Working Paper: NBER ID: w28860
Authors: 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.
Keywords: Pricing Algorithms; Price Competition; Online Retail; Oligopoly
JEL Codes: D43; L13; L81; L86
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| introduction of pricing algorithms (D40) | price dispersion (L11) |
| faster pricing technology (D49) | lower prices (P22) |
| slower pricing technology (D49) | higher prices (D49) |
| asymmetry in pricing technology (D49) | higher overall price levels (E30) |
| pricing algorithms (D40) | exacerbate the price effects of mergers (D43) |
| superior pricing technology (D49) | supracompetitive prices (D41) |