History shows that there is only a small step from mutual price checking to price collusion. Worryingly, algorithms can also be used to facilitate human collusion, such as when David Topkins 3 conspired with supposed ‘competitors’ to fix the price of posters which he, and they, sold on Amazon. He was eventually charged by the DoJ anti-trust division for price fixing.

Exposing algorithmic cartels

Traditionally, it is believed that cartels are susceptible to human error, irrational behavior and emotions taking over.

Using game theory, economists postulate that cartels will eventually break down as members will defect in pursuit of higher gains. For machines however, there is less danger of defection as they do not behave irrationally or react emotionally in complex situations. They can easily detect breaches of the collusion by other cartelists and then punish accordingly.

Developing an ability to monitor, identify and detect algorithmic pricing cartels is therefore essential to safeguard a free market and to protect customers.

Who is affected?

Algorithms can be very useful for providing up-to-date and real-time pricing and to react to changes in supply and demand.

However, when used as a dominating way of establishing prices without regard to actual clearing prices, consumers may end up overpaying for goods or services.

The dangers of automated collusion based on pricing algorithms are no different to traditional cartels: unfair pricing, reduced competition and lack of transparency.

When the value of products is no longer determined by what willing buyers and sellers agree, but what algorithms calculate from theoretical supply/demand curves, which are determined by large scale datamining on customers, the notion of scarcity is lost and the principles underpinning free market economies are compromised.

It is very likely that a large number of algorithmic anti-competitive practices currently remain undetected as law enforcement agencies and consumer organizations are playing catch-up with technology.

Fideres is committed to continue its development of systems and methodologies for the detection of algorithmic price cartels.