Collusion and artificial intelligence : a computational experiment with sequential pricing algorithms under stochastic costs

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 difficult to achieve.

Keywords: Competition Policy, Artificial Intelligence, Pricing Algorithms, Collusion.