The Centre for Business Economics is pleased to invite you to a seminar with Joseph E. Harrington, Dept. of Business Economics and Public Policy, The Wharton School, University of Pennsylvania.
The Effect of Outsourcing Pricing Algorithms on Market Competition
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 makes price more sensitive to this demand variation, and this is shown to decrease consumer welfare and increase industry profit. This effect is larger when products are more substitutable.