By Fair Means or Foul: Quantifying Collusion in a Market Simulation with Deep Reinforcement Learning
This research addresses a critical issue for regulators and economists by demonstrating that AI pricing can lead to tacit collusion without explicit communication, highlighting incremental insights into automated market behaviors.
The study tackled the problem of AI-driven pricing algorithms potentially causing market collusion in eCommerce by simulating an oligopoly with deep reinforcement learning agents, finding that these agents consistently converged to collusive outcomes with supracompetitive prices regardless of algorithm variations or observation restrictions.
In the rapidly evolving landscape of eCommerce, Artificial Intelligence (AI) based pricing algorithms, particularly those utilizing Reinforcement Learning (RL), are becoming increasingly prevalent. This rise has led to an inextricable pricing situation with the potential for market collusion. Our research employs an experimental oligopoly model of repeated price competition, systematically varying the environment to cover scenarios from basic economic theory to subjective consumer demand preferences. We also introduce a novel demand framework that enables the implementation of various demand models, allowing for a weighted blending of different models. In contrast to existing research in this domain, we aim to investigate the strategies and emerging pricing patterns developed by the agents, which may lead to a collusive outcome. Furthermore, we investigate a scenario where agents cannot observe their competitors' prices. Finally, we provide a comprehensive legal analysis across all scenarios. Our findings indicate that RL-based AI agents converge to a collusive state characterized by the charging of supracompetitive prices, without necessarily requiring inter-agent communication. Implementing alternative RL algorithms, altering the number of agents or simulation settings, and restricting the scope of the agents' observation space does not significantly impact the collusive market outcome behavior.