American Economic Review: Insights
ISSN 2640-205X (Print) | ISSN 2640-2068 (Online)
Pricing with Algorithms
American Economic Review: Insights
(pp. 320–40)
Abstract
This paper studies Markov perfect equilibria in a repeated duopoly model where sellers choose algorithms. An algorithm is a mapping from the competitor's price to own price. Once set, the algorithms respond quickly. Customers arrive randomly, and sellers can periodically revise their algorithms. The main results are that (i) for the simple two-price model with standard profit functions, monopoly pricing is the unique equilibrium outcome and (ii) for any general finite price grid, all equilibrium outcomes feature supracompetitive pricing. Sustenance of such collusion seems outside the scope of current antitrust laws, for it does not involve any direct communication.Citation
Lamba, Rohit, and Sergey Zhuk. 2026. "Pricing with Algorithms." American Economic Review: Insights 8 (3): 320–40. DOI: 10.1257/aeri.20240436Additional Materials
JEL Classification
- C73 Stochastic and Dynamic Games; Evolutionary Games; Repeated Games
- D21 Firm Behavior: Theory
- D43 Market Structure, Pricing, and Design: Oligopoly and Other Forms of Market Imperfection
- K21 Antitrust Law