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Competition in Pricing Algorithms

Author

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  • Zach Y. Brown
  • Alexander MacKay

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.

Suggested Citation

  • Zach Y. Brown & Alexander MacKay, 2023. "Competition in Pricing Algorithms," American Economic Journal: Microeconomics, American Economic Association, vol. 15(2), pages 109-156, May.
    • Handle: RePEc:aea:aejmic:v:15:y:2023:i:2:p:109-56
    DOI: 10.1257/mic.20210158
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    References listed on IDEAS

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    1. Yongmin Chen & Michael H. Riordan, 2007. "Price and Variety in the Spokes Model," Economic Journal, Royal Economic Society, vol. 117(522), pages 897-921, July.
    2. Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 141-156, Spring.
    3. von Ungern-Sternberg, Thomas, 1991. "Monopolistic Competition on the Pyramid," Journal of Industrial Economics, Wiley Blackwell, vol. 39(4), pages 355-368, June.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce

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