5 ms·

I actually commented on this exact possibility on the original post about his prosecution [1]. The answer to the headline is yes, they can form cartels, and if

I actually commented on this exact possibility on the original post about his prosecution [1]. The answer to the headline is yes, they can form cartels, and if they were smart enough, the algorithms would figure it out on their own without any human intervention that this is the most profitable way to do business. There is currently no API for bots to check with to see if they are violating the law, and it's unlikely that the author of an algorithm that ultimately decides on its own to take actions that would probably violate the law if performed by a human would be held accountable for its actions. [1] https://news.ycombinator.com/item?id=9333046 https://news.ycombinator.com/item?id=9333046

shasta 12y ago
As you say, the problem is that, in an oligopoly, raising prices is often game theoretically optimal. And while explicit collusion may be illegal, implicit collusion (all parties noticing the best strategy independently) currently isn't. I don't see that computers add much of an interesting angle, except, as the article states, to make irrational or accidental defection less likely. So really the law on this has always been pretty broken in theory, but maybe it worked well enough in practice. With computers that may change and the law will adapt to some other broken-in-theory system that works just well enough in practice.
- yuhong 12y ago
  I have been thinking of what happens if exceptions to price fixing laws was allowed.
  - kyllo 12y ago
    What happens is you end up with a wasteful meta-bureaucracy where competing companies and governments form committees to set prices. I used to work for an ocean container shipping company, and due to idiosyncrasies of maritime law and the fact that these companies are considered "too big to fail" by governments, they are exempt from certain price-fixing laws in many countries including the US and Canada (but they are no longer exempt in the EU since 2008). Carriers are required to publish their rate schedules and surcharges and jointly announce rate increases 30 days in advance of the effective date. They also share service strings, so a weekly Transpacific service may have a rotation of five different vessels from different carriers, who lease each other container space. They are officially not allowed to restrict supply in a coordinated fashion to prop up prices anymore, but they have to jointly make operational decisions to downsize or cancel service strings, which is effectively the same thing. The result of this, along with numerous government and private bailouts, is that many of these perennially loss-making companies with inefficient operations and terrible service continue to limp along and slowly bleed shareholder value, whereas in a free market they would have been bankrupted and their assets liquidated years ago.
    - deleted 12y ago
      [deleted]
- solve 12y ago
  The role of computers is to get rid of human culpability, which is what 95% of law ultimately comes down to. Seems to be working quite well.
- yuhong 12y ago
  Though to be honest, I think anti-discrimination laws are even more broken. One reason being that price fixing has to involve multiple companies, where anti-discrimination laws can involve just one company even if there are plenty of other jobs that the employee could choose from.
- jsprogrammer 12y ago
  >to make irrational or accidental defection less likely. Why do you believe these behaviors are less likely? A single bug could wipe out all previous gains and incorrect assumptions could cause behavior that is later identified as irrational.
whybroke 12y ago
> it's unlikely that the author of an algorithm that ultimately decides on its own to take actions that would probably violate the law if performed by a human would be held accountable for its actions. You maybe right about how the courts and regulators will find in this matter. But if you build a machine that breaks the law on your behalf and you knew this was a possible outcome then you are obviously culpable. To come to another conclusion requires an inordinate amount of mental gymnastics. And in this decade's climate, it's quite possible those gymnastics win the day. Consider more hypothetically: someone whips up a truly magnificent algorithm to make cash for him anyway what-so-ever, not just on the exchange. The programer made no effort to preclude illegal actions because that is essentially impossible. This hypothetical super program occasionally finds the best way to make money is reselling pirated movies and web based child porn and deposing the revenue straight into the programmers account. You watch how fast the courts ban the practice and finds him culpable without a shadow of a doubt.
baddox 12y ago
Without communication between the competitors, why wouldn't one competitor's algorithm "cheat" and slightly lower its price?
- candu 12y ago
  If all competitors "cheat", you have a race to the bottom. (This points out one way to punish defectors: respond in kind.)
- asgard1024 12y ago
  No. There is an excellent work by Steve Keen that shows how simple it is for non-communicating bots under perfect competition to collude: http://arxiv.org/pdf/nlin/0411006.pdf http://arxiv.org/pdf/nlin/0411006.pdf I wish that mainstream economists would accept that the collusion and not competition (aka price war) is the normal state of affairs and updated their school models accordingly.
  - baddox 12y ago
    I wish I knew enough econ math to follow that. Is there an easy English explanation?
  - devinhelton 12y ago
    From the paper: "In this paper, we assume the only information a firm has is its own cost function, the decision it made on the previous time step (increase or decrease production), and what impact this decision had on its profit levels." I wish that people would stop citing papers based on the abstract and complicated looking math, when the entire paper is based on a completely ridiculous assumption. That companies can collude without direct communication is not in doubt - they can just do a tit-for-tat strategy. What is in doubt is whether this is stable - new entrants can come in and use a different algorithm, play a different game. This paper does not address that issue.
    - asgard1024 12y ago
      It's actually not primarily based on complicated mathematical assumptions, but on the simulation and also empirical data about MR!=MC in the real world. That was his primary motivation to study this problem. See Steve Keen's book Debunking Economics if you want a bit more details. Even if you would have an endless stream of market entrants, you would also need some companies to exit, otherwise everybody would get smaller and smaller piece of the pie. In the real world, those who come will usually set the price just below the current market value. If you think about it, it's nothing else than the Keen's model with just companies being renamed endlessly (after they make one step). But go ahead and try to simulate it, and add more realism. I think you will find very similar result (that is, profit maximizing strategy will never be to compete on price). Except for the price wars, which (in my opinion) always happen only temporarily when the big company wants to drive smaller companies out of the market entirely to get more market share as a result (just like real wars). But you need to have inelastic demand for that, otherwise I doubt it can be considered a viable strategy.
nether 12y ago
It's like self-sustaining structures in Conway's game of life.

shasta 12y ago

As you say, the problem is that, in an oligopoly, raising prices is often game theoretically optimal. And while explicit collusion may be illegal, implicit collusion (all parties noticing the best strategy independently) currently isn't. I don't see that computers add much of an interesting angle, except, as the article states, to make irrational or accidental defection less likely. So really the law on this has always been pretty broken in theory, but maybe it worked well enough in practice. With computers that may change and the law will adapt to some other broken-in-theory system that works just well enough in practice.

yuhong 12y ago
I have been thinking of what happens if exceptions to price fixing laws was allowed.
- kyllo 12y ago
  What happens is you end up with a wasteful meta-bureaucracy where competing companies and governments form committees to set prices. I used to work for an ocean container shipping company, and due to idiosyncrasies of maritime law and the fact that these companies are considered "too big to fail" by governments, they are exempt from certain price-fixing laws in many countries including the US and Canada (but they are no longer exempt in the EU since 2008). Carriers are required to publish their rate schedules and surcharges and jointly announce rate increases 30 days in advance of the effective date. They also share service strings, so a weekly Transpacific service may have a rotation of five different vessels from different carriers, who lease each other container space. They are officially not allowed to restrict supply in a coordinated fashion to prop up prices anymore, but they have to jointly make operational decisions to downsize or cancel service strings, which is effectively the same thing. The result of this, along with numerous government and private bailouts, is that many of these perennially loss-making companies with inefficient operations and terrible service continue to limp along and slowly bleed shareholder value, whereas in a free market they would have been bankrupted and their assets liquidated years ago.
  - deleted 12y ago
    [deleted]
solve 12y ago
The role of computers is to get rid of human culpability, which is what 95% of law ultimately comes down to. Seems to be working quite well.
yuhong 12y ago
Though to be honest, I think anti-discrimination laws are even more broken. One reason being that price fixing has to involve multiple companies, where anti-discrimination laws can involve just one company even if there are plenty of other jobs that the employee could choose from.
jsprogrammer 12y ago
>to make irrational or accidental defection less likely. Why do you believe these behaviors are less likely? A single bug could wipe out all previous gains and incorrect assumptions could cause behavior that is later identified as irrational.

whybroke 12y ago

> it's unlikely that the author of an algorithm that ultimately decides on its own to take actions that would probably violate the law if performed by a human would be held accountable for its actions. You maybe right about how the courts and regulators will find in this matter. But if you build a machine that breaks the law on your behalf and you knew this was a possible outcome then you are obviously culpable. To come to another conclusion requires an inordinate amount of mental gymnastics. And in this decade's climate, it's quite possible those gymnastics win the day. Consider more hypothetically: someone whips up a truly magnificent algorithm to make cash for him anyway what-so-ever, not just on the exchange. The programer made no effort to preclude illegal actions because that is essentially impossible. This hypothetical super program occasionally finds the best way to make money is reselling pirated movies and web based child porn and deposing the revenue straight into the programmers account. You watch how fast the courts ban the practice and finds him culpable without a shadow of a doubt.

baddox 12y ago

Without communication between the competitors, why wouldn't one competitor's algorithm "cheat" and slightly lower its price?

candu 12y ago
If all competitors "cheat", you have a race to the bottom. (This points out one way to punish defectors: respond in kind.)
asgard1024 12y ago
No. There is an excellent work by Steve Keen that shows how simple it is for non-communicating bots under perfect competition to collude: http://arxiv.org/pdf/nlin/0411006.pdf http://arxiv.org/pdf/nlin/0411006.pdf I wish that mainstream economists would accept that the collusion and not competition (aka price war) is the normal state of affairs and updated their school models accordingly.
- baddox 12y ago
  I wish I knew enough econ math to follow that. Is there an easy English explanation?
- devinhelton 12y ago
  From the paper: "In this paper, we assume the only information a firm has is its own cost function, the decision it made on the previous time step (increase or decrease production), and what impact this decision had on its profit levels." I wish that people would stop citing papers based on the abstract and complicated looking math, when the entire paper is based on a completely ridiculous assumption. That companies can collude without direct communication is not in doubt - they can just do a tit-for-tat strategy. What is in doubt is whether this is stable - new entrants can come in and use a different algorithm, play a different game. This paper does not address that issue.
  - asgard1024 12y ago
    It's actually not primarily based on complicated mathematical assumptions, but on the simulation and also empirical data about MR!=MC in the real world. That was his primary motivation to study this problem. See Steve Keen's book Debunking Economics if you want a bit more details. Even if you would have an endless stream of market entrants, you would also need some companies to exit, otherwise everybody would get smaller and smaller piece of the pie. In the real world, those who come will usually set the price just below the current market value. If you think about it, it's nothing else than the Keen's model with just companies being renamed endlessly (after they make one step). But go ahead and try to simulate it, and add more realism. I think you will find very similar result (that is, profit maximizing strategy will never be to compete on price). Except for the price wars, which (in my opinion) always happen only temporarily when the big company wants to drive smaller companies out of the market entirely to get more market share as a result (just like real wars). But you need to have inelastic demand for that, otherwise I doubt it can be considered a viable strategy.

nether 12y ago

It's like self-sustaining structures in Conway's game of life.