Artificial Intelligence, Algorithmic Pricing and Collusion

47 Pages Posted: 7 Jan 2019 Last revised: 28 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 2018

Abstract

Increasingly, pricing algorithms are supplanting human decision making in real marketplaces. To inform the competition policy debate on the possible consequences of this development, we experiment with pricing algorithms powered by Artificial Intelligence (AI) in controlled environments (computer simulations), studying the interaction among a number of Q-learning algorithms in a workhorse oligopoly model of price competition with Logit demand and constant marginal costs. In this setting the algorithms consistently learn to charge supra-competitive prices, without communicating with one another. The high prices are sustained by classical collusive strategies with a finite phase of punishment 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, Collusion, Pricing-Algorithms, Q-Learning, Reinforcement Learning

JEL Classification: D43, D83, L13, L41

Suggested Citation

Calvano, Emilio and Calzolari, Giacomo and Denicolo, Vincenzo and Pastorello, Sergio, Artificial Intelligence, Algorithmic Pricing and Collusion (December 2018). CEPR Discussion Paper No. DP13405, Available at SSRN: https://ssrn.com/abstract=3310310

Emilio Calvano (Contact Author)

University of Bologna - Department of Economics ( email )

Bologna
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University of Toulouse 1 - Department of Economics ( email )

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Giacomo Calzolari

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

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Vincenzo Denicolo

University of Bologna ( email )

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Bologna, 40125
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Sergio Pastorello

University of Bologna - Department of Economics ( email )

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Bologna, 40125
Italy
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+39 051 2098040 (Fax)

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