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Pricing algorithms in oligopoly: theory and antitrust implications

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  • Jacques THEPOT

    (LaRGE Research Center, Université de Strasbourg)

Abstract

Pricing algorithms are computerized procedures that a seller may use to adapt instantaneously its price to market conditions, including to prices quoted by its rivals. These algorithms are related to the extensive use of web-collectors which contribute in many industries to identifying the best price. In such settings, price competition operates between algorithms, no longer between executives of brick and mortar companies. In this context, the question is to know whether economic efficiency is achieved as implicit forms of collusion may arise between the sellers. This paper is aimed at discussing this conceptual issue in a price-setting homogeneous product oligopoly with decreasing returns to scale where algorithms implement downward and upward matching policies. Using fixed point argument akin to general equilibrium theory, we find a multiplicity of equilibria with prices located between collusion and Cournot, if matching is allowed upward and downward. When matching operates only for price undercutting, this multiplicity is extended up to a bottom value of the market price, close to the competitive price. This bypasses the Bertrand-Edgeworth paradox. As a result, pricing algorithms may contribute to the stability of the market and also to welfare improvement.

Suggested Citation

  • Jacques THEPOT, 2018. "Pricing algorithms in oligopoly: theory and antitrust implications," Working Papers of LaRGE Research Center 2018-04, Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg.
    • Handle: RePEc:lar:wpaper:2018-04
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    References listed on IDEAS

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    1. Mongoljin Batsaikhan & Norovsambuu Tumennasan, 2018. "Output Decisions and Price Matching: Theory and Experiment," Management Science, INFORMS, vol. 64(8), pages 3609-3624, August.
    2. Jean-Pascal Benassy, 1989. "Market Size and Substitutability in Imperfect Competition: A Bertrand-Edgeworth-Chamberlin Model," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 56(2), pages 217-234.
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    4. Claude d'Aspremont & Rodolphe Dos Santos Ferreira & Jacques Thépot, 2016. "Hawks and Doves in Segmented Markets: Profit Maximization with Varying Competitive Aggressiveness," Annals of Economics and Statistics, GENES, issue 121-122, pages 45-66.
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    More about this item

    Keywords

    oligopoly; antitrust law; cost structure.;
    All these keywords.

    JEL classification:

    • K21 - Law and Economics - - Regulation and Business Law - - - Antitrust Law
    • 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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