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Algorithmic price recommendations and collusion: Experimental evidence

Author

Listed:
  • Hunold, Matthias
  • Werner, Tobias
Abstract
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.

Suggested Citation

  • Hunold, Matthias & Werner, Tobias, 2023. "Algorithmic price recommendations and collusion: Experimental evidence," DICE Discussion Papers 410, Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    • Handle: RePEc:zbw:dicedp:280937
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    References listed on IDEAS

    as
    1. Andreas Freitag & Catherine Roux & Christian Thöni, 2021. "Communication And Market Sharing: An Experiment On The Exchange Of Soft And Hard Information," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 62(1), pages 175-198, February.
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    6. Janssen, Maarten & Reshidi, Edona, 2022. "Regulating recommended retail prices," International Journal of Industrial Organization, Elsevier, vol. 85(C).
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    8. Harrington, Joseph E. & Hernan Gonzalez, Roberto & Kujal, Praveen, 2016. "The relative efficacy of price announcements and express communication for collusion: Experimental findings," Journal of Economic Behavior & Organization, Elsevier, vol. 128(C), pages 251-264.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Collusion; Experiment; Human-Machine Interaction; Bertrand Oligopoly;
    All these keywords.

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices

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