Competition in pricing algorithms

Increasingly, retailers have access to better pricing technology, especially in online markets. Firms employ automated pricing algorithms that allow for high-frequency price changes. What are the implications for price competition? We develop a model of price competition where firms can differ in pricing frequency and choose algorithms that autonomously react to rivals' prices. We demonstrate that pricing technology with these features can increase prices in competitive equilibrium, relative to the standard simultaneous price-setting model. Using high-frequency data from major online retailers, we document asymmetric pricing frequency and pricing patterns consistent with the model. A simple counterfactual simulation implies that pricing algorithms lead to meaningful increases in markups, especially for firms with superior pricing technology