Algorithmic Price Recommendations and Collusion: Experimental Evidence
67 Pages Posted: 20 Sep 2023
Date Written: August 30, 2023
This paper investigates the collusive and competitive effects of algorithmic price recommendations on market outcomes. These recommendations are often non-binding and common in many markets, especially on online platforms. We develop a theoretical framework and derive two algorithms that recommend collusive pricing strategies. Utilizing a laboratory experiment, we find that sellers condition their prices on the recommendation of the algorithms. The algorithm with a soft punishment strategy lowers market prices and has a pro-competitive effect. The algorithm that recommends a subgame perfect equilibrium strategy increases the range of market outcomes, including more collusive ones. Variations in economic preferences lead to heterogeneous treatment effects and explain the results.
Keywords: Collusion, Experiment, Human–Machine Interaction, Bertrand Oligopoly
JEL Classification: C92, D43, L13, L41
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