Collusion and Artificial Intelligence: A Computational Experiment with Sequential Pricing Algorithms under Stochastic Costs

Gonzalo Ballestero
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Gonzalo Ballestero: Universidad de San Andrés

No 118, Working Papers from Red Nacional de Investigadores en Economía (RedNIE)

Abstract: Firms increasingly delegate their strategic decisions to algorithms. A potential concern is that algorithms may undermine competition by leading to pricing outcomes that are collusive, even without having been designed to do so. This paper investigates whether Q-learning algorithms can learn to collude in a setting with sequential price competition and stochastic marginal costs adapted from Maskin and Tirole (1988). By extending a previous model developed in Klein (2021), I find that sequential Q-learning algorithms leads to supracompetitive profits despite they compete under uncertainty and this finding is robust to various extensions. The algorithms can coordinate on focal price equilibria or an Edgeworth cycle provided that uncertainty is not too large. However, as the market environment becomes more uncertain, price wars emerge as the only possible pricing pattern. Even though sequential Q-learning algorithms gain supracompetitive profits, uncertainty tends to make collusive outcomes more dicult to achieve.

Keywords: Competition Policy; Artificial Intelligence; Algorithmic Collusion (search for similar items in EconPapers)
JEL-codes: D43 K21 L13 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2022-02
New Economics Papers: this item is included in nep-big, nep-cmp, nep-com, nep-exp, nep-ind, nep-law, nep-ore and nep-reg
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Persistent link: https://EconPapers.repec.org/RePEc:aoz:wpaper:118

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