> 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.
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 means a lot of the smaller burger stands end up just selling the same stuff as every other burger stand. Food that tastes a lot like my high school cafeteria did (hint, also Sysco).
The only real lever any food business can pull is in facilities and staffing. The price of the food is fixed and there's no real competition to be had.
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.
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]
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.
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 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.
> 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.
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.
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.
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 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.
It’s also the case that market-ideals tend to become miserable to experience in practice if you approach them too closely.
Usually the discussion of that kind of thing revolves around the near-elimination of profit via (hypothetical) too-perfect competition among producers and too-perfect information for consumers, but with the rise of automated mass-scale spying and automated finer-grained price discrimination (plus enormous consolidation of markets due to near-abandonment of anti-trust enforcement in the ‘70s), we’re kinda seeing the real deal play out the other direction: approaching-maximum extraction of profit from every transaction.
Which sucks, to put it mildly. You do not want markets that function “too well” in any direction.
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 simple free market assumptions actually is not a bad idea at all.
It's also common practice to show the effect of something on an idealized free market, with the idea of being that even under supposedly ideal conditions, the something being analyzed is still problematic.
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.
> Free markets as described by Econ 101 don’t apply.
FTFY
They don't apply anywhere. It's a 101 class. It's over simplified. It looks accurate enough but a first order approximation isn't enough to operate effectively in the real world. It's like thinking you can code if you're able to read psuedocode. It's a great outline, but there's a lot of little things in between that ends up being >90% of the lines of code you need to make a working program
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 in this "free market"
> 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.
Yes, there is nothing wrong with working hard and making money. But if you use that money against the rest of us, then we have a problem. Making a huge pile of money to corner a market is one of those scenarios, but there are many.
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."
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.
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.
> 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 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.
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.
Wouldn't that require a large flooding of units not attached to those landlords? And considering they already cornered the market on the "old" units, unless this market disrupting supply of units is owned by someone generous, they'll just match the old prices and call it a win.
usually prices dont go down. the cost does relative to inflation. what usually happens is a new investor will do the analysis and build new units that are even more expensive but only slightly. now all the current tenants that can afford it will leave the current landlords and the current landlords wont be able to increase prices because there is a better product at that price level.
It does depend on where you are and how elastic supply is. In Austin for example there has been a recent decrease in rent (even relative to inflation) despite continually growing demand.
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.
And yet, if you check it out for real, you'll find most food could be a lot cheaper (some countries have regulations for basic foods to be excepted from most regulation and taxes, and there's a large price difference)
Especially meat could be a great deal cheaper if these countries wanted to make that happen.
Food in the west is only cheap in one sense of the word, and even then if you compare how much of the cheapest bread today you can buy for the average monthly pay today versus how much of the cheapest bread in 2000 you could buy for the average monthly pay in 2000 it's almost a factor 2 less.
But yeah, that's still very cheap: nobody's going hungry at the increased prices.
Agricultural productive capacity hasn't changed that much in the past 25 years. Looking at the longer term, food prices have dropped enormously. At the beginning of the 20th century, the average American household budget was 40+% food. Today it's around 10%.
>the average American household budget was 40+% food. Today it's around 10%.
Does that mean food prices have dropped enormously or could it be that families have to spend more money on eg. rent, gas, and health? Adjusting for inflation, the price of milk have only decreased 1.1%[1]
> 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 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!
> (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)
> But how would a regulator find/prove algorithmic collusion?
They don't need to. At least in the US, courts look at the outcome and if the outcome is discriminatory that's the important part. This is under the idea of disparate impact. Beyond that, the realpage cases offer an example of modern day prosecution of algorithmic collusion.
Seems like an optimistic read on things. This is the kind of common-sense approach you would expect in a world without lawyers, just observing that collusion is bad because the effects are bad, and digging into the details of the causes are completely irrelevant for the public/plaintiff because it's really just on the company to fix the undesirable result.
IANAL but if realpages outcomes were definitive or reasonably generalized results dealing with the core issue, then similar arguments against e.g. Amazon would be a slam dunk. AFAIK, actual case outcome just hinges on details about "nonpublic data" and similar. Not remotely on bad effects for consumers or anything like that. Since printing realpages database in the newspaper would not actually help apartment-hunters, then this just tells landlords and third party markets how to do price-fixing legally next time? Most likely algorithmic pricing, surveillance pricing, etc is still coming to your grocery store after the issue is "settled" for property rental, or at least settled for realpages, in certain jurisdictions, for now.
> AFAIK, actual case outcome just hinges on details about "nonpublic data" and similar.
that sounds like insider trading. price fixing would need not involve nonpublic information (beyond the actual conspiracy to fix the prices as it helps to keep that part secret normally)
> “Settling Defendants have agreed not to provide nonpublic data to RealPage for use in competitor pricing recommendations and to refrain from using RealPage’s RMS that relies on non-public competitor data to make pricing recommendations,” attorneys wrote in the settlement filing.
I agree that "nonpublic" is barely related to the problem so how it's related to a solution is unclear. But it seems like this is the only general aspect of the outcome. Otherwise the outcome is just to stop doing this specific bad thing this specific time, and fines that are less than the profit made from bad behaviour.
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.
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
> (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.
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.
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.
On October 6, 2025, California Governor Gavin Newsom signed AB325, a law targeting the use and distribution of certain algorithmic pricing tools. This law is part of a larger legislative trend to try to reign in algorithmic pricing.. California’s bill targets pricing algorithms in all markets and will take effect in 2026. However, a violation of the new law requires a conspiracy or price coercion, so as a practical matter, it may not extend the range of violations already encompassed by the Cartwright Act.
I mean we are in the age of digital pricing, even on the shelf. Modern price collusion is more apt to happen with A/B testing if prices at locations to see what the local market will bear.
I've seen Walmart do this in the past. Items that were not on sale could have significant differences in price, where in general the prices in more affluent areas are higher. We're talking 50 to 75 cents on common items, but sporting goods quite often had a different of 3 to 5 dollars.
I don't know. Surely the biggest impact on Amazon's prices, for example, is that it is disguising a $7 shipping cost inside the $0.10 items that are priced for $8? Or disguising $100 of prepaid shipping as a "Prime" membership?
You can see this happening all the time on Amazon these days if you use a price tracker. Most items are swapping between two prices that are maintained for periods and little peaks just a little bit lower and higher to test response. Then when you take that and look across different countries stores you can see they are running different pricing and running tests globally while the price is being sustained in others.
Enormous amounts of price testing with a very clear strategy that is easy to see in pricing charts.
Having a single flat price is/was due to labor prices being high enough in the developed world to ignore potential profits from price discrimination.
When my grandparents went to the market in the developing country they immigrated from, they would bargain for everything, and every customer got a different price.
The developed world was rich enough that grocery stores didn’t need to waste time doing this, and could simply price high enough to earn a consistent profit margin and expect consistent sales. They did engage in price discrimination via coupons. Just not individually, until smartphones and apps came along.
Now that automation can handle a lot of the price discrimination, expect more of it, everywhere.
It is not only about labor prices being high enough (creating consumers who can buy more). There is a significant religious component to the introduction of fixed pricing. Quakers are often credited with introducing fixed pricing in the Western world, because they felt that charging higher prices to those less able to haggle (or higher prices by age, gender, race) was immoral, dishonest in the eyes of God. They then experienced greater sales because you could send your kid to the store and trust the kid wouldn't get ripped off. It just took a layer of stress off going to the store. John Wanamaker (a Presbyterian?) I think is the one who really started a retail empire on fixed pricing. One of his main selling points was one price for anyone, and a fair return policy.
The behavioral economics here is that many people will pay a consistent (fair) price to not be surprised and not feel ripped off.
Agree that automation will engage in price discrimination whenever possible. When will we see the backlash? I have heard stories of outrage ("when I looked for airline tickets at work they were way cheaper than when I looked on my home laptop!") but we haven't seen a widespread reaction, and the moral aspect seems to be relatively overlooked at this time.
> Modern price collusion is more apt to happen with A/B testing if prices at locations to see what the local market will bear.
One of my first thoughts as well. If you're big enough, you collect so much data and run so many experiments all the time that you know exactly what you'd do if/when there's any competitor on the scene. Not only is there no need to talk to them and make backroom deals, but barely any need to even observe them. You priced like they did/would/could at some point already anyway. At a certain scale and if you already know the price that the market can tolerate.. the most relevant hidden information you want to know is how much cash your competitor has access to. That tells you whether you can win the price-war to sell at a loss for long enough to ruin them, buy them, move on to integrating verticals etc.
Game theory is interesting but also a bad model to the extent that it assumes persistent players with changing strategies, whereas average case in late-stage capitalism is more likely to have players eating players, no new players can enter, players changing rules, etc. As a CS nerd I still like a game theoretical approach better than most econ, but at some point we need to give up on tidy formulas and closed-form answers, and go all in on messy simulations.
Labor and land prices in more affluent areas will be higher, so it is expected COGS will be higher.
However, Walmart now displays in store and online for pickup prices on their website. I walked into the Walmart and paid $1.11 more than if I were to have ordered it via the app on my phone or website for pickup.
And Walmart was very upfront about it, and I knowingly paid $1.11 more because their online order and pickup option sometimes makes you wait 20min+ for a Walmart employee to come out and give you what you bought (even after it says your order is ready for pickup).
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.
Very interesting. I looked at stability in learning agents in artificial markets back in the late 90s for my PhD and concluded that at least the systems I worked with weren't stable - they were prone to bubbles and crashes.
Very interesting to see that there is a class of stable systems that force high prices.
Would be interesting to understand if the no swap regret systems studied also give stable results when it is an N player game rather than a 2 player game
I had the same question about N-player settings. My intuition is the more players, the more competition and the more chaotic the dynamics, and the harder it would be for any strategy like they describe to emerge. But intuitions can be wrong.
In any event, it would be interesting to know how the dynamics change with increases in the number of players — I wondered if it might provide some kind of rationale for having a certain number of competitors in a market.
Intuitively, stability might also be easier to achieve here since there is a human check in the loop, oftentimes someone with considerable experience and knowledge of the current market state.
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?
"Algorithm" has got to be the least useful word in English today.
It isn't the software that's responsible driving up prices, it's the information.
> Yet a widely cited 2019 paper (opens a new tab) showed that algorithms could learn to collude tacitly, even when they weren’t programmed to do so. A team of researchers pitted two copies of a simple learning algorithm against each other in a simulated market, then let them explore different strategies for increasing their profits. Over time, each algorithm learned through trial and error to retaliate when the other cut prices — dropping its own price by some huge, disproportionate amount. The end result was high prices, backed up by mutual threat of a price war.
This is nonsense. Those "algorithms" were programed to do that. I also notice they didn't add a third copy of the algorithm or a fourth. The summary of this research is that they built a novel algorithm (not one used in practice) and put it in a simulation. How this is representative of any real world scenario escapes me. They proved that software written to optimize profits optimizes profits. Shocking.
The researchers quoted in the article are, essentially, defining collusion as knowing what competitors prices are.
>"Algorithm" has got to be the least useful word in English today.
On the contrary, it's the word that's going to justify balkanization and government control of speech on the web. It's spooky magic that controls people's minds to most people. You know we're cooked when it becomes common on HN of all places to claim that "algorithmic feeds" should be illegal because they're the source of all society's ills, toxicity and political dissent.
> 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.
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.
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 means a lot of the smaller burger stands end up just selling the same stuff as every other burger stand. Food that tastes a lot like my high school cafeteria did (hint, also Sysco).
The only real lever any food business can pull is in facilities and staffing. The price of the food is fixed and there's no real competition to be had.
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.
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/
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.
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
>see streaming companies increasing prices every few months They can do that because they are practically monopolies.
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...
> 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.
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.
You sound like an engineer.
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.
That’s the fun part of observing influencers.
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.
if you've ever shopped at Giant Eagle instead of Kroger you'll understand the flaw in the logic.
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.
So the products are not the same
> 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.
It’s also the case that market-ideals tend to become miserable to experience in practice if you approach them too closely.
Usually the discussion of that kind of thing revolves around the near-elimination of profit via (hypothetical) too-perfect competition among producers and too-perfect information for consumers, but with the rise of automated mass-scale spying and automated finer-grained price discrimination (plus enormous consolidation of markets due to near-abandonment of anti-trust enforcement in the ‘70s), we’re kinda seeing the real deal play out the other direction: approaching-maximum extraction of profit from every transaction.
Which sucks, to put it mildly. You do not want markets that function “too well” in any direction.
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 simple free market assumptions actually is not a bad idea at all.
It's also common practice to show the effect of something on an idealized free market, with the idea of being that even under supposedly ideal conditions, the something being analyzed is still problematic.
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.
They don't apply anywhere. It's a 101 class. It's over simplified. It looks accurate enough but a first order approximation isn't enough to operate effectively in the real world. It's like thinking you can code if you're able to read psuedocode. It's a great outline, but there's a lot of little things in between that ends up being >90% of the lines of code you need to make a working program
The closet they actually come to existing is in black markets because regulations exist.
Your typo actually works in context.
Can gravity buy out magnetism?
> Copyright and patents are flawed... the incumbents always get away with "but we have fair rules"
You're right, but I'd add that important thing here is that this is not a free market.
> 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 in this "free market"
> 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.
Just look at how hotel owners despise Booking.com.
Yes, there is nothing wrong with working hard and making money. But if you use that money against the rest of us, then we have a problem. Making a huge pile of money to corner a market is one of those scenarios, but there are many.
It's funny how much "rational behavior" in economics often comes down to psychological inference
I find double-action[0] a really useful mental model of market.
[0] https://en.wikipedia.org/wiki/Double_auction#Game-theoretic_...
It is an intentional oversimplification.
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."
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.
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.
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
> 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 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)?
And on a macro scale, like China can (and has)?
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.
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.
Wouldn't that require a large flooding of units not attached to those landlords? And considering they already cornered the market on the "old" units, unless this market disrupting supply of units is owned by someone generous, they'll just match the old prices and call it a win.
usually prices dont go down. the cost does relative to inflation. what usually happens is a new investor will do the analysis and build new units that are even more expensive but only slightly. now all the current tenants that can afford it will leave the current landlords and the current landlords wont be able to increase prices because there is a better product at that price level.
It does depend on where you are and how elastic supply is. In Austin for example there has been a recent decrease in rent (even relative to inflation) despite continually growing demand.
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.
And yet, if you check it out for real, you'll find most food could be a lot cheaper (some countries have regulations for basic foods to be excepted from most regulation and taxes, and there's a large price difference)
Especially meat could be a great deal cheaper if these countries wanted to make that happen.
Food in the west is only cheap in one sense of the word, and even then if you compare how much of the cheapest bread today you can buy for the average monthly pay today versus how much of the cheapest bread in 2000 you could buy for the average monthly pay in 2000 it's almost a factor 2 less.
But yeah, that's still very cheap: nobody's going hungry at the increased prices.
Agricultural productive capacity hasn't changed that much in the past 25 years. Looking at the longer term, food prices have dropped enormously. At the beginning of the 20th century, the average American household budget was 40+% food. Today it's around 10%.
>the average American household budget was 40+% food. Today it's around 10%.
Does that mean food prices have dropped enormously or could it be that families have to spend more money on eg. rent, gas, and health? Adjusting for inflation, the price of milk have only decreased 1.1%[1]
[1] https://www.usinflationcalculator.com/inflation/milk-prices-...
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 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 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!
What's interesting is that the surprise seems less about the behavior itself and more about how minimal the assumptions were
> (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)
> But how would a regulator find/prove algorithmic collusion?
They don't need to. At least in the US, courts look at the outcome and if the outcome is discriminatory that's the important part. This is under the idea of disparate impact. Beyond that, the realpage cases offer an example of modern day prosecution of algorithmic collusion.
Seems like an optimistic read on things. This is the kind of common-sense approach you would expect in a world without lawyers, just observing that collusion is bad because the effects are bad, and digging into the details of the causes are completely irrelevant for the public/plaintiff because it's really just on the company to fix the undesirable result.
IANAL but if realpages outcomes were definitive or reasonably generalized results dealing with the core issue, then similar arguments against e.g. Amazon would be a slam dunk. AFAIK, actual case outcome just hinges on details about "nonpublic data" and similar. Not remotely on bad effects for consumers or anything like that. Since printing realpages database in the newspaper would not actually help apartment-hunters, then this just tells landlords and third party markets how to do price-fixing legally next time? Most likely algorithmic pricing, surveillance pricing, etc is still coming to your grocery store after the issue is "settled" for property rental, or at least settled for realpages, in certain jurisdictions, for now.
> AFAIK, actual case outcome just hinges on details about "nonpublic data" and similar.
that sounds like insider trading. price fixing would need not involve nonpublic information (beyond the actual conspiracy to fix the prices as it helps to keep that part secret normally)
> “Settling Defendants have agreed not to provide nonpublic data to RealPage for use in competitor pricing recommendations and to refrain from using RealPage’s RMS that relies on non-public competitor data to make pricing recommendations,” attorneys wrote in the settlement filing.
https://www.multifamilydive.com/news/realpage-class-action-l...
I agree that "nonpublic" is barely related to the problem so how it's related to a solution is unclear. But it seems like this is the only general aspect of the outcome. Otherwise the outcome is just to stop doing this specific bad thing this specific time, and fines that are less than the profit made from bad behaviour.
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.
> what can regulators do?
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.
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
> (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.
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/sol3/papers.cfm?abstract_id=3304991
> 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.
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.
"Algorithmic collusion"... If using an algorithm leads to collusion, then choosing to use the algorithm should be considered regular collusion.
Feels more like a system design failure than malice
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.
I never mentioned a computer.
>strikingly high probabilities to very high prices, along with lower probabilities for a wide range of lower prices
Isn't this describing the strategy of keeping ever high prices, then doing some temporary price cuts/sales/deals?
> hard it may be to regulate
Not hard at all. Outright ban fixes all.
How is this new compared to https://www.paecon.net/PAEReview/issue53/KeenStandish53.pdf ? (See the section "perfect competitors are not profit maximizers".)
https://news.ycombinator.com/item?id=45611361
I mean we are in the age of digital pricing, even on the shelf. Modern price collusion is more apt to happen with A/B testing if prices at locations to see what the local market will bear.
I've seen Walmart do this in the past. Items that were not on sale could have significant differences in price, where in general the prices in more affluent areas are higher. We're talking 50 to 75 cents on common items, but sporting goods quite often had a different of 3 to 5 dollars.
Yeah, dynamic pricing isn't just for airlines anymore, it's quietly baked into everyday retail, and most don't even notice
I don't know. Surely the biggest impact on Amazon's prices, for example, is that it is disguising a $7 shipping cost inside the $0.10 items that are priced for $8? Or disguising $100 of prepaid shipping as a "Prime" membership?
You can see this happening all the time on Amazon these days if you use a price tracker. Most items are swapping between two prices that are maintained for periods and little peaks just a little bit lower and higher to test response. Then when you take that and look across different countries stores you can see they are running different pricing and running tests globally while the price is being sustained in others.
Enormous amounts of price testing with a very clear strategy that is easy to see in pricing charts.
Having a single flat price is/was due to labor prices being high enough in the developed world to ignore potential profits from price discrimination.
When my grandparents went to the market in the developing country they immigrated from, they would bargain for everything, and every customer got a different price.
The developed world was rich enough that grocery stores didn’t need to waste time doing this, and could simply price high enough to earn a consistent profit margin and expect consistent sales. They did engage in price discrimination via coupons. Just not individually, until smartphones and apps came along.
Now that automation can handle a lot of the price discrimination, expect more of it, everywhere.
It is not only about labor prices being high enough (creating consumers who can buy more). There is a significant religious component to the introduction of fixed pricing. Quakers are often credited with introducing fixed pricing in the Western world, because they felt that charging higher prices to those less able to haggle (or higher prices by age, gender, race) was immoral, dishonest in the eyes of God. They then experienced greater sales because you could send your kid to the store and trust the kid wouldn't get ripped off. It just took a layer of stress off going to the store. John Wanamaker (a Presbyterian?) I think is the one who really started a retail empire on fixed pricing. One of his main selling points was one price for anyone, and a fair return policy.
The behavioral economics here is that many people will pay a consistent (fair) price to not be surprised and not feel ripped off.
Agree that automation will engage in price discrimination whenever possible. When will we see the backlash? I have heard stories of outrage ("when I looked for airline tickets at work they were way cheaper than when I looked on my home laptop!") but we haven't seen a widespread reaction, and the moral aspect seems to be relatively overlooked at this time.
> Modern price collusion is more apt to happen with A/B testing if prices at locations to see what the local market will bear.
One of my first thoughts as well. If you're big enough, you collect so much data and run so many experiments all the time that you know exactly what you'd do if/when there's any competitor on the scene. Not only is there no need to talk to them and make backroom deals, but barely any need to even observe them. You priced like they did/would/could at some point already anyway. At a certain scale and if you already know the price that the market can tolerate.. the most relevant hidden information you want to know is how much cash your competitor has access to. That tells you whether you can win the price-war to sell at a loss for long enough to ruin them, buy them, move on to integrating verticals etc.
Game theory is interesting but also a bad model to the extent that it assumes persistent players with changing strategies, whereas average case in late-stage capitalism is more likely to have players eating players, no new players can enter, players changing rules, etc. As a CS nerd I still like a game theoretical approach better than most econ, but at some point we need to give up on tidy formulas and closed-form answers, and go all in on messy simulations.
Labor and land prices in more affluent areas will be higher, so it is expected COGS will be higher.
However, Walmart now displays in store and online for pickup prices on their website. I walked into the Walmart and paid $1.11 more than if I were to have ordered it via the app on my phone or website for pickup.
And Walmart was very upfront about it, and I knowingly paid $1.11 more because their online order and pickup option sometimes makes you wait 20min+ for a Walmart employee to come out and give you what you bought (even after it says your order is ready for pickup).
Is this applicable to the stock market? Maybe this is why valuations are completely devoid of any intrinsic value.
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.
Very interesting. I looked at stability in learning agents in artificial markets back in the late 90s for my PhD and concluded that at least the systems I worked with weren't stable - they were prone to bubbles and crashes.
Very interesting to see that there is a class of stable systems that force high prices.
Would be interesting to understand if the no swap regret systems studied also give stable results when it is an N player game rather than a 2 player game
I had the same question about N-player settings. My intuition is the more players, the more competition and the more chaotic the dynamics, and the harder it would be for any strategy like they describe to emerge. But intuitions can be wrong.
In any event, it would be interesting to know how the dynamics change with increases in the number of players — I wondered if it might provide some kind of rationale for having a certain number of competitors in a market.
Intuitively, stability might also be easier to achieve here since there is a human check in the loop, oftentimes someone with considerable experience and knowledge of the current market state.
That sounds actually really cool. Do you have a link to any of your papers?
"Everything is working as intended" but the real-world outcome feels dystopian
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?
That's not what was said.
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.
> I had friends who we're doctors who we're forced to move out of one bedroom apartments ... so hack comedian can move in.
It may not be a direct quote but it _is_ what you said.
Who wrote the algorithm?
"Algorithm" has got to be the least useful word in English today.
It isn't the software that's responsible driving up prices, it's the information.
> Yet a widely cited 2019 paper (opens a new tab) showed that algorithms could learn to collude tacitly, even when they weren’t programmed to do so. A team of researchers pitted two copies of a simple learning algorithm against each other in a simulated market, then let them explore different strategies for increasing their profits. Over time, each algorithm learned through trial and error to retaliate when the other cut prices — dropping its own price by some huge, disproportionate amount. The end result was high prices, backed up by mutual threat of a price war.
This is nonsense. Those "algorithms" were programed to do that. I also notice they didn't add a third copy of the algorithm or a fourth. The summary of this research is that they built a novel algorithm (not one used in practice) and put it in a simulation. How this is representative of any real world scenario escapes me. They proved that software written to optimize profits optimizes profits. Shocking.
The researchers quoted in the article are, essentially, defining collusion as knowing what competitors prices are.
>"Algorithm" has got to be the least useful word in English today.
On the contrary, it's the word that's going to justify balkanization and government control of speech on the web. It's spooky magic that controls people's minds to most people. You know we're cooked when it becomes common on HN of all places to claim that "algorithmic feeds" should be illegal because they're the source of all society's ills, toxicity and political dissent.