Dynamic Pricing and Demand Volatility: Evidence from Restaurant Food Delivery

31 Pages Posted: 25 Jul 2022

See all articles by Alexander MacKay

Alexander MacKay

Harvard University - Business School (HBS)

Dennis Svartbäck

Priceff Ltd

Anders G. Ekholm

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

Date Written: July 15, 2022

Abstract

Pricing technology that allows firms to rapidly adjust prices has two potential benefits. Prices can respond more rapidly to demand shocks, leading to higher revenues. On the other hand, time-varying prices can be used to smooth out demand across periods, reducing costs in markets with capacity constraints. 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. Our results point to the potential efficiency gains of time-varying pricing when firms face capacity constraints.

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

JEL Classification: D4, L1, L81, L86

Suggested Citation

MacKay, Alexander and Svartbäck, Dennis and Ekholm, Anders G., Dynamic Pricing and Demand Volatility: Evidence from Restaurant Food Delivery (July 15, 2022). 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/

Lappeenranta University of Technology (LUT) ( email )

Lappeenranta
Finland

University of Helsinki

Finland

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
66
Abstract Views
154
rank
464,707
PlumX Metrics