Affiliation:
1. Department of Business Economics & Public Policy, The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania 19104
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. This paper was accepted by Joshua Gans, business strategy.
Publisher
Institute for Operations Research and the Management Sciences (INFORMS)
Subject
Management Science and Operations Research,Strategy and Management
Cited by
9 articles.
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