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Algorithm and Collusion: A Survey of Economic Analyses and the Implications for Competition Policy (2022.3)

Algorithm and Collusion: A Survey of Economic Analyses and the Implications for Competition Policy (2022.3)

Algorithm and Collusion: A Survey of Economic Analyses and the Implications for Competition Policy (2022.3)

ODAGIRI, Hiroyuki (Emeritus Professor, Hitotsubashi University)

Abstract
 
To inquire into the relationship between algorithms and collusion, this paper surveys recent studies employing three distinctive methodologies – computer simulations using Q-learning ML (machine learning) methods, experiments employing students as surrogates for corporate decisionmakers, and empirical analyses using price data. All these studies suggest the presence of supra-normal profits, that is, the level of profits higher than what the Nash equilibria (i.e., equilibria in the Cournot model and the Bertrand model) predict. Yet, none of them presume (or found) the presence of agreement among the competitors; that is, there is no “collusion as a conduct.” Only present is the “collusion as an outcome.” Thus, the role of algorithms in implementing collusion, if any, is “self-learning” according to the OECD (2017) classification.

Two further conjectures are made. First, probably the adoption of algorithms only facilitates and fosters the tendency for collusion that has been already there. In other words, the studies do not imply that such adoption makes a heretofore competitive market collusive. Second, generally the role of algorithms is twofold: algorithms in a narrow sense, that is, accuracy and speed in calculation and optimization; and fast data handling, that is, automatic and instantaneous acquisition and processing of data on demand conditions, rivals’ decisions, and such. Many studies suggest that the presence of collusive outcome owes more to the latter.

Finally, the paper concludes with discussions of the implications for competition policy, mainly cartel regulations and merger regulations, and to the oligopoly theory.
 

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