Publications
Publications
- 2023
- HBS Working Paper Series
Dynamic Pricing, Intertemporal Spillovers, and Efficiency
By: Alexander J. MacKay, Dennis Svartbäck and Anders G. Ekholm
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
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.)