Artificial Intelligence, Algorithm Design, and Pricing

Author:

Asker John1,Fershtman Chaim2,Pakes Ariel3

Affiliation:

1. UCLA and NBER (email: )

2. Eitan Berglas School of Economics, Tel Aviv University and CEPR (email: )

3. Harvard University and NBER (email: )

Abstract

We calculate the time path of prices generated by algorithmic pricing games that differ in their learning protocols. Asynchronous learning occurs when the algorithm only learns about the return from the action it actually took. Synchronous learning occurs when the artificial intelligence conducts counterfactuals to learn about the returns it would have earned had it taken an alternative action. In a simple market setting, we show that synchronous updating can lead to competitive pricing, while asynchronous updating can lead to pricing close to monopoly levels. However, building simple economic reasoning into the asynchronous algorithms significantly modifies the prices it generates.

Publisher

American Economic Association

Subject

General Medicine

Reference6 articles.

1. Asker, John, Chaim Fershtman, and Ariel Pakes. 2021. "Arti cial Intelligence and Pricing: The Impact of Algorithm Design." NBER Working Paper 28535.

2. Assad, Stephanie, Robert Clark, Daniel Ershov, and Lei Xu. 2021. "Algorithmic Pricing and Competition: Empirical Evidence from the German Retail Gasoline Market." Unpublished.

3. Artificial Intelligence, Algorithmic Pricing, and Collusion

4. Competition and Markets Authority. 2018. "Pricing Algorithms: Economic Working Paper on the Use of Algorithms to Facilitate Collusion and Personalised Pricing." CMA Working Paper CMA94.

5. Sutton, Richard S., and Andrew G. Barto. 2018. Reinforcement Learning: An Introduction. Cambridge, MA: MIT Press.

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