Interference Produces False-Positive Pricing Experiments

Lars Roemheld and Justin Rao

Papers from arXiv.org

Abstract: It is standard practice in online retail to run pricing experiments by randomizing at the article-level, i.e. by changing prices of different products to identify treatment effects. Due to customers' cross-price substitution behavior, such experiments suffer from interference bias: the observed difference between treatment groups in the experiment is typically significantly larger than the global effect that could be expected after a roll-out decision of the tested pricing policy. We show in simulations that such bias can be as large as 100%, and report experimental data implying bias of similar magnitude. Finally, we discuss approaches for de-biased pricing experiments, suggesting observational methods as a potentially attractive alternative to clustering.

Date: 2024-02
New Economics Papers: this item is included in nep-exp
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