Download This PaperAlgorithmic Pricing and Consumer Sensitivity to Price Variability
23 Pages Posted: 8 May 2023 Last revised: 11 Feb 2024
Date Written: February 2, 2024
Abstract
Artificial Intelligence (AI) automates human decisions. Algorithmic pricing—an AI application for scalable price determination—is now prevalent in ride-hailing, travel, drugs, gasoline, and online retail. A common thread across all these implementations is heightened price variability due to frequent price adjustments made by the algorithms. We study the impact of this algorithmic pricing-induced price variability on consumer behavior. Using granular clickstream data from an online grocery retailer in the U.S. that implemented algorithmic pricing, we find that increased price variability exacerbates consumer price sensitivity. While extant literature shows that firms are better off using algorithmic pricing, these findings are economically consequential as AI pricing triggers side effects that undermine those gains, i.e., a more price-sensitive demand offsets some of the expected benefits of algorithmic pricing. We confirm the findings of our field study using controlled lab experiments and identify price salience as the key underlying mechanism.
Keywords: algorithmic pricing, price variability, price sensitivity, price salience, experiments
JEL Classification: L11, L21, L81, D22, D91
Suggested Citation: Suggested Citation
