Algorithmic Pricing and Consumer Sensitivity to Price Variability

23 Pages Posted: 8 May 2023 Last revised: 11 Feb 2024

See all articles by Diego Aparicio

Diego Aparicio

University of Navarra, IESE Business School

Dean Eckles

MIT Sloan School of Management

Madhav Kumar

Massachusetts Institute of Technology (MIT)

Date Written: February 2, 2024

Abstract

Artificial Intelligence (AI) automates human decisions. Algorithmic pricing—an AI application for scalable price determination—is now prevalent in ride-hailing, travel, drugs, gasoline, and online retail. A common thread across all these implementations is heightened price variability due to frequent price adjustments made by the algorithms. We study the impact of this algorithmic pricing-induced price variability on consumer behavior. Using granular clickstream data from an online grocery retailer in the U.S. that implemented algorithmic pricing, we find that increased price variability exacerbates consumer price sensitivity. While extant literature shows that firms are better off using algorithmic pricing, these findings are economically consequential as AI pricing triggers side effects that undermine those gains, i.e., a more price-sensitive demand offsets some of the expected benefits of algorithmic pricing. We confirm the findings of our field study using controlled lab experiments and identify price salience as the key underlying mechanism.

Keywords: algorithmic pricing, price variability, price sensitivity, price salience, experiments

JEL Classification: L11, L21, L81, D22, D91

Suggested Citation

Aparicio, Diego and Eckles, Dean and Kumar, Madhav, Algorithmic Pricing and Consumer Sensitivity to Price Variability (February 2, 2024). IESE Business School Working Paper No. 4435831, Available at SSRN: https://ssrn.com/abstract=4435831 or http://dx.doi.org/10.2139/ssrn.4435831

Diego Aparicio (Contact Author)

University of Navarra, IESE Business School ( email )

Carrer d'Arnus i de Gari, 3-7
Barcelona
Spain

Dean Eckles

MIT Sloan School of Management ( email )

Madhav Kumar

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

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