> 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 you can compensate with higher per item profit.
The common wisdom is that in properly functional markets there's enough supply with n-1 market participants, therefore given a market signal of one participant lowering their prices the last one standing without lowering prices gets kicked out of the market, making maintaining prices the losing move. Yet, if the rest of the market does not react to the signal, the one lowering their prices hurts their profits and possibly kicks themselves out of the market. Making price maintenance, and depending on elasticity maybe even jacking of prices, the winning move in the presence of this signal.
Turns out the probability of either move being the winning move is dependent on probability of other market participants colluding/defecting. However, since lowering the prices hurts the profit a rational market participant would conclude that the rest of the market is inclined, even if a little bit, not to lower their prices in reaction given price cutting signal and similarly a bit more inclined to raise the prices given price hike signal.
The main difference between algorithms and humans is that software feels no guilt. Traditional human building superintendents were once happy with a 10% increase in rent from one tenant to the next, and would feel guilty when doubling prices. There are plenty of small business owners which take pride in delivering affordable prices to their customers across many market segments. Not a trait that is present in large corporations.
One of the Behind the Bastards podcasts touched upon the fact that in the rental property market the 2 cloud vendors peddling software to manage properties could collude on behalf of landlords. Collusion by humans is fairly limited in scale, but when you're a "platform" every price can be set based on the prices of millions of listings -- what was once impossible for humans is now trivial.
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.
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
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 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.
Not flawed, but very, very complicated. The theory of free markets holds a lot of very well reasoned and tested lessons that can be instructive, depending to which principles you are referring.
Newtonian principles does a really good job for a huge number of use cases, but it isn't the end all.
When it comes to intertwining human taste, a doctrine of equal opportunity combined with private property, and scarce resources, I don't want to throw the baby out with the bathwater.
> 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.
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.
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.
Let’s say there is a dozen of them playing Minecraft, one could say they are in the same market competing with each other.
But what happens really is some folks like dude with long hair, others like the other guy that screams every time he wins.
Same with training videos, I bought course from a guy that is kind of monotonous and I don’t care but my GF cannot stand watching the guy for longer than 10 minutes.
Bakeries seem like closest one would be best, but somehow I’d rather go 10 mins further because I don’t like the feeling of the first one. Even though quality or price they don’t differ.
I don't mean it in a bad way. I do think engineers and business people should be in contention. But business people will sacrifice product (quality) for profit while engineers sacrifice profit for product.
Quality is often hard to define too. The business people have a harder time defining it as well since they understand at best as a user, but only if they are dog fooding (even engineers often don't!). They've developed strategies to make profit and still be relevant.
> Imagine a town with two widget merchants. Customers prefer cheaper widgets, so the merchants must compete to set the lowest price.
Imagine a town with two widget merchants. The two go out to dinner one night, and next week they both double their prices. Both widget merchants are pleased.
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.
> 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.
Like Walmart/Dollar Tree/Costco/Aldi/Target/Kroger/Amazon etc can (and have)?
If anything it's incredible how competitive the market is. You can go into walmart, in the richest large country on earth by a significant margin, and buy pants for like $20. There are some heavily regulated industries where maybe we don't want this but in general companies competing to drive down prices is how most things work, and it works unbelievably well.
> Yet, if the rest of the market does not react to the signal, the one lowering their prices hurts their profits and possibly kicks themselves out of the market.
The reason this doesn't happen is because the ones lowering their prices have typically done so due to explicit measures to improve efficiency, and so they already have a healthier margin with which to capture more of the market from competitors.
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.
Although a good proxy for the situation in the real world is gas stations, as long as you ignore that gas stations tend not to make much, if any, profit on gas sales.
No need to ignore it. This is exactly why gas stations tend not to make much profit on gas.
In my area, there's one notorious gas station that's a couple miles away from any other commerce but has a reasonably large amount of traffic passing by. Amazingly, its prices are always about 50% higher than everywhere else.
Competition works when it exists. Yes, you also have to factor in supply. That's why the phrase is "supply and demand."
> Individual lowering of prices makes sense if and only if your competitor is capable of saturating the market.
Individual lowering of prices makes sense if you are capable of producing some amount more than you currently do.
Suppose there are 10 suppliers, your production cost is $1 and the current market price is $2. You each sell 100 widgets and you yourself make $100, the other 9 providers also sell an average of 100 widgets, so there are 1000 total purchases.
If you can produce 200 widgets and you lower your price to $1.90, you're now making $180 instead of $100, because people prefer to pay $1.90 to $2 until you run out of capacity. Moreover, the other suppliers have now collectively lost 100 sales to you unless they match your price reduction and maybe some of them have higher costs than you and can't, which means you get to keep their share of the market. The other participants who have lower costs like you, even if they don't have any excess capacity, would rather make the ones who can't lower prices eat the loss in sales because it's better to lower margins by 10% than take an 11% reduction in sales. And lowering prices might also increase sales if customers buy more market-wide at the lower price.
> Yet, if the rest of the market does not react to the signal, the one lowering their prices hurts their profits and possibly kicks themselves out of the market.
How would the one lowering the price kick themselves out of the market? Their sales would only go up, or if consumers are completely insensitive to price, stay the same. As long as the lower price is still yielding them a net profit, they're still in the market. The theory isn't expected to cause them to lower prices below their own costs, because of course they weren't going to do that.
If consumers are completely price insensitive and they didn't know that until they tried it, they might end up raising the price again because it didn't do any good, but that's also pretty uncommon. If you can get the exact same thing for less money, do you pay more for no reason?
> Turns out the probability of either move being the winning move is dependent on probability of other market participants colluding/defecting.
Collusion is something else entirely. If all of the participants are getting together in a back room to fix prices then none of this applies, but that's also why there's a law against that.
It's also why the theory doesn't work when the number of participants is very small.
Suppose there are only two providers and they each have unlimited capacity. They each have a $1 cost, sell 500 widgets for $2 and make $500 each. If one of them lowers prices to $1.90, they'll sell 1000 widgets and make $900. Except that the other one will just match their price and then they'll each make $450 instead, which they both know so they both don't do it. And that's on top of explicit collusion being much easier to hold together and harder to detect when there are fewer sellers.
That isn't what happens when there are 100 sellers, because then 99 of them are trying to hold together a cartel and the last one is laughing at them all because they can increase their sales by 10,000% by lowering prices by 5% and none of the others are matching them.
You want to get an economist to shut up? Point out that we're now in a situation that for nearly any physical good, one producer is able to saturate the market, that nearly every factory is operating below capacity, that individual farms are so big they can easily produce what an entire state needs and in fact operates below capacity for financial reasons. Both factories and farms: A LOT below capacity. Because 1% of a modern factory's capacity is able to saturate a very large local market, and the rest depends on international treaties, not on supply, demand, or even price.
Which means increasing supply for just about anything ... doesn't actually change price, and in fact the issue you're pointing out is not just one of the influences on prices, but almost the only one.
The market is saturated and producers have no incentive to lower prices, for nearly every good. Which means increasing supply ... does not lower prices. Increasing demand does not raise prices ... that's just not how it works anymore.
The only influence on price is international relations, or to put it more bluntly: various kinds of taxes are the only influence on prices (going from import/export tax, vat/sales tax, subsidies, raw material availability (effectively mostly meaning a tax in the form of export restrictions), what loan conditions are for good X, ...), and so economics just doesn't really apply anymore to the vast majority of goods.
The price of widgets from water balloons to air fryers is controlled by government subsidies in particular countries.
The price of houses is controlled by mortgage conditions, which are set in law. Meaning they are different between countries in both ways that matter (so, for example, Freehold vs Leasehold, Australia's Negative Gearing, whether 30 year fixed price is available, immigration policy, whether foreign investment is allowed ...) and in weird ways that don't matter. Supply and demand don't control price.
The price of labor and services is around 80% tax in most of Europe. Measured by taking $100 that the employer pays to have labour done, so including for example France's "patronal" tax, compared to what the employer would receive and not have to pay to the government in his bank account if the employee chose to spend all of his pay on whatever his labor produces. Yes there is still some supply/demand here ... but not much.
The problem is that for nearly everything "taxes" (as in taxes and tax-like regulations) determine who produces, and the tax swings are so large (going from -10%, yes minus, to 80% and more) depending on location and good, and their effect swamps any economic concern in nearly all sectors of the economy.
Food in developed nations is incredibly cheap as a direct result of the massive productive capacity of modern agriculture. Factory goods are also very cheap. Increasing supply demonstrably drives prices down.
Housing is an area where supply is heavily restricted, partially because land cannot be manufactured, partly because of government regulations controlling what can be built and where. Surprise, housing is very expensive.
> 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 the next 1000 days. On day one you price high (hoping your rival will). But your rival prices low and wins lots of business. On day two, you price high again (hoping your rival will have seen your prices and cooperate). If your rival prices high, you both stay high for the most of the next 998 days (there's some incentive to 'cheat' and price low, but that is easily countered by the rival pricing low). If your rival priced low on day 2, you have to start pricing low too. But occasionally you'll price high to try to 'nudge' your rival to price high to avoid low-low. If they eventually understand, you can both price high for the rest of the 1000 days. Critically, even if stuck at the low-low equilibrium, you'll keep trying to 'nudge' high periodically. The frequency with which you try to 'nudge' will depend on the ratio of profit for high-high vs low-low. If you both make extreme profits when pricing high-high, you have more incentive to 'nudge', but if the difference isn't great, you won't nudge as often.
Seems obvious pricing high will be attempted in proportion to the reward relative to pricing low.
The researchers' conclusion seems reasonable:
> it’s very hard for a regulator to come in and say, ‘These prices feel wrong’”
and
> what can regulators do? Roth admits he doesn’t have an answer.
(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)
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.
> (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)
Regulators can already police the data used as inputs in decision-making in industries like insurance, so policing the algorithms that operate on that data doesn't seem like too much of a reach.
> Regulators can already police the data used as inputs in decision-making in industries like insurance
How enforceable is policing which data can be used as inputs though?
It's common for insurance companies to price based on age and sex (e.g. teenage boys will typically pay higher car insurance premiums than similar aged girls). Presumably insurers are not allowed to price on a factor such as race. Unlike collusion, overt use of a variable like 'race' in a pricing model could be detected and enforced via a company whistleblower.
But how would a regulator find/prove algorithmic collusion?
In an extreme case, regulators could ban all use of competitors' data in a sellers' pricing models. But that seems extreme and unproductive since it could stop price wars (downward prices), as well as muting good effects of the 'invisible hand' (higher prices attracting more market entrants and greater investment)
> (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.
This example works well in a vacuum, but not much else. You would see people filling up outside the small town, or see a third station open up to undercut the other two. Or, there is so much overhead that the high-high price is actually the fair price. Like grocery store monopolies that are bilking people so they can reap....1-2% profit margins.
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.
Regulators could say "you're not allowed to make more than X profit". They already do that with utilities, so it's not a matter of practical impossibility.
I continue to believe that in the case of oversized margins, the government should just enter the market themselves. Buy the smallest competitor and operate it at a reasonable margin, growing it at every opportunity. If the rest of the market lowers their margins to beat it, spin the thing off.
Basically don't bother to dictate margins, just declare that market a failure.
The problem with this is it ends up being a signal in of itself, so when you say, the cap is X you end up having everyone immediately set their profits to X and never budge from there
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.
It's possible algorithms simply drive up prices because price isn't the main factor some people use in deciding what to buy. Algorithms are probably able to learn that raising the price outweighs the decrease in the number of people buying something, and if every algorithm does the same, then prices will continue to rise.
I never understand why people don’t pay more attention to “n” in these cases: number of other players.
If there are 2 suppliers in a market, they will collude without algos or private meetings: I can be pretty sure you will not cut your price if I don’t cut mine. The issue there is that there are only 2 suppliers, so trust is very easy.
If there are 100 other suppliers, I know ONE of them will cut their price. So I best cut mine first.
What I am trying to say here is that, algos or not, n is the major driver here imho.
That’s kind of interesting since the US has been very relaxed about falling values of n as long as prices seem ok.
The Problem is that "using the algorithm" doesn't require you to use a computer. You can do this with pen and paper and it still works. You just have to ensure your competitor is aware of how the algorithm works, which is impossible to make illegal.
This was the Greystar situation that already happened with apartment rentals.
Are people not aware of this?
A switch to value based pricing for essentials (water,shelter,transport,utilities, etc.)is an extremely easy way to destroy disposable income and even make some areas impossible to live in for the existing members.
Austin, Texas in 2021 saw several of my friends who were renters see a 1 year price increase that more than doubled their rent, I had friends who we're doctors who we're forced to move out of one bedroom apartments, even if it wasn't the plan, it's still a great way to displace people like local musicians so hack comedian can move in.
> Austin, Texas in 2021 saw several of my friends who were renters see a 1 year price increase that more than doubled their rent, I had friends who we're doctors who we're forced to move out of one bedroom apartments, even if it wasn't the plan, it's still a great way to displace people like local musicians so hack comedian can move in.
Hack comedians are moving in while doctors are priced out? What are you even talking about?
Readit News
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.
The common wisdom is that in properly functional markets there's enough supply with n-1 market participants, therefore given a market signal of one participant lowering their prices the last one standing without lowering prices gets kicked out of the market, making maintaining prices the losing move. Yet, if the rest of the market does not react to the signal, the one lowering their prices hurts their profits and possibly kicks themselves out of the market. Making price maintenance, and depending on elasticity maybe even jacking of prices, the winning move in the presence of this signal.
Turns out the probability of either move being the winning move is dependent on probability of other market participants colluding/defecting. However, since lowering the prices hurts the profit a rational market participant would conclude that the rest of the market is inclined, even if a little bit, not to lower their prices in reaction given price cutting signal and similarly a bit more inclined to raise the prices given price hike signal.
You often see a McDonalds or Wendy's outcompete lower price/higher quality alternatives, simply because it's a brand people can recall.
Economy of Scale is powerful.
One of the Behind the Bastards podcasts touched upon the fact that in the rental property market the 2 cloud vendors peddling software to manage properties could collude on behalf of landlords. Collusion by humans is fairly limited in scale, but when you're a "platform" every price can be set based on the prices of millions of listings -- what was once impossible for humans is now trivial.
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
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.
Newtonian principles does a really good job for a huge number of use cases, but it isn't the end all.
When it comes to intertwining human taste, a doctrine of equal opportunity combined with private property, and scarce resources, I don't want to throw the baby out with the bathwater.
You're right, but I'd add that important thing here is that this is not a free market.
Can you go into specifics?
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.
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.
Let’s say there is a dozen of them playing Minecraft, one could say they are in the same market competing with each other.
But what happens really is some folks like dude with long hair, others like the other guy that screams every time he wins.
Same with training videos, I bought course from a guy that is kind of monotonous and I don’t care but my GF cannot stand watching the guy for longer than 10 minutes.
Bakeries seem like closest one would be best, but somehow I’d rather go 10 mins further because I don’t like the feeling of the first one. Even though quality or price they don’t differ.
I don't mean it in a bad way. I do think engineers and business people should be in contention. But business people will sacrifice product (quality) for profit while engineers sacrifice profit for product.
Quality is often hard to define too. The business people have a harder time defining it as well since they understand at best as a user, but only if they are dog fooding (even engineers often don't!). They've developed strategies to make profit and still be relevant.
Imagine a town with two widget merchants. The two go out to dinner one night, and next week they both double their prices. Both widget merchants are pleased.
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.
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.
Like Walmart/Dollar Tree/Costco/Aldi/Target/Kroger/Amazon etc can (and have)?
And on a macro scale, like China can (and has)?
[0] https://en.wikipedia.org/wiki/Double_auction#Game-theoretic_...
The reason this doesn't happen is because the ones lowering their prices have typically done so due to explicit measures to improve efficiency, and so they already have a healthier margin with which to capture more of the market from competitors.
If it was just one player, like Open AI, we'd still be at GPT-4 turbo and it would cost $400/mo.
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.
Although a good proxy for the situation in the real world is gas stations, as long as you ignore that gas stations tend not to make much, if any, profit on gas sales.
In my area, there's one notorious gas station that's a couple miles away from any other commerce but has a reasonably large amount of traffic passing by. Amazingly, its prices are always about 50% higher than everywhere else.
Competition works when it exists. Yes, you also have to factor in supply. That's why the phrase is "supply and demand."
There are many industries where that doesn’t happen, but there is also opportunity to make it happen
Individual lowering of prices makes sense if you are capable of producing some amount more than you currently do.
Suppose there are 10 suppliers, your production cost is $1 and the current market price is $2. You each sell 100 widgets and you yourself make $100, the other 9 providers also sell an average of 100 widgets, so there are 1000 total purchases.
If you can produce 200 widgets and you lower your price to $1.90, you're now making $180 instead of $100, because people prefer to pay $1.90 to $2 until you run out of capacity. Moreover, the other suppliers have now collectively lost 100 sales to you unless they match your price reduction and maybe some of them have higher costs than you and can't, which means you get to keep their share of the market. The other participants who have lower costs like you, even if they don't have any excess capacity, would rather make the ones who can't lower prices eat the loss in sales because it's better to lower margins by 10% than take an 11% reduction in sales. And lowering prices might also increase sales if customers buy more market-wide at the lower price.
> Yet, if the rest of the market does not react to the signal, the one lowering their prices hurts their profits and possibly kicks themselves out of the market.
How would the one lowering the price kick themselves out of the market? Their sales would only go up, or if consumers are completely insensitive to price, stay the same. As long as the lower price is still yielding them a net profit, they're still in the market. The theory isn't expected to cause them to lower prices below their own costs, because of course they weren't going to do that.
If consumers are completely price insensitive and they didn't know that until they tried it, they might end up raising the price again because it didn't do any good, but that's also pretty uncommon. If you can get the exact same thing for less money, do you pay more for no reason?
> Turns out the probability of either move being the winning move is dependent on probability of other market participants colluding/defecting.
Collusion is something else entirely. If all of the participants are getting together in a back room to fix prices then none of this applies, but that's also why there's a law against that.
It's also why the theory doesn't work when the number of participants is very small.
Suppose there are only two providers and they each have unlimited capacity. They each have a $1 cost, sell 500 widgets for $2 and make $500 each. If one of them lowers prices to $1.90, they'll sell 1000 widgets and make $900. Except that the other one will just match their price and then they'll each make $450 instead, which they both know so they both don't do it. And that's on top of explicit collusion being much easier to hold together and harder to detect when there are fewer sellers.
That isn't what happens when there are 100 sellers, because then 99 of them are trying to hold together a cartel and the last one is laughing at them all because they can increase their sales by 10,000% by lowering prices by 5% and none of the others are matching them.
Which means increasing supply for just about anything ... doesn't actually change price, and in fact the issue you're pointing out is not just one of the influences on prices, but almost the only one.
The market is saturated and producers have no incentive to lower prices, for nearly every good. Which means increasing supply ... does not lower prices. Increasing demand does not raise prices ... that's just not how it works anymore.
The only influence on price is international relations, or to put it more bluntly: various kinds of taxes are the only influence on prices (going from import/export tax, vat/sales tax, subsidies, raw material availability (effectively mostly meaning a tax in the form of export restrictions), what loan conditions are for good X, ...), and so economics just doesn't really apply anymore to the vast majority of goods.
The price of widgets from water balloons to air fryers is controlled by government subsidies in particular countries.
The price of houses is controlled by mortgage conditions, which are set in law. Meaning they are different between countries in both ways that matter (so, for example, Freehold vs Leasehold, Australia's Negative Gearing, whether 30 year fixed price is available, immigration policy, whether foreign investment is allowed ...) and in weird ways that don't matter. Supply and demand don't control price.
The price of labor and services is around 80% tax in most of Europe. Measured by taking $100 that the employer pays to have labour done, so including for example France's "patronal" tax, compared to what the employer would receive and not have to pay to the government in his bank account if the employee chose to spend all of his pay on whatever his labor produces. Yes there is still some supply/demand here ... but not much.
The problem is that for nearly everything "taxes" (as in taxes and tax-like regulations) determine who produces, and the tax swings are so large (going from -10%, yes minus, to 80% and more) depending on location and good, and their effect swamps any economic concern in nearly all sectors of the economy.
Housing is an area where supply is heavily restricted, partially because land cannot be manufactured, partly because of government regulations controlling what can be built and where. Surprise, housing is very expensive.
> 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 the next 1000 days. On day one you price high (hoping your rival will). But your rival prices low and wins lots of business. On day two, you price high again (hoping your rival will have seen your prices and cooperate). If your rival prices high, you both stay high for the most of the next 998 days (there's some incentive to 'cheat' and price low, but that is easily countered by the rival pricing low). If your rival priced low on day 2, you have to start pricing low too. But occasionally you'll price high to try to 'nudge' your rival to price high to avoid low-low. If they eventually understand, you can both price high for the rest of the 1000 days. Critically, even if stuck at the low-low equilibrium, you'll keep trying to 'nudge' high periodically. The frequency with which you try to 'nudge' will depend on the ratio of profit for high-high vs low-low. If you both make extreme profits when pricing high-high, you have more incentive to 'nudge', but if the difference isn't great, you won't nudge as often.
Seems obvious pricing high will be attempted in proportion to the reward relative to pricing low.
The researchers' conclusion seems reasonable:
> it’s very hard for a regulator to come in and say, ‘These prices feel wrong’”
and
> what can regulators do? Roth admits he doesn’t have an answer.
(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)
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).
All of this is a tall order, but there's no shortcut to establishing, re-establishing, or maintaining a democracy.
Regulators can already police the data used as inputs in decision-making in industries like insurance, so policing the algorithms that operate on that data doesn't seem like too much of a reach.
How enforceable is policing which data can be used as inputs though?
It's common for insurance companies to price based on age and sex (e.g. teenage boys will typically pay higher car insurance premiums than similar aged girls). Presumably insurers are not allowed to price on a factor such as race. Unlike collusion, overt use of a variable like 'race' in a pricing model could be detected and enforced via a company whistleblower.
But how would a regulator find/prove algorithmic collusion?
In an extreme case, regulators could ban all use of competitors' data in a sellers' pricing models. But that seems extreme and unproductive since it could stop price wars (downward prices), as well as muting good effects of the 'invisible hand' (higher prices attracting more market entrants and greater investment)
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.
Regulators could say "you're not allowed to make more than X profit". They already do that with utilities, so it's not a matter of practical impossibility.
Basically don't bother to dictate margins, just declare that market a failure.
[0] - https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3304991
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.
If there are 2 suppliers in a market, they will collude without algos or private meetings: I can be pretty sure you will not cut your price if I don’t cut mine. The issue there is that there are only 2 suppliers, so trust is very easy.
If there are 100 other suppliers, I know ONE of them will cut their price. So I best cut mine first.
What I am trying to say here is that, algos or not, n is the major driver here imho.
That’s kind of interesting since the US has been very relaxed about falling values of n as long as prices seem ok.
Are people not aware of this?
A switch to value based pricing for essentials (water,shelter,transport,utilities, etc.)is an extremely easy way to destroy disposable income and even make some areas impossible to live in for the existing members.
Austin, Texas in 2021 saw several of my friends who were renters see a 1 year price increase that more than doubled their rent, I had friends who we're doctors who we're forced to move out of one bedroom apartments, even if it wasn't the plan, it's still a great way to displace people like local musicians so hack comedian can move in.
Hack comedians are moving in while doctors are priced out? What are you even talking about?
There were different professional cohorts of people displaced as prices went up around the entire city, this is not a hard concept.
This massive cultural displacement is part of what drove Austin to permit more new construction than any other city in the states.
Fortunately musicians are still the single largest cohesive voting block in Austin.
>it's still a great way to displace people like local musicians so hack comedian can move in.