Competition in Pricing Algorithms
59 Pages Posted: 22 Nov 2019 Last revised: 29 Apr 2021
Date Written: April 29, 2021
Increasingly, retailers have access to better pricing technology, especially in online markets. Using hourly data from five major online retailers, we show that retailers set prices at regular intervals that differ across firms. In addition, faster firms appear to use automated pricing rules that are functions of rivals' prices. These features are inconsistent with the standard assumptions about pricing technology used in the empirical literature. Motivated by these facts, we consider a model of competition in which firms can differ in pricing frequency and choose pricing algorithms rather than prices. We demonstrate that, relative to the standard simultaneous price-setting model, pricing technology with these features can increase prices in Markov perfect equilibrium. A simple counterfactual simulation implies that pricing algorithms lead to meaningful increases in markups in our empirical setting, especially for firms with the fastest pricing technology.
Keywords: Pricing Algorithms, Pricing Frequency, Online Competition
JEL Classification: L40, D43, L81, L13, L86
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