Tacit collusion by pricing algorithms

Abstract

This article contributes to the debate about the potential of pricing algorithms to collude and earn supra-competitive profits without explicit communication. By simulating competition among seven algorithms, we demonstrate that: (1) algorithms can reach supra-competitive prices in a reasonably short time, taking less than $1/1,000^{\text{th}}$ the time taken by algorithms in recent studies; and (2) tacit collusion among the algorithms is robust to the choice of different algorithms by competing firms. These results address the main criticisms concerning the practical relevance of recent studies that demonstrate algorithmic collusion. The top-performing algorithms possess properties of niceness, forgiveness, provocability, and flexibility.