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Competition in Pricing Algorithms

Author

Listed:
  • Zach Y. Brown
  • Alexander MacKay

Abstract

We document new facts about pricing technology using high-frequency data, and we examine the implications for competition. Some online retailers employ technology that allows for more frequent price changes and automated responses to price changes by rivals. Motivated by these facts, we consider a model in which firms can differ in pricing frequency and choose pricing algorithms that are a function of rivals’ prices. In competitive (Markov perfect) equilibrium, the introduction of simple pricing algorithms can generate price dispersion, increase price levels, and exacerbate the price effects of mergers.

Suggested Citation

  • Zach Y. Brown & Alexander MacKay, 2021. "Competition in Pricing Algorithms," NBER Working Papers 28860, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:28860
    Note: IO LE
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    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce
    • L86 - Industrial Organization - - Industry Studies: Services - - - Information and Internet Services; Computer Software

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