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Price to Compete ... with Many: How to Identify Price Competition in High Dimensional Space

43 Pages Posted: 26 Oct 2015 Last revised: 22 Dec 2016

Jun Li

University of Michigan, Stephen M. Ross School of Business

Serguei Netessine

The Wharton School, University of Pennsylvania

Sergei Koulayev

Consumer Financial Protection Bureau

Date Written: December 21, 2016

Abstract

We study price competition in markets with a large number (in magnitude of hundreds or thousands) of potential competitors. We address two methodological challenges: simultaneity bias and high dimensionality. Simultaneity bias arises from joint determination of prices in competitive markets. We propose a new instrumental variable approach to address simultaneity bias in high dimensions. The novelty of the idea is to exploit online search and clickstream data to uncover customer preferences at a granular level, with sufficient variations both over time and across competitors in order to obtain valid instruments at a large scale. We then develop a methodology to identify relevant competitors in high dimensions combining the instrumental variable approach with high dimensional l-1 norm regularization. We apply this data-driven approach to study the patterns of hotel price competition in the New York City market. We also show that the competitive responses identified through our method can help hoteliers proactively manage their prices and promotions.

Suggested Citation

Li, Jun and Netessine, Serguei and Koulayev, Sergei, Price to Compete ... with Many: How to Identify Price Competition in High Dimensional Space (December 21, 2016). INSEAD Working Paper No. 2016/38/TOM. Available at SSRN: https://ssrn.com/abstract=2651045 or http://dx.doi.org/10.2139/ssrn.2651045

Jun Li

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

Serguei Netessine (Contact Author)

The Wharton School, University of Pennsylvania ( email )

SH-DH 1332B
Philadelphia, PA 19104-6367
United States
(215) 573 3571 (Phone)
(215) 898 3660 (Fax)

HOME PAGE: http://www.netessine.com

Sergei Koulayev

Consumer Financial Protection Bureau ( email )

United States

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