Pricing algorithms in oligopoly: theory and antitrust implications

Jacques Thépot

Working Papers of LaRGE Research Center from Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg

Abstract: Pricing algorithms are computerized procedures that a seller may use to adapt instantaneously its price to market conditions, including to prices quoted by its rivals. These algorithms are related to the extensive use of web-collectors which contribute in many industries to identifying the best price. In such settings, price competition operates between algorithms, no longer between executives of brick and mortar companies. In this context, the question is to know whether economic efficiency is achieved as implicit forms of collusion may arise between the sellers. This paper is aimed at discussing this conceptual issue in a price-setting homogeneous product oligopoly with decreasing returns to scale where algorithms implement downward and upward matching policies. Using fixed point argument akin to general equilibrium theory, we find a multiplicity of equilibria with prices located between collusion and Cournot, if matching is allowed upward and downward. When matching operates only for price undercutting, this multiplicity is extended up to a bottom value of the market price, close to the competitive price. This bypasses the Bertrand-Edgeworth paradox. As a result, pricing algorithms may contribute to the stability of the market and also to welfare improvement.

Keywords: oligopoly; antitrust law; cost structure. (search for similar items in EconPapers)
JEL-codes: K21 L13 L41 (search for similar items in EconPapers)
Date: 2018
New Economics Papers: this item is included in nep-com, nep-gth, nep-ind and nep-law
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Persistent link: https://EconPapers.repec.org/RePEc:lar:wpaper:2018-04

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