Competition in Pricing Algorithms
Zach Y. Brown
- American Economic Journal: Microeconomics (Forthcoming)
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
generate price dispersion, increase price levels, and exacerbate the
price effects of mergers.
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