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Competition in Pricing Algorithms

  • Zach Y. Brown
  • Alexander MacKay
American Economic Journal: Microeconomics
vol. 15, no. 2, May 2023
(pp. 109-56)
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Abstract

We document new facts about pricing technology using high-frequency data, and we examine the implications for competition. Some online retailers employ technology that allows for more frequent price changes and automated responses to price changes by rivals. Motivated by these facts, we consider a model in which firms can differ in pricing frequency and choose pricing algorithms that are a function of rivals' prices. In competitive (Markov perfect) equilibrium, the introduction of simple pricing algorithms can increase price levels, generate price dispersion, and exacerbate the price effects of mergers.

Citation

Brown, Zach Y., and Alexander MacKay. 2023. "Competition in Pricing Algorithms." American Economic Journal: Microeconomics, 15 (2): 109-56. DOI: 10.1257/mic.20210158

Additional Materials

JEL Classification

  • D21 Firm Behavior: Theory
  • D22 Firm Behavior: Empirical Analysis
  • D43 Market Structure, Pricing, and Design: Oligopoly and Other Forms of Market Imperfection
  • G34 Mergers; Acquisitions; Restructuring; Voting; Proxy Contests; Corporate Governance
  • L13 Oligopoly and Other Imperfect Markets
  • L81 Retail and Wholesale Trade; e-Commerce
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