Beware Algorithms That Could Collude on Prices

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It’s one thing for algorithms to set prices. It’s another thing for algorithms to unfairly raise prices.

A new study shows that this can indeed happen, at least theoretically.

Companies are increasingly using algorithms to help them set prices for air travel, ride sharing, gasoline and a range of other goods. Now, researchers have conducted a series of computer simulations in which pricing algorithms learned, through trial and error and without communicating directly, to collude in maintaining prices above levels that would be expected in open competition. The only instruction the algorithms were given was to maximize profits, though the researchers didn’t tell them how to do this.

To prove that the algorithms were colluding and not just randomly landing, in unison, on inflated prices, the researchers forced one algorithm in each simulation to cut its price. The algorithms then engaged in a price war—but eventually returned together to higher prices. Such behavior, experts say, is a hallmark of collusion, in which companies that have agreed to raise prices above competitive levels occasionally cheat on the collusive arrangement but ultimately fall back in line.

“The question, as we are delegating key managerial tasks to machines, is what shall we expect?” says Emilio Calvano, an author of the study and a professor of economics at the University of Bologna. “One option is that markets will function better—lower prices, perhaps. Or machines can find clever ways to extract more money out of consumers’ pockets. And collusion is a clever way of doing exactly that.”

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