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An economic test for an unlawful agreement to adopt a third-party’s pricing algorithm

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  • Joseph E Harrington

Abstract

SUMMARYArtificial intelligence has helped fuel a growing market in the supply of pricing algorithms by software developers. While there is an efficiency rationale for outsourcing pricing, anticompetitive concerns have been expressed when competitors in a market adopt the same pricing algorithm. These concerns have resulted in private litigation claiming a third-party company (who developed the pricing algorithm) and firms (who adopted it) had an unlawful agreement. This study develops an empirical test for determining whether firms’ adoption decisions are coordinated. If adoption decisions are coordinated then adopters’ average price is increasing in the number of adopting firms, while if adoption decisions are independent then adopters’ average price does not depend on the number of adopting firms. This test could provide economic evidence to support a claim of an unlawful agreement between a third-party developer and adopting firms.

Suggested Citation

  • Joseph E Harrington, 2025. "An economic test for an unlawful agreement to adopt a third-party’s pricing algorithm," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 40(121), pages 261-295.
    • Handle: RePEc:oup:ecpoli:v:40:y:2025:i:121:p:261-295.
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    File URL: http://hdl.handle.net/10.1093/epolic/eiae054
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    More about this item

    Keywords

    L13; L41;

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices

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