Artificial Intelligence, Algorithmic Pricing and Collusion

44 Pages Posted: 6 Jan 2019 Last revised: 29 Jan 2019

See all articles by Emilio Calvano

Emilio Calvano

University of Bologna - Department of Economics; University of Toulouse 1 - Department of Economics; CSEF - Center for Studies in Economics and Finance

Giacomo Calzolari

European University Institute - Economics Department (ECO); Centre for Economic Policy Research (CEPR); University of Bologna

Vincenzo Denicolò

University of Bologna

Sergio Pastorello

University of Bologna - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: December 20, 2018

Abstract

Pricing algorithms are increasingly replacing human decision making in real marketplaces. To inform the competition policy debate on possible consequences, we run experiments with pricing algorithms powered by Artificial Intelligence in controlled environments (computer simulations).

In particular, we study the interaction among a number of Q-learning algorithms in the context of a workhorse oligopoly model of price competition with Logit demand and constant marginal costs. We show that the algorithms consistently learn to charge supra-competitive prices, without communicating with each other. The high prices are sustained by classical collusive strategies with a finite punishment phase followed by a gradual return to cooperation. This finding is robust to asymmetries in cost or demand and to changes in the number of players.

Keywords: Artificial Intelligence, Pricing-Algorithms, Collusion, Reinforcement Learning, Q-Learning.

JEL Classification: L41, L13, D43, D83.

Suggested Citation

Calvano, Emilio and Calzolari, Giacomo and Denicolo, Vincenzo and Pastorello, Sergio, Artificial Intelligence, Algorithmic Pricing and Collusion (December 20, 2018). Available at SSRN: https://ssrn.com/abstract=3304991 or http://dx.doi.org/10.2139/ssrn.3304991

Emilio Calvano

University of Bologna - Department of Economics ( email )

Bologna
Italy

University of Toulouse 1 - Department of Economics ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France

CSEF - Center for Studies in Economics and Finance ( email )

Via Cintia
Complesso Monte S. Angelo
Naples, Naples 80126
Italy

Giacomo Calzolari (Contact Author)

European University Institute - Economics Department (ECO) ( email )

Villa la Fonte
Via delle fontanelle 18
San Domenico di Fiesole, Florence 50014
Italy

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

University of Bologna ( email )

Piazza Scaravilli 2
I-40126 Bologna
Italy

HOME PAGE: http://sites.google.com/view/giacomo-calzolari

Vincenzo Denicolo

University of Bologna ( email )

Strada Maggiore 45
Bologna, 40125
Italy

Sergio Pastorello

University of Bologna - Department of Economics ( email )

Via Saragozza, 8
Bologna, 40125
Italy
+39 051 2098144 (Phone)
+39 051 2098040 (Fax)

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