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Human-Algorithm Interaction: Algorithmic Pricing in Hybrid Laboratory Markets

Author

Listed:
  • Hans-Theo Normann

    (Heinrich Heine University, Düsseldorf)

  • Martin Sternberg

    (Max Planck Institute for Research on Collective Goods, Bonn)

Abstract

This paper investigates pricing in laboratory markets when human players interact with an algorithm. We compare the degree of competition when exclusively humans interact to the case of one firm delegating its decisions to an algorithm, an n-player generalization of tit-for-tat. We further vary whether participants know about the presence of the algorithm. When one of three firms in a market is an algorithm, we observe significantly higher prices compared to human-only markets. Firms employing an algorithm earn significantly less profit than their rivals. (Un)certainty about the actual presence of an algorithm does not significantly affect collusion, although humans seem to perceive algorithms as more disruptive.

Suggested Citation

  • Hans-Theo Normann & Martin Sternberg, 2021. "Human-Algorithm Interaction: Algorithmic Pricing in Hybrid Laboratory Markets," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2021_11, Max Planck Institute for Research on Collective Goods, revised 13 Apr 2022.
  • Handle: RePEc:mpg:wpaper:2021_11
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    References listed on IDEAS

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    Cited by:

    1. Normann, Hans-Theo & Sternberg, Martin, 2022. "Human-algorithm interaction: Algorithmic pricing in hybrid laboratory markets," DICE Discussion Papers 392, Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    2. Fourberg, Niklas & Marques-Magalhaes, Katrin & Wiewiorra, Lukas, 2022. "They are among us: Pricing behavior of algorithms in the field," WIK Working Papers 6, WIK Wissenschaftliches Institut für Infrastruktur und Kommunikationsdienste GmbH, Bad Honnef.
    3. Normann, Hans-Theo & Sternberg, Martin, 2023. "Human-algorithm interaction: Algorithmic pricing in hybrid laboratory markets," European Economic Review, Elsevier, vol. 152(C).
    4. Marcel Wieting & Geza Sapi, 2021. "Algorithms in the Marketplace: An Empirical Analysis of Automated Pricing in E-Commerce," Working Papers 21-06, NET Institute.

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    More about this item

    Keywords

    algorithms; collusion; human-computer interaction; laboratory experiments;
    All these keywords.

    JEL classification:

    • C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices

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