Yesterday’s FT provides a fascinating article (available here) on the role algorithms may increasingly plan in price-rigging and collusion. While previously humans have colluded to fix prices, today’s algorithms which seek profit maximization may end up colluding in a way which is hard to detect and difficult to stop. Indeed a recent OECD report states:
“Finding ways to prevent collusion between self-learning algorithms might be one of the biggest challenges that competition law enforcers have ever faced… [Algorithms and Big Data] “may pose serious challenges to competition authorities in the future, as it may be very difficult, if not impossible, to prove an intention to co-ordinate prices, at least using current antitrust tools”.
While algorithmic trading has proliferated in financial services (reported in many popular books such as “Dark Pools”), it is their increasing use in consumer marketplaces which concerns the article’s authors – airline booking, hotels, and online retailing.
The problem for regulation is that “All of the economic models are based on human incentives and what we think humans rationally will do.” (Terrell McSweeny US FTC) while an AI algorithm which “learns” that its most profitable course of action is price coordination are poorly represented in our understanding.
“What happens if the machines realise it is in their interest to systematically and quickly raise prices in a co-ordinated way without deviating?” (Terrell McSweeny)
Indeed we might ask whether an algorithm which uses huge databases of historical demand and supply data, and detailed data of the competitive marketplace, to arrive at its most profitable price in the milliseconds of a webpage loading is acting competitively in keeping with market principles or against the consumer (who could never undertake similar analysis and therefore faces huge information asymmetry challenges).
An interesting example in the article is an App to track petrol pricing whereby, because the app highlights instantly to competitors that a price has been cut (and they can match the price cut before demand shifts), so it removes the incentive for anyone to discount.
The article even states: “the availability of perfect information, a hallmark of free market theory, might harm rather than empower consumers”