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They are among us: Pricing behavior of algorithms in the field

Author

Listed:
  • Fourberg, Niklas
  • Marques-Magalhaes, Katrin
  • Wiewiorra, Lukas

Abstract

We analyze pricing patterns and price level effects of algorithms in the market segments for OTC-antiallergics and -painkillers in Germany. Based on a novel hourly dataset which spans over four months and contains over 10 million single observations, we produce the following results. First, price levels are substantially higher for antiallergics compared to the segment of painkillers, which seems to be reflective of a lower price elasticity for antial- lergics. Second, we find evidence that this exploitation of demand character- istics is heterogeneous with respect to the pricing technology. Retailers with a more advanced pricing technology establish even higher price premiums for antiallergics than retailers with a less advanced technology. Third, retailers with more advanced pricing technology post lower prices which contradicts previous findings from simulations but are in line with empirical findings if many firms compete in a market. Lastly, our data suggests that pricing algo- rithms take web-traffic of retailers' online-shops as demand side feedback into account when choosing prices. Our results stress the importance of a careful policy approach towards pricing algorithms and highlights new areas of risks when multiple players employ the same pricing technology.

Suggested Citation

  • Fourberg, Niklas & Marques-Magalhaes, Katrin & Wiewiorra, Lukas, 2022. "They are among us: Pricing behavior of algorithms in the field," WIK Working Papers 6, WIK Wissenschaftliches Institut für Infrastruktur und Kommunikationsdienste GmbH, Bad Honnef.
  • Handle: RePEc:zbw:wikwps:6
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    References listed on IDEAS

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    More about this item

    Keywords

    Algorithmic pricing; Collusion; Artificial intelligence;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices

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