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The effect of demand variability on the adoption and design of a third party’s pricing algorithm

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  • Harrington, Joseph E.

Abstract

Consider a data analytics company supplying a pricing algorithm that adjusts price to a changing demand state. For this setting, I show the pricing algorithm is designed and priced so that higher demand variability results in more firms adopting the pricing algorithm. Furthermore, there is a critical threshold for demand variability whereby there is complete or near-complete adoption of the pricing algorithm. While widespread adoption of a third party’s pricing algorithm among competitors has raised concerns of collusive conduct, it could instead reflect a strong efficiency delivered by a third party.

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  • Harrington, Joseph E., 2024. "The effect of demand variability on the adoption and design of a third party’s pricing algorithm," Economics Letters, Elsevier, vol. 244(C).
    • Handle: RePEc:eee:ecolet:v:244:y:2024:i:c:s0165176524004956
    DOI: 10.1016/j.econlet.2024.112011
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