Algorithmic Discrimination in Service

69 Pages Posted: 20 Aug 2020 Last revised: 1 Jun 2021

See all articles by Kalinda Ukanwa

Kalinda Ukanwa

University of Southern California - Marshall School of Business

Roland T. Rust

University of Maryland - Robert H. Smith School of Business

Date Written: May 29, 2021

Abstract

This research investigates conditions under which algorithmic discrimination can impact long-term demand and profits. We employ experiments and an agent-based model to demonstrate that algorithmic discrimination can be profitable in the short-run but can erode profits in the long-run. This research shows that discriminatory algorithms have short-term profit advantages, but non-discriminatory algorithms earn higher long-term profits when factoring in consumer word-of-mouth and competition. Large error in measuring consumer quality (value or profitability to the firm) exacerbates algorithmic discrimination, while large consumer heterogeneity attenuates it. This research emphasizes the long-term benefits of using non-discriminatory algorithms, as well as incorporation of word-of-mouth considerations in the algorithm’s design. However, for firms that must engage in using discriminatory algorithms, this research recommends increasing investment in methods of measurement error reduction and increasing exposure to consumers of different populations. By doing so, a firm could reduce algorithmic discrimination while improving both long-term profits and societal well-being.

Keywords: algorithmic bias, discrimination, algorithms, agent-based modeling, word of mouth, service

Suggested Citation

Ukanwa, Kalinda and Rust, Roland T., Algorithmic Discrimination in Service (May 29, 2021). USC Marshall School of Business Research Paper, Available at SSRN: https://ssrn.com/abstract=3654943 or http://dx.doi.org/10.2139/ssrn.3654943

Kalinda Ukanwa (Contact Author)

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd, HOH 431
Los Angeles, CA California 90089-1424
United States

Roland T. Rust

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States

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