
Can Algorithms Form Price-Fixing Cartels? - jonbaer
http://www.newyorker.com/business/currency/when-bots-collude
======
jasonzemos
> Economists typically assert that cartels dissolve naturally after members
> cheat or become irrational. When computers are the actors, though, detection
> is faster and not prone to human errors or failings, making defection less
> likely. Automated participants can identify price changes more quickly,
> allowing defectors who lower prices at the expense of the group to be sifted
> out earlier. Given this dynamic, participants have little incentive to
> either “cheat” the group or to leave it.

What is the penalty for defecting from the group to clear the market? An actor
gets kicked out of a group in which he was a voluntary member?

Suppliers take a risk by price-fixing in that they may be underutilized, or be
left with excess supply. Breaking even occurs when a few customers paying the
collusion price net the same income as many customers paying a spot price.
Clever suppliers can profit, but all actors are still independent. The only
recourse for clearing the market is being left out of future collusion, which
means nothing if you're clearing 100% of your supply and the adversary is
clearing 0. The only choice of all actors is to compete for satisfaction.

~~~
harry8
"Economists typically assert that cartels dissolve naturally after members
cheat or become irrational."

Really? Most economists I know acknowledge OPEC still exists and is still a
functioning cartel. And they acknowledge that many economists predicted
otherwise when it formed and were wrong. I'm pretty sure even those who made
such predictions (Milton Friedman from memory for one) have acknowledged they
were completely wrong.

"As everybody knows..." Was how such falsehoods used to be prefaced in the bad
old days in the Soviet Union, so I'm told.

~~~
pjc50
To what extent OPEC is functioning and able to effectively control the oil
price is very much debatable today, especially since shale oil.

~~~
tormeh
You're nitpicking. Shale's an external disturbance. It says nothing about the
inherent stability of cartels in general or OPEC in particular.

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downandout
I actually commented on this exact possibility on the original post about his
prosecution [1]. The answer to the headline is yes, they can form cartels, and
if they were smart enough, the algorithms would figure it out on their own
without any human intervention that this is the most profitable way to do
business. There is currently no API for bots to check with to see if they are
violating the law, and it's unlikely that the author of an algorithm that
ultimately decides on its own to take actions that would probably violate the
law if performed by a human would be held accountable for its actions.

[1]
[https://news.ycombinator.com/item?id=9333046](https://news.ycombinator.com/item?id=9333046)

~~~
shasta
As you say, the problem is that, in an oligopoly, raising prices is often game
theoretically optimal. And while explicit collusion may be illegal, implicit
collusion (all parties noticing the best strategy independently) currently
isn't. I don't see that computers add much of an interesting angle, except, as
the article states, to make irrational or accidental defection less likely.

So really the law on this has always been pretty broken in theory, but maybe
it worked well enough in practice. With computers that may change and the law
will adapt to some other broken-in-theory system that works just well enough
in practice.

~~~
yuhong
I have been thinking of what happens if exceptions to price fixing laws was
allowed.

~~~
kyllo
What happens is you end up with a wasteful meta-bureaucracy where competing
companies and governments form committees to set prices.

I used to work for an ocean container shipping company, and due to
idiosyncrasies of maritime law and the fact that these companies are
considered "too big to fail" by governments, they are exempt from certain
price-fixing laws in many countries including the US and Canada (but they are
no longer exempt in the EU since 2008). Carriers are required to publish their
rate schedules and surcharges and jointly announce rate increases 30 days in
advance of the effective date.

They also share service strings, so a weekly Transpacific service may have a
rotation of five different vessels from different carriers, who lease each
other container space. They are officially not allowed to restrict supply in a
coordinated fashion to prop up prices anymore, but they have to jointly make
operational decisions to downsize or cancel service strings, which is
effectively the same thing.

The result of this, along with numerous government and private bailouts, is
that many of these perennially loss-making companies with inefficient
operations and terrible service continue to limp along and slowly bleed
shareholder value, whereas in a free market they would have been bankrupted
and their assets liquidated years ago.

------
guiambros
_" The only winning move is not to play"_

Or, in this case, to play, but play a safer game, where algorithms find their
a local minima, and profits are potentially smaller than when using an
aggressive stance, but maximized in the long run.

Difficult, but seems theoretically feasible.

------
solve
[http://en.wikipedia.org/wiki/Reinforcement_learning](http://en.wikipedia.org/wiki/Reinforcement_learning)

Yes, easily.

------
swehner
Gas prices come to mind.

