Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/236669 
Year of Publication: 
2021
Series/Report no.: 
CESifo Working Paper No. 9127
Publisher: 
Center for Economic Studies and Ifo Institute (CESifo), Munich
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 dataset containing bookings for a sample of mid-sized hotels in Europe. Using non-binding 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 model selection 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 decision makers. However, the difference-in-differences estimates are more noisy and only yield consistent estimates if data is 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 time as well as 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.
Subjects: 
big data
causal inference
machine learning
revenue management
price recommendations
demand estimation
JEL: 
L13
L83
D12
Document Type: 
Working Paper
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