Algorithmic pricing: Implications for marketing strategy and regulation

Abstract

Over the past decade, a growing number of firms have delegated pricing decisions to algorithms in consumer and business markets such as travel, entertainment, and retail, as well as in platform markets such as ride-sharing. We define algorithmic pricing as “the use of programs to automate the setting of prices.” Firms adopt algorithmic pricing to optimize their prices in response to changing market conditions and to leverage the efficiency gains from automation. Advances in information technology and the increased availability of digital data have further facilitated the use of algorithm-driven pricing strategies. Yet adopting algorithmic pricing is not merely a technical upgrade — it is a strategic decision that must align with a company’s existing and future marketing strategies. Moreover, algorithmic pricing can raise various regulatory concerns regarding potential threats to competition and the legality of price discrimination. This paper discusses the implementation of algorithmic pricing in the context of firms’ marketing strategies and regulatory frameworks, while outlining an agenda for future research in this increasingly important area.