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    Competition in Pricing Algorithms
    03 Feb 2020Working Paper Summaries

    Competition in Pricing Algorithms

    by Zach Y. Brown and Alexander MacKay
    The adoption of pricing technology can lead to higher prices, by increasing the frequency of price changes and/or encoding pricing strategies in algorithms. This raises new antitrust questions for policymakers, as firms do not need to coordinate or collude to raise prices.
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    Author Abstract

    Increasingly, retailers have access to better pricing technology, especially in online markets. Through pricing algorithms, firms can automate their response to rivals’ prices. What are the implications for price competition? We develop a model in which firms choose algorithms, rather than prices. Even with simple (i.e., linear) algorithms, competitive equilibria can have higher prices than in the standard simultaneous Bertrand pricing game. Using hourly prices of over-the-counter drugs from five major online retailers, we document evidence that these retailers possess different pricing technologies. In addition, we find pricing patterns consistent with competition in pricing algorithms. A simple calibration of the model suggests that pricing algorithms lead to meaningful increases in markups, especially for firms with superior pricing technology.

    Paper Information

    • Full Working Paper Text
    • Working Paper Publication Date: November 2019
    • HBS Working Paper Number: HBS Working Paper #20-067
    • Faculty Unit(s): Strategy
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    Alexander J. MacKay
    Alexander J. MacKay
    Assistant Professor of Business Administration
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