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This research demonstrates that standard AI deployment practices, specifically those prioritizing robustness and reproducibility, can inadvertently trigger a phase transition leading to supracompetitive pricing in duopolies. The study highlights that high output fidelity creates a bistable system where price coordination becomes stable, suggesting that market competition may require deliberate introduction of noise or diversification of AI providers to prevent collusion.
Supracompetitive Pricing Under AI Monoculture
arXiv:2601.01279v3 Announce Type: replace-cross Abstract: When competing sellers delegate pricing to a shared AI model, such as a large language model, correlated recommendations combined with performance-driven updates aggregating seller feedback raise a key question: can standard AI deployment practices inadvertently produce supracompetitive pricing? We develop a stylized duopoly model in which two sellers receive pricing recommendations from a shared AI characterized by two parameters: a propensity parameter capturing the model's tendency to set high prices and an output-fidelity parameter measuring alignment between this tendency and actual outputs, with propensity updated via periodic retraining on observed outcomes. We find that configuring AI models for robustness and reproducibility can lead to supracompetitive pricing via a phase transition. Below a critical output-fidelity threshold, competitive pricing is the unique stable outcome. Above it, the model exhibits bistability: both competitive and supracompetitive pricing are locally stable, with the realized outcome determined by the model's initial propensity. Supracompetitive pricing raises average prices, but occasional low-price recommendations complicate detection. With perfect output fidelity, full price coordination emerges from any interior initial propensity. For finite training batches of size $b$, when the initial propensity lies in the supracompetitive basin, the probability of supracompetitive pricing approaches 1 as $b$ increases, with the region of indeterminate outcomes shrinking at rate $O(1/\sqrt{b})$. Any factor reducing alignment between the model's propensity and sellers' actual pricing, whether through diversifying AI providers, introducing recommendation noise, or reducing seller adherence, pushes the market toward competitive outcomes.
Abstract:When competing sellers delegate pricing to a shared AI model, such as a large language model, correlated recommendations combined with performance-driven updates aggregating seller feedback raise a key question: can standard AI deployment practices inadvertently produce supracompetitive pricing? We develop a stylized duopoly model in which two sellers receive pricing recommendations from a shared AI characterized by two parameters: a propensity parameter capturing the model's tendency to set high prices and an output-fidelity parameter measuring alignment between this tendency and actual outputs, with propensity updated via periodic retraining on observed outcomes. We find that configuring AI models for robustness and reproducibility can lead to supracompetitive pricing via a phase transition. Below a critical output-fidelity threshold, competitive pricing is the unique stable outcome. Above it, the model exhibits bistability: both competitive and supracompetitive pricing are locally stable, with the realized outcome determined by the model's initial propensity. Supracompetitive pricing raises average prices, but occasional low-price recommendations complicate detection. With perfect output fidelity, full price coordination emerges from any interior initial propensity. For finite training batches of size $b$, when the initial propensity lies in the supracompetitive basin, the probability of supracompetitive pricing approaches 1 as $b$ increases, with the region of indeterminate outcomes shrinking at rate $O(1/\sqrt{b})$. Any factor reducing alignment between the model's propensity and sellers' actual pricing, whether through diversifying AI providers, introducing recommendation noise, or reducing seller adherence, pushes the market toward competitive outcomes.
Theoretical Economics (econ.TH); Artificial Intelligence (cs.AI); Computational Engineering, Finance, and Science (cs.CE); Computation and Language (cs.CL); Computer Science and Game Theory (cs.GT)
arXiv:2601.01279 [econ.TH]
(or arXiv:2601.01279v3 [econ.TH] for this version)
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