An Economic Test for an Unlawful Agreement to Adopt a Third-Party's Pricing Algorithm

28 Pages Posted: 27 Jul 2023 Last revised: 14 Apr 2024

Date Written: January 18, 2024

Abstract

A growing market is the supply of pricing algorithms by software developers. While there is an efficiency rationale for outsourcing pricing, anticompetitive concerns have been expressed when competitors in a market adopt the same pricing algorithm. These concerns have resulted in private litigation claiming a third-party company (who developed the pricing algorithm) and firms (who adopted it) had an unlawful agreement. This study develops an empirical test for determining whether firms' adoption decisions are coordinated and thus a violation of competition law. If adoption decisions are coordinated then adopters' average price is increasing in the number of firms that adopt, while if adoption decisions are independent then adopters' average price does not depend on the number of firms that adopt. This economic evidence could serve as a plus factor in proving the conduct of a third-party developer and adopting firms is in violation of Section 1 of the Sherman Act.

Keywords: Collusion, Antitrust, Pricing Algorithms, Third Party Developers

JEL Classification: L13, L41

Suggested Citation

Harrington Jr, Joseph E., An Economic Test for an Unlawful Agreement to Adopt a Third-Party's Pricing Algorithm (January 18, 2024). Available at SSRN: https://ssrn.com/abstract=4520245 or http://dx.doi.org/10.2139/ssrn.4520245

Joseph E. Harrington Jr (Contact Author)

University of Pennsylvania ( email )

Philadelphia, PA 19102
Philadelphia, PA 19104

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