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The game theory of how algorithms can drive up prices

quantamagazine.org

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Re: The game theory of how algorithms can drive up prices

#21
post #6

The researcher says > this strange strategy will maximize your profit. “To me, it was a complete surprise” It doesn't seem like such a surprise that algorithms that use information about rivals to optimising profit tend to price high. Consider a small town with two gas stations, you own one. You can set the price (high or low) in the morning and can't change it until the next day. Your goal is to optimise profit for…

> what can regulators do?

Regulators could say "you're not allowed to make more than X profit". They already do that with utilities, so it's not a matter of practical impossibility.

Re: The game theory of how algorithms can drive up prices

#22

Earlier quoted context omitted.

You can see this happening all the time on Amazon these days if you use a price tracker. Most items are swapping between two prices that are maintained for periods and little peaks just a little bit lower and higher to test response. Then when you take that and look across different countries stores you can see they are running different pricing and running tests globally while the price is being sustained in others.…

Having a single flat price is/was due to labor prices being high enough in the developed world to ignore potential profits from price discrimination. When my grandparents went to the market in the developing country they immigrated from, they would bargain for everything, and every customer got a different price. The developed world was rich enough that grocery stores didn’t need to waste time doing this, and could s…

It is not only about labor prices being high enough (creating consumers who can buy more). There is a significant religious component to the introduction of fixed pricing. Quakers are often credited with introducing fixed pricing in the Western world, because they felt that charging higher prices to those less able to haggle (or higher prices by age, gender, race) was immoral, dishonest in the eyes of God. They then experienced greater sales because you could send your kid to the store and trust the kid wouldn't get ripped off. It just took a layer of stress off going to the store. John Wanamaker (a Presbyterian?) I think is the one who really started a retail empire on fixed pricing. One of his main selling points was one price for anyone, and a fair return policy.

The behavioral economics here is that many people will pay a consistent (fair) price to not be surprised and not feel ripped off.

Agree that automation will engage in price discrimination whenever possible. When will we see the backlash? I have heard stories of outrage ("when I looked for airline tickets at work they were way cheaper than when I looked on my home laptop!") but we haven't seen a widespread reaction, and the moral aspect seems to be relatively overlooked at this time.

Re: The game theory of how algorithms can drive up prices

#23

> Imagine a town with two widget merchants. Customers prefer cheaper widgets, so the merchants must compete to set the lowest price. I always found this statement to be rather wishful. Individual lowering of prices makes sense if and only if your competitor is capable of saturating the market. Otherwise, demand elasticity becomes very relevant. Sure, your competitor may take the larger share of the market, but then y…

You want to get an economist to shut up? Point out that we're now in a situation that for nearly any physical good, one producer is able to saturate the market, that nearly every factory is operating below capacity, that individual farms are so big they can easily produce what an entire state needs and in fact operates below capacity for financial reasons. Both factories and farms: A LOT below capacity. Because 1% of a modern factory's capacity is able to saturate a very large local market, and the rest depends on international treaties, not on supply, demand, or even price.

Which means increasing supply for just about anything ... doesn't actually change price, and in fact the issue you're pointing out is not just one of the influences on prices, but almost the only one.

The market is saturated and producers have no incentive to lower prices, for nearly every good. Which means increasing supply ... does not lower prices. Increasing demand does not raise prices ... that's just not how it works anymore.

The only influence on price is international relations, or to put it more bluntly: various kinds of taxes are the only influence on prices (going from import/export tax, vat/sales tax, subsidies, raw material availability (effectively mostly meaning a tax in the form of export restrictions), what loan conditions are for good X, ...), and so economics just doesn't really apply anymore to the vast majority of goods.

The price of widgets from water balloons to air fryers is controlled by government subsidies in particular countries.

The price of houses is controlled by mortgage conditions, which are set in law. Meaning they are different between countries in both ways that matter (so, for example, Freehold vs Leasehold, Australia's Negative Gearing, whether 30 year fixed price is available, immigration policy, whether foreign investment is allowed ...) and in weird ways that don't matter. Supply and demand don't control price.

The price of labor and services is around 80% tax in most of Europe. Measured by taking $100 that the employer pays to have labour done, so including for example France's "patronal" tax, compared to what the employer would receive and not have to pay to the government in his bank account if the employee chose to spend all of his pay on whatever his labor produces. Yes there is still some supply/demand here ... but not much.

The problem is that for nearly everything "taxes" (as in taxes and tax-like regulations) determine who produces, and the tax swings are so large (going from -10%, yes minus, to 80% and more) depending on location and good, and their effect swamps any economic concern in nearly all sectors of the economy.

Re: The game theory of how algorithms can drive up prices

#25

> Imagine a town with two widget merchants. Customers prefer cheaper widgets, so the merchants must compete to set the lowest price. I always found this statement to be rather wishful. Individual lowering of prices makes sense if and only if your competitor is capable of saturating the market. Otherwise, demand elasticity becomes very relevant. Sure, your competitor may take the larger share of the market, but then y…

> I always found this statement to be rather wishful.

The principles behind the free market are flawed. Copyright and patents are flawed. We're being played. But somehow the incumbents always get away with "but we have fair rules", when everybody who has ever entered a game of monopoly late knows this is not true.

Re: The game theory of how algorithms can drive up prices

#26
The author cites the common CEPR paper [0], but missed its most interesting finding. It found that the algorithms definitively did show signs of collusive behaviour, but that their chosen equilibrium price point was far below the Nash equilibrium. That is, the researchers expected these algorithms to maximally extort the consumers, but they only modestly extorted the economy's consumers.

[0] - https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3304991

Re: The game theory of how algorithms can drive up prices

#27
post #6

The researcher says > this strange strategy will maximize your profit. “To me, it was a complete surprise” It doesn't seem like such a surprise that algorithms that use information about rivals to optimising profit tend to price high. Consider a small town with two gas stations, you own one. You can set the price (high or low) in the morning and can't change it until the next day. Your goal is to optimise profit for…

> what can regulators do? Regulators could say "you're not allowed to make more than X profit". They already do that with utilities, so it's not a matter of practical impossibility.

The problem with this is it ends up being a signal in of itself, so when you say, the cap is X you end up having everyone immediately set their profits to X and never budge from there

Re: The game theory of how algorithms can drive up prices

#28
This was the Greystar situation that already happened with apartment rentals.

Are people not aware of this?

A switch to value based pricing for essentials (water,shelter,transport,utilities, etc.)is an extremely easy way to destroy disposable income and even make some areas impossible to live in for the existing members.

Austin, Texas in 2021 saw several of my friends who were renters see a 1 year price increase that more than doubled their rent, I had friends who we're doctors who we're forced to move out of one bedroom apartments, even if it wasn't the plan, it's still a great way to displace people like local musicians so hack comedian can move in.

Re: The game theory of how algorithms can drive up prices

#29
post #25

> Imagine a town with two widget merchants. Customers prefer cheaper widgets, so the merchants must compete to set the lowest price. I always found this statement to be rather wishful. Individual lowering of prices makes sense if and only if your competitor is capable of saturating the market. Otherwise, demand elasticity becomes very relevant. Sure, your competitor may take the larger share of the market, but then y…

> I always found this statement to be rather wishful. The principles behind the free market are flawed. Copyright and patents are flawed. We're being played. But somehow the incumbents always get away with "but we have fair rules", when everybody who has ever entered a game of monopoly late knows this is not true.

Not flawed, but very, very complicated. The theory of free markets holds a lot of very well reasoned and tested lessons that can be instructive, depending to which principles you are referring.

Newtonian principles does a really good job for a huge number of use cases, but it isn't the end all.

When it comes to intertwining human taste, a doctrine of equal opportunity combined with private property, and scarce resources, I don't want to throw the baby out with the bathwater.

Re: The game theory of how algorithms can drive up prices

#30
post #17

Earlier quoted context omitted.

> (i.e. in practical terms, there's no way regulators can police what algorithms sellers use - I can't think of exceptions to this, but perhaps there are some special cases) Regulators can already police the data used as inputs in decision-making in industries like insurance, so policing the algorithms that operate on that data doesn't seem like too much of a reach.

> Regulators can already police the data used as inputs in decision-making in industries like insurance How enforceable is policing which data can be used as inputs though? It's common for insurance companies to price based on age and sex (e.g. teenage boys will typically pay higher car insurance premiums than similar aged girls). Presumably insurers are not allowed to price on a factor such as race. Unlike collusion…

> But how would a regulator find/prove algorithmic collusion?

They don't need to. At least in the US, courts look at the outcome and if the outcome is discriminatory that's the important part. This is under the idea of disparate impact. Beyond that, the realpage cases offer an example of modern day prosecution of algorithmic collusion.

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