Misspecified Estimate-then-Optimize Leads to Supra-Competitive Prices
A new research paper explores how simple algorithmic pricing systems can lead to collusive-like prices in multi-firm markets. The study, which analyzes firms using a misspecified estimate-then-optimize rule that omits competitor prices, found that these systems can converge to prices above the Nash equilibrium. This phenomenon is particularly likely when firms initially explore similar price ranges, and in some cases, prices can even reach monopoly levels. AI
IMPACT Highlights potential for AI-driven pricing algorithms to create anti-competitive market conditions.