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Buyer-Optimal Algorithmic Consumption

Author

Listed:
  • Shota Ichihashi

    (Queen's University, Department of Economics, 94 University Avenue, Kingston, Canada)

  • Alex Smolin

    (Toulouse School of Economics, University of Toulouse Capitole and CEPR, 1 Esp. de l'Universite, 31000 Toulouse, France)

Abstract

We analyze a bilateral trade model in which the buyer's value for the product and the seller's costs are uncertain, the seller chooses the product price, and the product is recommended by an algorithm based on its value and price. We characterize an algorithm that maximizes the buyer's expected payoff and show that the optimal algorithm under-recommends the product at high prices and over-recommends at low prices. Higher algorithm precision increases the maximal equilibrium price and may increase prices across all of the seller's costs, whereas informing the seller about the buyer's value results in a mean-preserving spread of equilibrium prices and a mean-preserving contraction of the buyer's payoff.

Suggested Citation

  • Shota Ichihashi & Alex Smolin, 2023. "Buyer-Optimal Algorithmic Consumption," Working Papers 23-02, NET Institute.
    • Handle: RePEc:net:wpaper:2302
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    Keywords

    data; algorithm; pricing; recommendation; mechanism design; information design;
    All these keywords.

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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