Linking Algorithms to Static and Dynamic pricing: theory and evidence
Abstract: We show how the main features of a pricing algorithm are shaped by organizational frictions, which impede continuous price adjustments. In our theoretical multi-unit capacity, multi-period pricing model, frictions lead the algorithm to set prices for each unit, which remain constant during a “static pricing spell”; dynamic pricing occurs when the algorithm modifies at least one price. Using airline data, we find evidence of static spells lasting long enough to suggest carriers cannot adjust fares constantly, consistent with the model’s assumptions and predictions.
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