DIKU Bits: Pricing in digital markets - Why do medicine prices often increase by over 100 %?
Anders Munk-Nielsen, assistant professor, Department of Economics.
As more and more markets become digital, companies often have to set prices in hundreds of markets simultaneously and in real time. For example, there are over 606 million products for sale on Amazon, many of which updating prices so often that the cheapest product one week may not be cheapest the next. When a company has to set so many prices simultaneously, it may be so overwhelming that they strategically choose to conserve on managerial attention; i.e. they do not always pay attention to all markets. Such inattention, however, can have drastic dynamic implications for the price equilibrium and can e.g. result in “price cycles” where the lowest price in a given market jumps up dramatically and then takes a long time to gradually fall back down.
This phenomenon is extremely common in gasoline markets and we document that is it also very widespread in the markets for prescription drugs after patent expiration in Denmark. Solving for these price equilibria is an extremely computationally challenging task but one that is relevant in many online pricing markets.