The Effect of Outsourcing Pricing Algorithms on Market Competition

Joseph E. Harrington ()
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Joseph E. Harrington: Department of Business Economics & Public Policy, The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania 19104

Management Science, 2022, vol. 68, issue 9, 6889-6906

Abstract: A third party developer designs and sells a pricing algorithm that enhances a firm’s ability to tailor prices to a source of demand variation, whether high-frequency demand shocks or market segmentation. The equilibrium pricing algorithm is characterized that maximizes the third party’s profit given firms’ optimal adoption decisions. Outsourcing the pricing algorithm does not reduce competition but does make prices more sensitive to the demand variation, and this is shown to decrease consumer welfare and increase industry profit. This effect is larger when products are more substitutable.

Keywords: pricing algorithm; competition; competition policy; outsourcing (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:68:y:2022:i:9:p:6889-6906

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