Theory Seminar: Leon Musolff

This week’s speaker is Leon A. Musolff, from Wharton. Talk details are below.

Title: Algorithmic Pricing facilitates Tacit Collusion

Abstract: As the economy digitizes, menu costs fall, and firms can more easily monitor prices. These trends have led to the rise of automatic pricing tools. We employ a novel e-commerce dataset to examine the potential implications of these algorithmic pricing tools. Evidence from an event study around repricer activation suggests that the average impact of automatic pricing is a significant price decline. However, algorithmic pricing companies have developed resetting strategies to avoid Bertrand-Nash competition: these strategies regularly raise a merchant’s prices (e.g., at night) to bait competitors to raise their prices in turn. After activating such a strategy, both the repricing merchant and his competitors’ prices increase. While the resulting patterns of cycling prices are reminiscent of Maskin-Tirole’s Edgeworth cycles, a model of equilibrium in delegated strategies fits the data better. This model suggests that the average price over the cycle will be the monopoly price. Moreover, if the available repricing technologies remain fixed, cycling and prices could rise significantly.