Demand Estimation Using Managerial Responses to Automated Price Recommendations
- Author(s)
- Daniel Garcia, Juha Tolvanen, Alexander K. Wagner
- Abstract
We provide a new framework to identify demand elasticities in markets where managers rely on algorithmic recommendations for price setting and apply it to a data set containing bookings for a sample ofmidsized hotels in Europe. Using nonbinding algorithmic price recommendations and observed delay in price adjustments by decision makers, we demonstrate that a control-function approach, combined with state-of-the-art modelselection techniques, can be used to isolate exogenous price variation and identify demand elasticities across hotel room types and over time. We confirm these elasticity estimates with a difference-in-differences approach that leverages the same delays in price adjustments by decisionmakers. However, the difference-in-differences estimates aremore noisy and only yield consistent estimates if data are pooled across hotels. We then apply our control-function approach to two classic questions in the dynamic pricing literature: the evolution of price elasticity of demand over and the effects of a transitory price change on future demand due to the presence of strategic buyers. Finally, we discuss how our empirical framework can be applied directly to other decision-making situations in which recommendation systems are used.
- Organisation(s)
- Department of Economics, Vienna Center for Experimental Economics
- External organisation(s)
- Paris-Lodron Universität Salzburg
- Journal
- Management Science
- Volume
- 68
- Pages
- 7918-7939
- No. of pages
- 22
- ISSN
- 0025-1909
- DOI
- https://doi.org/10.1287/mnsc.2021.4261
- Publication date
- 10-2021
- Peer reviewed
- Yes
- Austrian Fields of Science 2012
- 502013 Industrial economics, 502044 Business management, 502040 Tourism research
- Keywords
- ASJC Scopus subject areas
- Economics and Econometrics, Management Science and Operations Research, Strategy and Management
- Portal url
- https://ucris.univie.ac.at/portal/en/publications/demand-estimation-using-managerial-responses-to-automated-price-recommendations(585a0c86-aef6-4181-b5ca-e550b2b734b4).html