The impact of artificial intelligence design on pricing

John Asker, Chaim Fershtman and Ariel Pakes

Journal of Economics & Management Strategy, 2024, vol. 33, issue 2, 276-304

Abstract: The behavior of artificial intelligence (AI) algorithms is shaped by how they learn about their environment. We compare the prices generated by AIs that use different learning protocols when there is market interaction. Asynchronous learning occurs when the AI only learns about the return from the action it took. Synchronous learning occurs when the AI conducts counterfactuals to learn about the returns it would have earned had it taken an alternative action. The two lead to markedly different market prices. When future profits are not given positive weight by the AI, (perfect) synchronous updating leads to competitive pricing, while asynchronous can lead to pricing close to monopoly levels. We investigate how this result varies when either counterfactuals can only be calculated imperfectly and/or when the AI places a weight on future profits. Lastly, we investigate performance differences between offline and online play.

Date: 2024
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https://doi.org/10.1111/jems.12516

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