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Dynamic Pricing, Intertemporal Spillovers, and Efficiency

By: Alexander J. MacKay, Dennis Svartbäck and Anders G. Ekholm
  • Format:Print
  • | Language:English
  • | Pages:56
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Abstract

Pricing technology that allows firms to rapidly adjust prices has two potential benefits. Time-varying prices can respond to high-frequency demand shocks to generate greater revenues, and they can also be used to smooth out demand to reduce costs. Using data from the staggered adoption of a pricing algorithm, we measure the impacts of time-varying pricing in the context of restaurant food delivery. On average, the pricing algorithm reduced prices, though it led to substantial variation in prices within and across days. We find that the adoption of time-varying pricing reduced demand volatility, resulting in a relative increase in the share of transactions occurring during low-demand periods. We estimate that the volatility semi-elasticity, which we define to reflect the relationship between time-series variation in quantities and prices, is −1.96. This parameter is influenced by the presence of intertemporal spillovers in demand. Consumers appear to strategically time purchases across hours of the week and at higher frequencies (within the hour). Our analysis suggests that production costs fell and consumer welfare increased after adoption, highlighting potential efficiency gains of dynamic pricing algorithms.

Keywords

Price; Consumer Behavior; Applications and Software; Volatility

Citation

MacKay, Alexander J., Dennis Svartbäck, and Anders G. Ekholm. "Dynamic Pricing, Intertemporal Spillovers, and Efficiency." Harvard Business School Working Paper, No. 23-007, July 2022. (Revised December 2023.)

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