The game theory of how algorithms can drive up prices • Hacker News Board

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

#61

Post by indoordin0saur » Thu, Oct 23, 2025, 3:55 PM UTC

photochemsyn wrote: post #58

friendzis wrote: post #8

> 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…

Imagine a town with two landlords who own all rental properties. Yes consumers prefer cheaper rentals, but all the landlords have to do is write an app that they can use to set prices as high as they can while not having too many units empty. If the homeless population in the town increases, that's an externality - especially if the landlords themselves don't live in the town.

This works if landlords don't have significantly more units than are demanded by the population AND it is both very expensive for new units to be built and new competitors to enter the market. If enough supply comes on the market and the best move for the landlord with the additional supply would be to lower prices. Tenants then all move into the better value units and the expensive landlord is left with either empty buildings or is forced to lower his price.

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

#62

Post by MangoToupe » Thu, Oct 23, 2025, 3:56 PM UTC

nomilk wrote: 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…

> (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)

One obvious answer would be to introduce a publicly-owned, zero-margin competitor not constrained by this algorithm, thus reintroducing an incentive to drive down costs or drive up quality.

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

#63

Post by indoordin0saur » Thu, Oct 23, 2025, 3:59 PM UTC

amelius wrote: post #25

friendzis wrote: post #8

> 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.

> Copyright and patents are flawed... the incumbents always get away with "but we have fair rules"

You're right, but I'd add that important thing here is that this is not a free market.

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

#64

Post by parineum » Thu, Oct 23, 2025, 4:01 PM UTC

"Algorithm" has got to be the least useful word in English today.

It isn't the software that's responsible driving up prices, it's the information.

> Yet a widely cited 2019 paper (opens a new tab) showed that algorithms could learn to collude tacitly, even when they weren’t programmed to do so. A team of researchers pitted two copies of a simple learning algorithm against each other in a simulated market, then let them explore different strategies for increasing their profits. Over time, each algorithm learned through trial and error to retaliate when the other cut prices — dropping its own price by some huge, disproportionate amount. The end result was high prices, backed up by mutual threat of a price war.

This is nonsense. Those "algorithms" were programed to do that. I also notice they didn't add a third copy of the algorithm or a fourth. The summary of this research is that they built a novel algorithm (not one used in practice) and put it in a simulation. How this is representative of any real world scenario escapes me. They proved that software written to optimize profits optimizes profits. Shocking.

The researchers quoted in the article are, essentially, defining collusion as knowing what competitors prices are.

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

#65

Post by sharemywin » Thu, Oct 23, 2025, 4:09 PM UTC

friendzis wrote: post #8

> 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…

if you've ever shopped at Giant Eagle instead of Kroger you'll understand the flaw in the logic.

higher prices usually equals better service, less busy shopping. get in and get out.

so if your time is worth more than your money you aren't sensitive to price at the widget scale. most widgets are bundled with some kind of service.

I bought some printing and it was super cheap but no service not an email not a phone number nothing. not ordering from their again.

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

#66

Post by sharemywin » Thu, Oct 23, 2025, 4:14 PM UTC

nomilk wrote: 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…

that doesn't even consider the buying the competitor across the street and paying lobbyist to have congress ignore you for the benefit of the consumer because with the combined stores you can gain market efficiencies. of course ignore the price gouging that actually happens.

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

#67

Post by BizarroLand » Thu, Oct 23, 2025, 4:15 PM UTC

positron26 wrote: post #56

zaphar wrote: post #31

Earlier quoted context omitted.

You shouldn't lower prices as a direct reaction to your competitor. You should lower prices as a reaction to your customers willingness to buy at a given price. It's an indirect reaction but it factors in the actual market.

This is still so oversimplified. There's always bellwether products customers buy a lot and get used to. They use those to decide if you are cheap or expensive. Costco hotdogs are about satisfaction. If I can get one good deal or even a great deal that I find every time, I'm much more likely to be satisfied.

I was just thinking about this. Costco either loses money on or just barely breaks even on their hotdogs, but they keep selling them at $1.50. It's a part of their brand.

It would be smarter for them to raise the price of their membership another $10/yr to offset the losses than it would to raise the price of their hot dogs another $0.50 to make them profitable.

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

#68

Post by eitau_1 » Thu, Oct 23, 2025, 4:16 PM UTC

friendzis wrote: post #8

> 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 find double-action[0] a really useful mental model of market.

[0] https://en.wikipedia.org/wiki/Double_auction#Game-theoretic_...

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

#69

Post by krapp » Thu, Oct 23, 2025, 4:23 PM UTC

parineum wrote: post #64

"Algorithm" has got to be the least useful word in English today. It isn't the software that's responsible driving up prices, it's the information. > Yet a widely cited 2019 paper (opens a new tab) showed that algorithms could learn to collude tacitly, even when they weren’t programmed to do so. A team of researchers pitted two copies of a simple learning algorithm against each other in a simulated market, then let t…

>"Algorithm" has got to be the least useful word in English today.

On the contrary, it's the word that's going to justify balkanization and government control of speech on the web. It's spooky magic that controls people's minds to most people. You know we're cooked when it becomes common on HN of all places to claim that "algorithmic feeds" should be illegal because they're the source of all society's ills, toxicity and political dissent.

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

#70

Post by mhuffman » Thu, Oct 23, 2025, 4:27 PM UTC

bluGill wrote: post #50

friendzis wrote: post #8

> 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…

In the real world there are always things other than price to compete on. Business school will tell you constantly that best quality is where you want to compete in almost all cases. Quality has many different options and so you can compete with something that is different from someone else by enough that if someone prefers your quality you are the only option.

>Business school will tell you constantly that best quality is where you want to compete in almost all cases.

Hmmmm, I don't remember it that way. I remember the constant take was to build a moat (typically based on intellectual property), then optimize net profit and/or network effects. Quality never really came up unless it is so bad as to cause lawsuits.