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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

#71

Post by shmatt »

zaphar wrote: post #31
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…

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 actually works well the other way around.

When sales are still growing YoY (like the post covid market), but prices are up 30% or 40%, you understand your customer is still willing to pay the higher price

Its similar to a McDonalds or Starbucks situation where you just keep increasing prices dramatically until you get a first quarter of lower than expected sales, then you start adapting downwards

Most corporations still haven't hit that limit, see streaming companies increasing prices every few months, they still haven't hit the point where profits decrease YoY. When they do the streaming prices start decreasing

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

#72

Post by yieldcrv »

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…

The idea is that a third, fourth and fifth widget manufacturer pops up and undercuts everyone

There are many industries where that doesn’t happen, but there is also opportunity to make it happen

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

#73

Post by munificent »

AlGoreRhythm wrote: post #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…

> but they only modestly extorted the economy's consumers.

This is rational in the metagame where a maximally extortionate behavior invites attention and regulation.

A parasite's goal is to suck as much blood as it can without killing the host.

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

#74

Post by LPisGood »

wordpad wrote: post #14
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…

This feels like a variation of prisoners dilemma. I think what you say is true for well established markets. In growing markets the incentive to capture market share may well override any profit considerations.

TFA is about game theory and the prisoner’s dilemma is one of the most basic examples of game theory, so this makes sense.

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

#76

Post by Fernicia »

friendzis wrote: post #41
Fernicia wrote: post #38

Earlier quoted context omitted.

> The principles behind the free market are flawed Can you go into specifics?

The so called "free market" (not to be confused with laissez faire) assumes perfect "information symmetry" and perfectly rational market participants, which is, effectively, impossible in this particular reality, and concerns itself mostly with marginal eventual state. It is a model. E.g. the model "use VC money to subsidize cost until all competitors are bankrupt then hike prices to recoup" is not really reflected i…

> use VC money to subsidize cost until all competitors are bankrupt then hike prices to recoup

Can you give some examples of this happening in real life?

None of the examples I can think of where people criticised the companies for operating unprofitably, such as Amazon retail or Uber, were able to corner their markets.

Harvey Normans, Targets, Argos's, Walmarts, all still exist and compete with Amazon retail. Most towns still operate normal taxis services, Lyft, FreeNow, Bolt, all compete with Uber.

VC funding subsidising pricing, albeit temporarily, is still good for consumers. It doesn't seem to imply higher eventual prices. The opposite seems true, in fact.

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

#77

Post by crowcroft »

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…

Not entirely relevant to the article, but another factor that is rarely discussed. You need to assume people know about both widget companies.

You often see a McDonalds or Wendy's outcompete lower price/higher quality alternatives, simply because it's a brand people can recall.

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

#78

Post by ElevenLathe »

vladms wrote: post #49
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…

Regulators could ensure that detailed financial data of companies is public. If everybody understands how much profit and opportunities are in a certain thing that will encourage other people to do the same thing. I always think that in this day and age financial secrecy benefits mostly the richest people and adds to the informational imbalance (which does not help even the model of free markets).

I agree, but its much more complex than just forcing companies' books to be open to the public. There are all kinds of accounting tricks you can pull with complex constellations of "entities" (the jargon used by tax dodge experts for the fake companies they set up). IMO we have to retreat away from a world where anyone with a couple hundred dollars can create a corporation by filing a form. Corporate personhood should be a privilege that is granted specifically by a democratically-elected government for well-delineated purposes and subject to revocation if the public trust is betrayed. This in turn obviously means that we need to establish (or re-establish, in places) democratic control of the government and, unless we do this all at once everywhere (very tricky) also massively reduce the amount of cross-border capital flows to the point where they can be reasonably understood and regulated by these domestic democratic governments.

All of this is a tall order, but there's no shortcut to establishing, re-establishing, or maintaining a democracy.

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

#79

Post by schmidtleonard »

mhuffman wrote: post #70
bluGill wrote: post #50

Earlier quoted context omitted.

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.

Yeah, it's the exact opposite: business school teaches you that you should avoid competing on price/quality at all costs and all the ways to avoid competition: network effects, platform effects, last-mile dynamics, predatory pricing, information asymmetry, etc.

Of course, right after teaching you how to exploit all the bad incentives created by capitalism they teach you that the government is to blame for all bad incentives because capitalism only makes good incentives.

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

#80

Post by dghlsakjg »

BizarroLand wrote: post #67
positron26 wrote: post #56

Earlier quoted context omitted.

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.

Don't know if it had anything to do with the price of hotdogs, but Costco did just increase their membership prices.

https://customerservice.costco.com/app/answers/answer_view/a...

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