Dynamic Pricing, Intertemporal Spillovers, and Efficiency

54 Pages Posted: 25 Jul 2022 Last revised: 9 Jan 2024

See all articles by Alexander MacKay

Alexander MacKay

Harvard University - Business School (HBS)

Dennis Svartbäck

Priceff Ltd

Anders G. Ekholm

University of Helsinki; Priceff Ltd; Lappeenranta-Lahti University of Technology (LUT)

Date Written: December 14, 2023

Abstract

Pricing technology that allows firms to rapidly adjust prices has two potential benefits. Time-varying prices can respond to high-frequency demand shocks to generate greater revenues, and they can also be used to smooth out demand to reduce costs.

Using data from the staggered adoption of a pricing algorithm, we measure the impacts of time-varying pricing in the context of restaurant food delivery. On average, the pricing algorithm reduced prices, though it led to substantial variation in prices within and across days. We find that the adoption of time-varying pricing reduced demand volatility, resulting in a relative increase in the share of transactions occurring during low-demand periods. We estimate that the volatility semi-elasticity, which we define to reflect the relationship between time-series variation in quantities and prices, is $-1.96$. This parameter is influenced by the presence of intertemporal spillovers in demand. Consumers appear to strategically time purchases across hours of the week and at higher frequencies (within the hour). Our analysis suggests that production costs fell and consumer welfare increased after adoption, highlighting potential efficiency gains of dynamic pricing algorithms.

Keywords: Pricing Algorithms, Dynamic Pricing, Intertemporal Spillovers, Demand Volatility, Delivery Services

JEL Classification: D4, L1, L81, L86

Suggested Citation

MacKay, Alexander and Svartbäck, Dennis and Ekholm, Anders G., Dynamic Pricing, Intertemporal Spillovers, and Efficiency (December 14, 2023). Harvard Business School Strategy Unit Working Paper, Available at SSRN: https://ssrn.com/abstract=4164271 or http://dx.doi.org/10.2139/ssrn.4164271

Alexander MacKay (Contact Author)

Harvard University - Business School (HBS) ( email )

Soldiers Field Road
Boston, MA 02163
United States

HOME PAGE: http://alexandermackay.org/

Dennis Svartbäck

Priceff Ltd ( email )

Finland

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

Anders G. Ekholm

University of Helsinki ( email )

Finland

HOME PAGE: http://fi.linkedin.com/in/andersekholm

Priceff Ltd

Finland

Lappeenranta-Lahti University of Technology (LUT) ( email )

Lappeenranta
Finland

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