Platform Design When Sellers Use Pricing Algorithms

39 Pages Posted: 21 Sep 2020 Last revised: 12 Jul 2021

See all articles by Justin Johnson

Justin Johnson

Cornell University - Samuel Curtis Johnson Graduate School of Management

Andrew Rhodes

University of Toulouse 1 - Toulouse School of Economics (TSE)

Matthijs R. Wildenbeest

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy

Date Written: July 9, 2021

Abstract

Using both economic theory and Artificial Intelligence (AI) pricing algorithms, we investigate the ability of a platform to design its marketplace to promote competition, improve consumer surplus, and even raise its own profits. We allow sellers to use Q-learning algorithms (commonly used in computer science) to devise pricing strategies in a setting with repeated interactions, and consider the effect of platform rules that reward firms that cut prices with additional exposure to consumers. Overall, the evidence from our experiments suggests that platform design decisions can meaningfully benefit consumers, but that achieving these gains may require demand-steering policies that condition on past behavior and treat sellers in a non-neutral fashion. These more sophisticated policies disrupt the ability of algorithms to rotate demand and split industry profits, leading to very low prices. This is consistent with our theoretical results, which show that a platform can undermine collusion even when firms become infinitely patient.

Keywords: Algorithms, artificial intelligence, collusion, platform design

JEL Classification: K21, L00

Suggested Citation

Johnson, Justin and Rhodes, Andrew and Wildenbeest, Matthijs R., Platform Design When Sellers Use Pricing Algorithms (July 9, 2021). Available at SSRN: https://ssrn.com/abstract=3691621 or http://dx.doi.org/10.2139/ssrn.3691621

Justin Johnson (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States

Andrew Rhodes

University of Toulouse 1 - Toulouse School of Economics (TSE) ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France

Matthijs R. Wildenbeest

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy ( email )

Bloomington, IN 47405
United States
812-856-5067 (Phone)
812-855-3354 (Fax)

HOME PAGE: http://www.kelley.iu.edu/mwildenb

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