Collusive Outcomes Without Collusion

Inkoo Cho and Noah Williams

Papers from arXiv.org

Abstract: We develop a model of algorithmic pricing that shuts down every channel for explicit or implicit collusion while still generating collusive outcomes. We analyze the dynamics of a duopoly market where both firms use pricing algorithms consisting of a parameterized family of model specifications. The firms update both the parameters and the weights on models to adapt endogenously to market outcomes. We show that the market experiences recurrent episodes where both firms set prices at collusive levels. We analytically characterize the dynamics of the model, using large deviation theory to explain the recurrent episodes of collusive outcomes. Our results show that collusive outcomes may be a recurrent feature of algorithmic environments with complementarities and endogenous adaptation, providing a challenge for competition policy.

Date: 2024-03
New Economics Papers: this item is included in nep-ain, nep-com, nep-gth, nep-ind and nep-reg
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