The UK Competition & Markets Authority (CMA) has published the results of a study into how firms use pricing algorithms and whether this gives rise to potential competition concerns.
Pricing algorithms automatically set prices based upon the analysis of large volumes of relevant market data. When used properly, they can benefit consumers and promote competition, for example by reducing labour costs, creating supply-side efficiencies, allowing for faster and more informed decision-making and enabling consumers to carry out their own price forecasting.
The CMA’s study, however, identifies various ways in which pricing algorithms could be used to support anti-competitive practices, in particular:
- the enforcement of collusion within cartels: cartelists could use algorithms to automatically detect competitor pricing changes, identify instances in which their fellow cartel members deviate from an agreed pricing model, and "punish" them accordingly. This would stabilise cartels by reducing motivation for cartelists to deviate from their agreement.
- personalised pricing (use of data relating to an individual consumer’s behaviour to set prices for that consumer): whilst this can be used to ease market entry for new firms and increase competition (eg by offering targeted discounts), it can also cause obvious consumer harm. Although the CMA found limited evidence of personalised pricing in practice, it did find algorithms being used to change the order in which products appear to individual consumers on websites. It anticipates that increasingly complex algorithms will encourage firms’ use of personalised pricing in future.
The study is another example of the CMA’s efforts to increase its expertise in the digital sector. You can access the full text here.
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