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Pricing algorithms in oligopoly with decreasing returns

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  • Jacques Thépot

    (LARGE, Université de Strasbourg)

Abstract

Pricing algorithms are computerized procedures a seller may use to adapt instantaneously its price to market conditions, including to prices quoted by its rivals. These algorithms are related to the extensive use of web-collectors which contribute in many industries to identifying the best price. In such settings, price competition operates between algorithms, no longer between executives of brick and mortar companies. In this context, the question is to know how implicit forms of collusion may arise between the sellers. This paper is aimed at discussing this conceptual issue in a price-setting homogeneous product oligopoly with decreasing returns to scale where algorithms implement matching policies. Using fixed point argument, we find a family of equilibrium prices encompassing Cournot and Pareto efficient solutions, if matching is allowed upward and downward. Dynamical stability is studied in the linear demand constant return case. When matching operates only for price undercutting, this family is extended up to a bottom value of the market price, close to the Walrasian price. Pricing algorithms may solve the Bertrand–Edgeworth paradox.

Suggested Citation

  • Jacques Thépot, 2021. "Pricing algorithms in oligopoly with decreasing returns," Theory and Decision, Springer, vol. 91(4), pages 493-515, November.
    • Handle: RePEc:kap:theord:v:91:y:2021:i:4:d:10.1007_s11238-021-09819-y
    DOI: 10.1007/s11238-021-09819-y
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    References listed on IDEAS

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