Algorithmic Pricing and Consumer Sensitivity to Price Variability

Artificial Intelligence (AI) automates human decisions. Algorithmic pricing, a form of AI, sets prices by a computer. It is now common currency in ride-hailing, travel, drugs, gasoline, online goods---And great price variability characterizes all those settings. However, little is known about how consumers respond to encountering frequently changing prices. This paper uses clickstream data from an online retailer in the U.S. that varied pricing methods to examine effects of frequently-changing prices on purchase behavior. The evidence shows that exposure to price variability exacerbates price sensitivity. These findings are confirmed in online lab experiments. Additionally, an underlying mechanism is price salience