Competition in Pricing Algorithms

We document new facts about pricing technology using high-frequency data, and we examine the implications for competition.Some online retailers employ technology that allows for more frequent price changes and automated responses to price changes by rivals.Motivated by these facts, we consider a model in which firms can differ in pricing frequency and choose pricing algorithms that are a function of rivals' prices.In competitive (Markov perfect) equilibrium, the introduction of simple pricing algorithms can generate price dispersion, increase price levels, and exacerbate the price effects of mergers.