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Algorithmic and human collusion

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  • Werner, Tobias

Abstract

As self-learning pricing algorithms become popular, there are growing concerns among academics and regulators that algorithms could learn to collude tacitly on non-competitive prices and thereby harm competition. I study popular reinforcement learning algorithms and show that they develop collusive behavior in a simulated market environment. To derive a counterfactual that resembles traditional tacit collusion, I conduct market experiments with human participants in the same environment. Across different treatments, I vary the market size and the number of firms that use a self-learned pricing algorithm. I provide evidence that oligopoly markets can become more collusive if algorithms make pricing decisions instead of humans. In two-firm markets, market prices are weakly increasing in the number of algorithms in the market. In three-firm markets, algorithms weaken competition if most firms use an algorithm and human sellers are inexperienced.

Suggested Citation

  • Werner, Tobias, 2021. "Algorithmic and human collusion," DICE Discussion Papers 372, Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
  • Handle: RePEc:zbw:dicedp:372
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    Cited by:

    1. Gonzalo Ballestero, 2022. "Collusion and Artificial Intelligence: A Computational Experiment with Sequential Pricing Algorithms under Stochastic Costs," Working Papers 118, Red Nacional de Investigadores en Economía (RedNIE).
    2. Gonzalo Ballestero, 2021. "Collusion and Artificial Intelligence: A computational experiment with sequential pricing algorithms under stochastic costs," Young Researchers Working Papers 1, Universidad de San Andres, Departamento de Economia, revised Oct 2022.

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    More about this item

    Keywords

    Artificial Intelligence; Collusion; Experiment; Human-Machine Interaction;
    All these keywords.

    JEL classification:

    • C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • 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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