Two Artificial Neural Networks Meet in an Online Hub and Change the Future (of Competition, Market Dynamics and Society)

Two Artificial Neural Networks Meet in an Online Hub and Change the Future (of Competition, Market Dynamics and Society)

By Ariel Ezrachi (University of Oxford)  & Maurice E. Stucke (University of Tennessee)

Abstract:     In the future, one may imagine a new breed on antitrust humor. Jokes might start along the following lines: “Two Artificial Neural Network and one Nash equilibrium meet in an online (pub) hub. After a few milliseconds, a unique silent friendship is formed…” Back to the present; we are not sure how this joke might end. Nor can we estimate how funny future consumers would find it. We can, however, explain, at present, how technological advancements have changed, and will continue to change, the dynamics of competition and subsequently the distribution of wealth is society. How algorithms may be used in stealth mode to stabilize and dampen market competition while retaining the façade of competitive environment. That tale is at the heart of this paper.

We first raised algorithmic tacit collusion in 2015. In 2016 we provided further context and analysis in our book, Virtual Competition: The Promise and Perils of the Algorithm-Driven Economy. We illustrate how online tacit collusion may emerge when products are generally homogeneous and sellers do not benefit from brand recognition or loyalty, and when markets are transparent and concentrated. Since our book elaborates on the four collusion scenarios, we begin here by outlining one model of tacit collusion and its manifestation online. Taking note of advancement in technology and emerging policies, we move the debate forward and provide a review of the possible harm and means to address it. We begin our discussion with an illustration of how the move to an online pricing environment, under certain market conditions, may adversely affect the buyers’ welfare. We note how new technologies may undermine enforcers’ attempts to intervene – as stealth becomes a feature of future strategies. That tale, of course, is not immune from disruptive strategies. We consider these and reflect on the use of counter-measures to undermine tacit collusion. Further, we consider the effects and likelihood of secret dealings. We note how, somewhat counter intuitively, secrete deals in an online environment could reduce, at times, consumer welfare.

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