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

Joseph E. Harrington

Economics Letters, 2024, vol. 244, issue C

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.

Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:244:y:2024:i:c:s0165176524004956

DOI: 10.1016/j.econlet.2024.112011

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