A significant focus has been placed on whether pricing algorithms facilitate collusion and whether this should be the central focus of competition authorities. Opinions range from “making all tacit collusion illegal since pricing algorithms facilitate collusion” all the way to “there is nothing new here, nor anything that needs to be addressed.” Our view is that a necessary, but currently missing, first step is to clearly define what collusion or actual coordination looks like in the context of pricing algorithms. What is a “collusive algorithm?” Would we know one if we saw it? Only with a working definition can we really begin a discussion of what, if anything, needs to be updated or addressed in the various legal frameworks, and only then can policymakers provide corporations with any sort of guidance for the development, implementation, and monitoring of non-collusive pricing algorithms.
What are pricing algorithms? Put simply, pricing algorithms are computer models that suggest the optimal (generally “profit-maximizing”) price given various inputs. These inputs may include factors controlling for prevailing market demand and supply conditions as well as prices actually charged (or expected to be charged) by competitors for similar (substitutable) or complementary goods.2
Historically, some academics and policymakers have suggested that pricing algorithms could be used as signaling m...