiness at the Massachusetts Institute of Technology, who studied historical bazaars and flea markets for a better understanding of fine-tuning pricing. “In the 20th century, there was no easy way to personalize. Everything was standardized. One price fits all. Now with the Internet, we can go back to it.”

That’s the tantalizing theory, at least. The Internet allows a merchant to once again know the customer, know what merchandise he has bought before, what other sites he has visited (and how much they charge), and how eager he is to get the lowest price. Several software companies are using microeconomic theory, mathematics, a little psychology, and computer powers to analyze customer demand and set the best price.

The software can tell a merchant when a customer doesn’t care how much something costs, allowing him to raise the price, or when an adjustment downward will bring in far more revenue, offsetting the lower margin. The software can also help merchants determine the best price to charge different classes of customers. The art of refining prices is “the fastest and cheapest way for a retailer to improve their business,” says Michael Porges, a partner in the retail practice of Accenture.

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