The Game Theory of How Algorithms Can Drive Up Prices

Computer scientists at the University of Pennsylvania have proved that pricing algorithms can drive up prices even when they lack the capacity to collude. Aaron Roth and four colleagues studied so-called no-swap-regret algorithms, which are designed to minimize losses and were previously thought to guarantee competitive pricing. The researchers found that when such an algorithm faces an opponent using a nonresponsive strategy — one that randomly selects from predetermined…