Platform Design When Sellers Use Pricing Algorithms
60 Pages Posted: 21 Sep 2020 Last revised: 21 Oct 2022
Date Written: October 19, 2022
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: Suggested Citation