
Artificial intelligence, algorithmic pricing, and collusion - mgulaid
https://voxeu.org/article/artificial-intelligence-algorithmic-pricing-and-collusion
======
pmoriarty
This reminds me of the "Tit for Tat" results of simulations of the prisoners'
dilemma[1][2], where cooperating strategies won over competing ones.

It also reminds me of _Colossus: The Forbin Project_ [3], a science-fiction
movie from 1970 in which a supercomputer in the US and one in the Soviet Union
learn to communicate with one another in ways incomprehensible to their human
creators and together rule the Earth.

[1] -
[https://en.wikipedia.org/wiki/Tit_for_tat](https://en.wikipedia.org/wiki/Tit_for_tat)

[2] - [https://plato.stanford.edu/entries/prisoner-
dilemma/](https://plato.stanford.edu/entries/prisoner-dilemma/)

[3] -
[https://en.wikipedia.org/wiki/Forbin_Project](https://en.wikipedia.org/wiki/Forbin_Project)

~~~
roenxi
And that observation makes the article doubly weird:

1) Nobody needs an AI to figure out Tit-for-Tat is a good strategy. It isn't
complicated.

2) The technical economic term for this collusion is probably something like
'efficient market price', where the sellers have agreed on what the fair price
is to offer their service.

Collusion can't mean that the sellers all have an implicitly coordinated
price, because the market is always going to settle on an implicitly
coordinated price if conditions aren't changing.

Collusion is something like companies agreeing to strategically offer and not
offer services to control their competitors. Like, maybe FedEx has a deal
where they refuse to carry online goods that aren't bought from Amazon (don't
ask me how to implement that), that would be collusion. I'm not getting a
service for my online store because there is an exclusionary deal amongst the
big players.

~~~
doctorpangloss
> The technical economic term for this collusion is probably something like
> 'efficient market price'

That's definitely untrue. I mean, clearly an order book shows many sellers
with different opinions about what a fair price is, but it would seem
reasonable that the price in between the bid and the ask is a close
approximation of the efficient market price.

> Collusion can't mean that the sellers all have an implicitly coordinated
> price, because the market is always going to settle on an implicitly
> coordinated price if conditions aren't changing.

That's also pretty untrue, or so pedantic as to be meaningless. Clearly when
orders are fulfilled on a proper bid/ask market, conditions aren't changing in
any fundamental sense but the price definitely does.

You're really stuck applying Econ 101 in one of the worst places, retail. Your
line of thinking has been completely co-opted by a very specific kind of
consumption--buying all your things from the same few stores--where producers
benefit from collusion, meaning coordinating pricing, at the zero-sum expense
of consumers.

Ordinary consumers _could_ buy their goods at auction, or from artisans, or in
pre-sales. Those are much better examples of situations where secular trends
could sometimes show the symptoms of collusion without actual collusion. But
sellers on Amazon? C'mon man, sellers coordinate prices via implicit
information exchange on Amazon in a way that, if they were allowed to, they
would just collude straightforwardly to do so.

~~~
Hydraulix989
> That's definitely untrue.

I think he meant Efficient Market Hypothesis, which could be posed as a
strategy.

> That's also pretty untrue, or so pedantic as to be meaningless.

It's still collusion.

> You're really stuck applying Econ 101 in one of the worst places, retail.

This is Game Theory, not Econ 101. I also think it's one of the best places.

> But sellers on Amazon? C'mon man, sellers coordinate prices via implicit
> information exchange on Amazon in a way that, if they were allowed to, they
> would just collude straightforwardly to do so.

I've seen it happen. I've even seen collusion with online reviews on there.

------
comex
For the sake of a more informed discussion, here is a copy of the actual
paper:

[https://a.qoid.us/SSRN-id3310310.pdf](https://a.qoid.us/SSRN-id3310310.pdf)

(Couldn’t find it on Sci-Hub, so I paid $5 for it.)

Edit: in particular, it addresses a question I had after seeing the original
article and graph… or tries to:

> On the face of it, one may wonder whether the algorithms are eﬀectively
> punishing the deviation, or whether instead the price cuts simply serve to
> regain market share. Looking only at the non-deviating ﬁrm’s behavior, in
> fact, it is hard to tell these alternative explanations apart. But if you
> focus on the behavior of the deviating ﬁrm, the diﬀerence becomes perfectly
> clear. Given that in the deviation period (i.e., period τ = 1) the rival has
> stuck to its old price, in period τ = 2 the deviating algorithm, which
> meanwhile has regained control of the pricing, has no reason to cut its
> price endogenously unless it is taking part in the punishment itself. If its
> only concern were to maintain its market share, the deviating algorithm
> would cut its price only in period τ = 3, i.e. after observing the rival’s
> price reduction in period τ = 2. Actually, however, in period τ = 2 the
> deviating algorithm prices almost exactly the same as the other. This
> clearly shows that the deviating algorithm is responding not only to its
> rival’s but also to its own action. Such self-reactive behavior is often
> crucial to achieve genuine collusion, and it would be diﬃcult to rationalize
> otherwise.

The problem with this explanation is that the “AI” algorithm they’re using is
ridiculously simple. They talk about its input being “the set of all past
prices in the last k periods”… and then, for their main experiment, they _set
k to 1_! So unless I’m misunderstanding something, the input at each round
literally consists of both players’ chosen prices from the immediately
previous round; the algorithm has no memory beyond that. So all it knows is
that its price is lower than its competitor’s; how is it in any way surprising
that it would decide to increase the price for the next round?

And yes, I mean increase – the authors seem to claim it “cut its price
endogenously”, but on the graph, the price clearly increases at τ = 2 compared
to τ = 1. It does keep its price “cut” compared to two rounds ago, before the
intervention, but again that’s not surprising since it only has memory of the
last round.

Am I missing something?

~~~
salty_biscuits
I don't think you are and thanks for the link. I need to read it again more
carefully, but on a first read the results seem completely unsurprising. Seems
to be a problem with labeling this behavior "collusion" in that it gives more
agency to the agents than they deserve.

------
WheelsAtLarge
I think we are there for some of the lower demand products even though it's
not collusion in the strictest sense.

If an algorithm's goal is to match a competitor's price then it's not possible
to find a better price for any item.

In theory, those item's prices don't move constantly, therefore, all prices
will be the same across the board. As a vendor, all I have to do is hike my
product's price and wait for all the competitors to match it and then hike it
again. If I'm a large vendor like Amazon then it's only a matter of time until
I can sell a product at my designated profit without worrying that a
competitor will beat me.

A smaller vendor has no incentive to lower the price since it knows that
Amazon can always win the pricing war so they compete on service or other
ways.

Before algorithms and the net, this was not feasible on lower priced items so
vendors had to set prices independently. Now, it's easy to just match your
competitor no matter the price of the item.

It's not a conspiracy by definition but it has the same ultimate result of
algorithms rasing prices.

------
Maro
Somewhat related, there's a great book, _Twenty Lectures on Algorithmic Game
Theory_ :

    
    
      https://www.amazon.com/dp/131662479X
    

The book is free to download on the author's website, per-chapter, eg. first
one:

    
    
      https://theory.stanford.edu/~tim/f13/l/l1.pdf
    

Highly recommended. After reading the first 20 pages I understood why I
innately hate buying/selling cars and real-estate in the real world [and why
I'd prefer to do it on Ebay].

------
TomMckenny
It does not even have to be AI. If there is an area where the bulk of humans
contact a single agency to decide their prices for them and that agency then
tells every caller the same price (adjusted for quality differences), then you
will get this style of collusion.

The agency can merely claim it is doing research on competitors to set prices,
which is almost true since it looks at the prices it has told others to charge
before giving you a figure.

Which is exactly what is happening with rental housing, the vast bulk of which
use a shared revenue management system saas.

~~~
ummonk
Also what is happening with wages. Companies relying sharing their wage data
with each other through in organizations like Options Impact, and effectively
colluding to match each others’ comp.

~~~
chii
> Companies relying sharing their wage data with each other

If the collusion was only accidental, then an enterprising company could
_just_ increase their price a tiny bit, and attract better people than their
competitors.

~~~
TomMckenny
For this to work, potential employees would have to know about it while
competing employers don't.

------
est31
Imagine if the big world powers built computers with control over the nuclear
arsenals as well as nuclear defense to have superhuman first strike and
retaliation capabilities. Imagine if those computers realized that the biggest
threat to peace is not the other side but the fact that humans, a warmonger
species, control them. Imagine them colluding and trying to establish world
control using their nuclear arsenals. Guess the movie title. It's a must
watch!

~~~
airstrike
[https://en.wikipedia.org/wiki/Colossus:_The_Forbin_Project](https://en.wikipedia.org/wiki/Colossus:_The_Forbin_Project)

It's a fantastic movie I ought to rewatch one of these days...

~~~
01100011
Surprised it hasn't been remade. Seems quite appropriate given the fear of
machine learning lately.

------
orasis
Dynamic pricing developer here.

The bigger problem than collusion is the arms race between higher margins and
higher ad costs. In the end Facebook and Google will take almost all the
margin as consumers see prices rise until they receive zero net value from
their purchases.

~~~
harry8
Is there any published evidence that Goggle and Facebrick ads are actually
effective? Genuine question.

I don't know anybody who clicks them or takes any notice at all of them but
maybe these people exist. I don't know of any company that is wholly reliant
on some kind of advertising who uses them. Eg Chanel, Coca Cola etc. I do see
a bunch of goog/face advertisements on tv and posters at bus stops where I do
also see coke ads.

I don't know of any companies and products who road the early google advert
trend to prominence. Do they exist?

My strong suspicion is that the ad industry is drowning in BS and always has
been. Data cuts through that so I'd love to see anything that anyone has.
Maybe it's not all a giant mountain of con?

~~~
Hydraulix989
> Is there any published evidence that Goggle and Facebrick ads are actually
> effective?

Effective means ROI positive which is pretty easy to demonstrate.

~~~
harry8
This is a link to published evidence?

~~~
Hydraulix989
First, consider that no rational person or business would spend money on any
marketing that isn't ROI positive (because then they would just be losing
money).

Google and businesses aren't amenable to just sharing all of their
confidential marketing data, but here's a birds' eye view:

[https://economicimpact.google.com/](https://economicimpact.google.com/)

~~~
harry8
Colour me unimpressed with a marketing document, unaudited that is literally
selling the service. Without saying google are or aren't a con or having any
view on it in the absence of real data, Bernie Madoff had marketing documents.
There's a good reason to want, actual data.

Businesses do irrational stuff literally all the time. There is no business
that has ever existed that was always wholly rational.

No data is no data...

------
allworknoplay
"these autonomous pricing algorithms may independently discover that if they
are to make the highest possible profit, they should avoid price wars. That
is, they may learn to collude"

No, sorry, not what collusion is. It's pretty much business school 101 that
price is a terrible way to compete unless you actually have a sustainable
comparable advantage on cost or supply -- most people _already_ do this.
Collusion involves an actual agreement of some sort. Even if parties are using
the same software that operates with the same strategies, that's hardly
different from relatively common knowledge about price competition.

edit: I love the concept, sci-fi-wise, though!

~~~
duado
Different people can have different versions of the word “collusion” but the
important definition is that in the law, and in most countries it does _not_
require an explicit agreement between parties.

~~~
AmericanChopper
I’m not aware of any definition of the word collusion, legal or otherwise,
that doesn’t require an agreement between parties. I can’t see how you can
have collusion without colluding.

~~~
retsibsi
'Tacit collusion' is a real concept; as far as I can tell (as very much a non-
expert) it is legal in the US, but there's some ambiguity in the EU.

This (paywalled unless you have academic access) journal article looks very
relevant: [https://academic.oup.com/jeclap/advance-article-
abstract/doi...](https://academic.oup.com/jeclap/advance-article-
abstract/doi/10.1093/jeclap/lpy051/5068278), and there's a blog post by the
author here: [https://www.law.ox.ac.uk/business-law-
blog/blog/2019/02/tack...](https://www.law.ox.ac.uk/business-law-
blog/blog/2019/02/tackling-algorithmic-facilitated-tacit-collusion-
proportionate-way)

~~~
AmericanChopper
Tacit collusion still requires a tacit agreement. From your linked article:

>In an article published in the Journal of European Competition Law &
Practice, I argue that such an approach would amount to a reversal of the
burden of proof under existing case law, in particular on the prohibition of
coordinated facilitating practices. Indeed, following the current position of
the Court, in order to establish the existence of a collusive agreement solely
on the basis of circumstantial evidence (such as the uniform adoption of an
alleged facilitating practice), and without proof of reciprocal contact
through direct or indirect communication, the existence of any plausible and
legitimate alternative explanation must be ruled out.

------
imh
Neat work, but doesn't behavior require colluding to be considered collusive?
Otherwise this is just another neat equilibrium.

~~~
joe_the_user
Well, it's not just a legal question. The problem with colluding is that it
involves effectively taking money from the non-colluding parties. And this
causes those parties to not want to play anymore. If a small or medium
investor know the algorithms are going to cheat them, that investor would not
want to play the game and this, illegal or legal, prevents investing.

You have to keep in mind that markets are both a "game" and way that capital
can be mobilized by society for productive purposes and one doesn't want to
kill this latter aspect.

------
defertoreptar
I'd like to see this done, but over a larger scope where pricing agents are
continually improving. I might be willing to believe that non-communicative
collusion is possible if both agents are at the same "skill." In the real
world, agents will be improved periodically to gain an edge over each other.

------
dooglius
Based on the graph, it looks to me like the agents are just doing some sort of
average between the previous prices, and the "ideal" price. This is evidenced
by the fact that they both update to the same value immediately post-
intervention, and continue to set to about the same values on every subsequent
step. The article claims "This kind of self-reactive behaviour is a
distinctive sign of genuine collusion," but that seems like a reach.

------
wizwazzle
I heard from a friend Amazon dolling out tons of cash to their team of PhDs so
they can design automated pricing for certain customers

~~~
thoughtstheseus
Second that.

------
js8
This is not new, it was already discovered (and also theoretically explained)
by Steve Keen & Russel Standish (2006):"Profit Maximization, Industry
Structure, and Competition: A critique of neoclassical theory". You don't
really need AI to that.

Also, Alan Blinder's book Asking About Prices confirms this (and other things)
in practice.

------
lifeisstillgood
In the end does this matter - my cost function is to get the most possible
with the least effort, but there are case statements in the function labelled
"do not rob a bank".

If your AI program commits a crime in the pursuit of your goals, both of you
are going to jail, just as if your agent / lawyer / employee does.

------
randyrand
Side not: Is it illegal for independent contractors to collude on freelance
platforms like Fever?

Or could this be considered a trade union?

------
edoo
Things like this are how Soylent Green will happen without anyone actually
realizing it.

------
robertAngst
But people will compare prices, and alert the media/friends when they find
discrepancies.

I've seen the narrative change in the last few years, Fast food was deemed low
cost, but a Calorie Per Dollar comparison showed that eating fast food is
significant more expensive.

If a single company doesn't play by the rules, the world will be aware of the
price difference.

~~~
blihp
This assumes competitive markets which allow them to do anything about it. For
example (in the U.S. at least), when your local cable company raises prices
for Internet services that effectively signals to the local telco that they
can too. Sure, the market notices this but has few, if any, other options. (a
big assumption is that you even have the option of both cable and telco ISP
service in your area.) If all it takes to end up in this situation are NN's
learning that implicit collusion is good for profitability, I'd argue that it
really isn't a competitive market.

~~~
robertAngst
True, heavily regulated government sectors struggle from this(medical for
instance), but online is nearly anarchy. I don't see Amazon having ability to
screw customers (forever).

And those sectors you are talking about need serious reform that the
incumbents DONT want.

~~~
blihp
Regulated sectors are indicators of markets that aren't competitive since
regulation tends to come in after it's well past obvious that markets have
failed. When Amazon gets to their end game (which they seem to be pretty close
to IMO) I think you'll be surprised at how much and long they'll be able to
screw customers... after all, most of their competitors will be long gone and
the few that remain will be weak so who's going to be able to offer an
alternative in the short to intermediate term?

