Collusion by Algorithm: Does Better Demand Prediction Facilitate Coordination Between Sellers?
18 Pages Posted: 29 Oct 2018
Date Written: October 5, 2018
We build a game-theoretic model to examine how better demand forecasting due to algorithms, machine learning and artificial intelligence affects the sustainability of collusion in an industry. We find that while better forecasting allows colluding firms to better tailor prices to demand conditions, it also increases each firm's temptation to deviate to a lower price in time periods of high predicted demand. Overall, our research suggests that, despite concerns expressed by policymakers, better forecasting and algorithms can lead to lower prices and higher consumer surplus.
Keywords: collusion, demand prediction, machine learning
JEL Classification: L41, D43, M21, O33
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