Game Theory Explains How Algorithms Can Drive Up Prices

The original version of this story appeared in Quanta Magazine .

Imagine a town with two widget merchants. Customers prefer cheaper widgets, so the merchants must compete to set the lowest price. Unhappy with their meager profits, they meet one night in a smoke-filled tavern to discuss a secret plan: If they raise prices together instead of competing, they can both make more money. But that kind of intentional price-fixing, called collusion, has long been illegal. The widget merchants decide not to risk it, and everyone else gets to enjoy cheap widgets.

For well over a century, US law has followed this basic template: Ban those backroom deals, and fair prices should be maintained. These days, it’s not so simple. Across broad swaths of the economy, sellers increasingly rely on