Platform Design When Sellers Use Pricing Algorithms

60 Pages Posted: 21 Sep 2020 Last revised: 21 Oct 2022

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

University of Arizona - Department of Economics

Date Written: October 19, 2022

Abstract

We investigate the ability of a platform to design its marketplace to promote competition, improve consumer surplus, and increase its own payoff. We consider demand-steering rules that reward firms that cut prices with additional exposure to consumers. We examine the impact of these rules both in theory and by using simulations with artificial intelligence pricing algorithms (specifically Q-learning algorithms, which are commonly used in computer science). Our theoretical results indicate that these policies (which require little information to implement) can have strongly beneficial effects, even when sellers are infinitely patient and seek to collude. Similarly, our simulations suggest that platform design can benefit consumers and the platform, but that achieving these gains may require 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 low prices.

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 (October 19, 2022). 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

University of Arizona - Department of Economics ( email )

McClelland Hall
Tucson, AZ 85721-0108
United States

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