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Financial Analytics: Science and Experience
 

The impact of digital platform pricing algorithms on market equilibrium

Vol. 17, Iss. 2, JUNE 2024

Received: 25 December 2023

Received in revised form: 12 January 2024

Accepted: 23 January 2024

Available online: 30 May 2024

Subject Heading: MATHEMATICAL ANALYSIS AND MODELING IN ECONOMICS

JEL Classification: C72, D43, L13, L14

Pages: 143–161

https://doi.org/10.24891/fa.17.2.143

Georgii V. KOLESNIK Plekhanov Russian University of Economics (PRUE), Moscow, Russian Federation
Kolesnik.GV@rea.ru

https://orcid.org/0000-0003-0695-5038

Subject. The article discusses the penetration of platform technologies into markets, which results in changes in their structure and the nature of competition between participants, and leads to a redistribution of total wealth between producers and consumers of goods. Moreover, traditional market models can give incorrect estimates of equilibrium parameters, since they do not consider the specifics of pricing mechanisms used by platforms.
Objectives. The study aims to assess redistribution of wealth caused by a change in the pricing mechanism from the classical market to the algorithmic one, using the Nash solution, determine the conditions under which the use of this mechanism can lead to an increase in the well-being of market participants.
Methods. I apply methods of systems analysis, mathematical modeling, the theory of imperfect competition, and the game theory.
Results. The study shows that, depending on the structure of the market, determined by the ratio of the number of sellers and buyers, net social losses in algorithmic pricing can be both higher and lower, compared to market equilibrium. With a small number of sellers, the use of algorithmic pricing leads to lower product prices and an increase in public welfare. However, with an increase in the number of sellers, this advantage disappears and the algorithmic mechanism leads to prices close to market equilibrium in an oligopolistic market.
Conclusions. The use of digital platforms turns out to be expedient from the point of view of reducing net social losses in markets characterized by a high degree of monopolization. In this case, the mediation of the digital platform restricts the price limit, preventing manufacturers from setting a monopoly price for their products. In markets with a large number of sellers and buyers, the effects of algorithmic pricing are less pronounced. However, in this case, the efficiency of the market is increased by reducing the transaction costs of searching for information about potential counterparties.

Keywords: two-sided oligopoly, algorithmic pricing, digital platform, market equilibrium, public welfare

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