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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

#101

Post by BlandDuck »

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. 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 you can compensate with higher per item profit.

You should check the distinction between Bertrand and Cournot competition. Bertrand competition is price competition where the competitor can saturate the market, as you mention. Cournot competition, on the other hand, captures your intuition of competition on quantities rather than prices.

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

#103

Post by cogman10 »

nerdponx wrote: post #47
Retric wrote: post #34

Earlier quoted context omitted.

Free markets as described by Econ 101 don’t apply in any sector where advertising is useful. Far more complicated theories get much closer to reality, but aren’t nearly as well known outside of economic circles.

The irony is that rental markets are probably one of the better markets to apply Econ 101 principles. Yes you have problems with information asymmetry, but for the most part you have a huge number of relatively small buyers and sellers, and prices freely ebb and flow based on supply and demand conditions. So if you are going to analyze the effect of algorithmic pricing in the real estate market, starting with the sim…

It works for single family homes, but it breaks down when you start talking about multi-tenant facilities.

There are far fewer single family homes on the market and they are a lot harder to bring up in the market. However, multi-tenant facilities cost a lot less to bring to market but there are few owners of those buildings.

With a much smaller set of unit owners, it makes collusion a lot easier to pull off. Only a few facilities need to participate in order to raise the prices and once it goes up for the large owners the smaller owners will happily raise their prices because "it's competitive with market rates".

The part that's totally divorced is that the cost of these units has nothing to do with business expenses and everything to do with market availability. A new player can't really come in and disrupt things and even if one or a few actors start undercutting the others it doesn't matter because they only have so many units they can sell which will fill up quickly.

The whole thing has driven up housing prices to the extreme. My 15 year old home is worth 5x the price I purchased it at. That actually scares me. I couldn't afford my home today and I can't afford to really move into a nicer home in the future.

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

#104

Post by alostpuppy »

cogman10 wrote: post #94
gowld wrote: post #87

Earlier quoted context omitted.

What is lower price than McDonalds or Wendy's for a substitutable good Economy of Scale is powerful.

There's a weird thing happening in the US where all the restaurant suppliers have consolidated. What that means is you likely won't see competitive prices anywhere else not due to scale but due to the input price being fixed regardless of who you are. I believe McDonalds is still somewhat independent in it's sourcing. IDK about wendy's. But Burger King is absolutely just another Sysco reseller at this point. That mea…

This is fascinating take and makes SO much sense.

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

#105

Post by cogman10 »

mlsu wrote: post #100
cogman10 wrote: post #94

Earlier quoted context omitted.

There's a weird thing happening in the US where all the restaurant suppliers have consolidated. What that means is you likely won't see competitive prices anywhere else not due to scale but due to the input price being fixed regardless of who you are. I believe McDonalds is still somewhat independent in it's sourcing. IDK about wendy's. But Burger King is absolutely just another Sysco reseller at this point. That mea…

This is it. and: true across the board, not just restaurants...

Yup, and I really hate it. Monopolies and oligopolies are really terrible in just about every way imaginable. Everyone that isn't an oligopoly gets screwed.

This is also simply the natural end state of free market capitalism. Every one of these giant businesses knows that by swallowing up smaller competitors they can ultimately improve their revenue without improving quality or actually innovating/competing.

Companies like sysco should have never been allowed to merge with other distributors and they should absolutely be broken up.

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

#106

Post by vladms »

ElevenLathe wrote: post #78
vladms wrote: post #49

Earlier quoted context omitted.

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 shoul…

I think the idea of financial transparency should be more discussed at any level. Yes, there will be loopholes, but now the default is "money is secret, how dare you!".

I would claim that democracy was an ideal at any point in time. Most people have/had insufficient education to understand all the topics. Even in more advanced countries (with better education on average) the discourse gets focused on petty issues. The societies that will be able to focus on the longer term will be the next centuries winners!

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

#107

Post by treis »

alostpuppy wrote: post #104
cogman10 wrote: post #94

Earlier quoted context omitted.

There's a weird thing happening in the US where all the restaurant suppliers have consolidated. What that means is you likely won't see competitive prices anywhere else not due to scale but due to the input price being fixed regardless of who you are. I believe McDonalds is still somewhat independent in it's sourcing. IDK about wendy's. But Burger King is absolutely just another Sysco reseller at this point. That mea…

This is fascinating take and makes SO much sense.

Fortunately it's not true. Sysco has 17% of the market according to Morningstar:

https://www.morningstar.com/company-reports/1327868-sysco-re...

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

#108

Post by yndoendo »

gowld wrote: post #87
crowcroft wrote: post #77

Earlier quoted context omitted.

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.

What is lower price than McDonalds or Wendy's for a substitutable good Economy of Scale is powerful.

The city I live in has number of locally owned restaurants that easily compete against McDonalds and Wendys price point. I find the quality of food to be better.

Lack of communication to outsiders and visitors about those that compete against such establishments is key. The larger organizations have more capital to advertise and help capture that economic arena.

Personally, when I travel, I go out of my way to find local establishments over large franchises because the former slowly siphons out the local economy to some CEO that gets paid millions. The latter helps keep the competition local economy health. I haven't given Starbucks a penny in over 7 years and plan to never fund their organization ever again.

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

#109

Post by dheera »

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 once did an internship in a small town in Germany. There were 2 bakeries in this town. One closed for all of July as vacation, the other took all of August as vacation. They had coordinated this with each other so that everyone could always buy bread and pastries, but the bakers could also get their vacations. They would even put signs on their doors letting people know that the other bakery was open during their vacation.

I feel like in the US or Asia this would never happen. In these hyper-capitalist and competitive societies, both bakeries would jump on the opportunity of extra business, sacrifice their family and fun time, and neither would take any vacation. Two bakeries in a town would see each other as mortal competitors instead of collaborators and take every opportunity to eat into the others' business.

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

#110

Post by cogman10 »

treis wrote: post #107
alostpuppy wrote: post #104

Earlier quoted context omitted.

This is fascinating take and makes SO much sense.

Fortunately it's not true. Sysco has 17% of the market according to Morningstar: https://www.morningstar.com/company-reports/1327868-sysco-re...

Sysco isn't the only one, but it is one of the few.

If you start looking at the distribution centers of these companies and the competitors, you get a pretty clear picture of how concentrated things are.

The drop off for the distribution centers of the top 3 is stark. [1]

[1] https://abasto.com/en/advice/food-distributors/

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