Abstract
Algorithmic pricing may lead to more efficient and contestable markets, but high-impact, low-probability events such as terror attacks or heavy storms may lead to price gouging, which may trigger injunctions or get sellers banned from platforms such as Amazon or eBay. This work addresses how such events may impact prices when set by an algorithm and how different markets may be affected. We analyze how to mitigate these high-impact events by paying attention to external (market conditions) and internal (algorithm design) features surrounding the algorithms. We find that both forces may help in partially mitigating price gouging, but it remains unknown which forces or features may lead to complete mitigation.
Highlights
We address how HILP events influence the price set by algorithms in differentiated and undifferentiated markets and whether market forces or specific algorithmic designs can mitigate their impact
This exercise aims to show that particle swarm optimization (PSO) can be implemented as a price-setting algorithm
Algorithms setting prices for products are a reality in many businesses, such as ridehailing services or web-based markets such as Amazon, and they are essential for the sustainability of long-term strategies of many companies
Summary
In 2017, London suffered a terror attack. Given the memories of the metro attacks of 2005, many Londoners tried to reach home with ride-hailing services, such as Uber. Neither factor is capable of completely mitigating the HILP event, they partially mitigate it In both cases, the final price remains higher than optimal, which would explain why the only solution found to deal with such events in the last decade was either to suspend the algorithmic pricing or to set price caps [11,12]. Little is known on the specific software that firms use, those algorithms should not be computationally expensive, and they should be able to deal with multi-dimensional optimization problems since many digital companies are multi-product companies In this regard, the Q-learning algorithm seems not to be a good choice in its basic setting. The best option to carry out our experiment is the PSO algorithm
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