Fideres conducted a research on potential cartel behaviours in the use of algorithms. Today algorithmic pricing allows online retailers to adjust prices in real time according to factors such as supply, demand and costs. However, depending on the design of the algorithm, the potential for cartel behaviour may exist.
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.
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.
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