Bruno Salcedo (Penn State University)
29 January 2016 @ 12:00
There is an increasing tendency for firms to use pricing algorithms that speedily react to market conditions, such as the ones used by major airlines and online retailers like Amazon. I consider a dynamic model in which firms commit to pricing algorithms in the short run. Over time, their algorithms can be revealed to their competitors and firms can revise them, if they so wish. I show how pricing algorithms not only facilitate collusion but inevitably lead to it. To be precise, within certain parameter ranges, in any equilibrium of the dynamic game with algorithmic pricing, the long-run joint profits of the firms are close to those of a monopolist.