Consumer Aversion to Algorithm-Driven Price Volatility: Empirical Investigation of Airbnb

56 Pages Posted: 21 Dec 2022

See all articles by Jiaqi Shi

Jiaqi Shi

University of California, Irvine - Paul Merage School of Business

Jinan Lin

University of California, Irvine - Paul Merage School of Business

Tingting Nian

University of California, Irvine - Paul Merage School of Business

Mingyu Joo

University of California, Riverside - School of Business

Date Written: December 7, 2022

Abstract

Dynamic-pricing algorithms have enabled frequent price adjustments to improve sales. Yet, overly frequent price fluctuations may complicate consumers’ purchase decisions. This paper empirically investigates how algorithm-driven price volatility influences the occupancy rates of more than 105,000 rental properties in New York City listed on Airbnb. Because properties on Airbnb can be booked up to 12 months in advance, we compile two price-volatility measures: a property’s frequency of price changes across travel dates on a given booking date (i.e., volatility over travel dates) and a property’s frequency of price changes across booking dates on a given travel date (i.e., volatility over temporal distances). For both measures, the occupancy rates increase from flat pricing to a certain degree of dynamic pricing. However, the occupancy rates start to decrease when prices become too volatile, controlling for the magnitudes of price-level variation. A series of mechanism checks suggest the price volatility across travel dates leads to quality concerns, whereas the price volatility across temporal distances leads to fairness concerns. Our findings imply the algorithmic pricing optimality may not be achieved by ignoring consumers’ behavioral reactions.

Keywords: pricing algorithm, dynamic pricing, volatility aversion, human-AI interaction, Airbnb

Suggested Citation

Shi, Jiaqi and Lin, Jinan and Nian, Tingting and Joo, Mingyu, Consumer Aversion to Algorithm-Driven Price Volatility: Empirical Investigation of Airbnb (December 7, 2022). Available at SSRN: https://ssrn.com/abstract=4296586 or http://dx.doi.org/10.2139/ssrn.4296586

Jiaqi Shi

University of California, Irvine - Paul Merage School of Business ( email )

Paul Merage School of Business
Irvine, CA California 92697-3125
United States

Jinan Lin

University of California, Irvine - Paul Merage School of Business ( email )

Paul Merage School of Business
Irvine, CA California 92697-3125
United States

Tingting Nian

University of California, Irvine - Paul Merage School of Business ( email )

Paul Merage School of Business
Irvine, CA California 92697-3125
United States

Mingyu Joo (Contact Author)

University of California, Riverside - School of Business ( email )

900 University Ave.
Riverside, CA 92521
United States

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

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