Even without explicit collusion, pricing algorithms converge on price-fixing strategies

Literally the only kind of monopolistic behavior that the US government is willing to prosecute is price fixing, and that's why it's so important to read Artificial intelligence, algorithmic pricing, and collusion, a paper by four Italian economists from the University of Bologna who document how price-fixing is an emergent property of pricing algorithms — the systems online merchants use to price-match with their competitors.

The researchers find that "even relatively simple pricing algorithms systematically learn to play sophisticated collusive strategies," through iterated turns in which each tries to meet the others' prices without losing money, and that it's seemingly impossible to design pricing algorithms that don't evolve collusive strategies ("the propensity to collude is stubborn – substantial collusion continues to prevail even when the active firms are three or four in number, when they are asymmetric, and when they operate in a stochastic environment").

Pricing bots usually come to our attention when they made weird decisions that produce hilarious outcomes, but this paper suggests that the unsexy, invisible workaday world of algorithmic pricing is ripping off everyone who buys just about anything, even by the narrow and lax standards of modern antitrust enforcement.

Update: This confirms a decade-old paper's findings about collusion in pricing algorithms. I went looking for this paper this morning, but only just found it now!

What is most worrying is that the algorithms leave no trace of concerted action – they learn to collude purely by trial and error, with no prior knowledge of the environment in which they operate, without communicating with one another, and without being specifically designed or instructed to collude. This poses a real challenge for competition policy. While more research is needed before considering policy moves, the antitrust agencies' call for attention would appear to be well grounded.

Artificial intelligence, algorithmic pricing, and collusion [Emilio Calvano, Giacomo Calzolari, Vincenzo Denicolò, Sergio Pastorello/CEPR]

Left to Their Own Devices, Pricing Algorithms Resort to Collusion [David Grossman/Popular Mechanics]

(via /.)

(Image: Cryteria, CC-BY)