Algorithmic Pricing and Competition: Empirical Evidence from the German Retail Gasoline Market

75 Pages Posted: 28 Aug 2020

See all articles by Stephanie Assad

Stephanie Assad

affiliation not provided to SSRN

Robert Clark

Queen's University

Daniel Ershov

Toulouse School of Economics

Lei Xu

Government of Canada - Bank of Canada

Date Written: 2020

Abstract

Economic theory provides ambiguous and conflicting predictions about the association between algorithmic pricing and competition. In this paper we provide the first empirical analysis of this relationship. We study Germany’s retail gasoline market where algorithmic-pricing software became widely available by mid-2017, and for which we have access to comprehensive, highfrequency price data. Because adoption dates are unknown, we identify gas stations that adopt algorithmic-pricing software by testing for structural breaks in markers associated with algorithmic pricing. We find a large number of station-level structural breaks around the suspected time of large-scale adoption. Using this information we investigate the impact of adoption on outcomes linked to competition. Because station-level adoption is endogenous, we use brand headquarter-level adoption decisions as instruments. Our IV results show that adoption increases margins by 9%, but only in non-monopoly markets. Restricting attention to duopoly markets, we find that market-level margins do not change when only one of the two stations adopts, but increase by 28% in markets where both do. These results suggest that AI adoption has a significant effect on competition.

Keywords: artificial intelligence, pricing-algorithms, collusion, retail gasoline

JEL Classification: L410, L130, D430, D830, L710

Suggested Citation

Assad, Stephanie and Clark, Robert and Ershov, Daniel and Xu, Lei, Algorithmic Pricing and Competition: Empirical Evidence from the German Retail Gasoline Market (2020). CESifo Working Paper No. 8521, Available at SSRN: https://ssrn.com/abstract=3682021

Stephanie Assad (Contact Author)

affiliation not provided to SSRN

No Address Available

Robert Clark

Queen's University ( email )

Kingston, Ontario K7L 3N6
Canada

Daniel Ershov

Toulouse School of Economics ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France

HOME PAGE: http://danielershov.com

Lei Xu

Government of Canada - Bank of Canada ( email )

234 Wellington Street
Ottawa, Ontario K1A 0G9
Canada

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