Balancing Profit and Fairness in Risk-Based Pricing Markets

TL;DR

This paper proposes a learned, interpretable tax schedule to improve fairness in risk-based pricing markets, balancing profit and social equity through AI-driven regulation.

Contribution

It introduces a formal framework linking local demographic gaps to global disparities, and develops MarketSim with RL-based social planner for fairness regulation.

Findings

Increased demand-fairness by up to 16% in calibrated markets

Outperforms fixed linear schedules in social welfare

Provides transparent, interpretable regulatory policies

Abstract

Dynamic, risk-based pricing can systematically exclude vulnerable consumer groups from essential resources such as health insurance and consumer credit. We show that a regulator can realign private incentives with social objectives through a learned, interpretable tax schedule. First, we provide a formal proposition that bounding each firm's \emph{local} demographic gap implicitly bounds the \emph{global} opt-out disparity, motivating firm-level penalties. Building on this insight we introduce \texttt{MarketSim} -- an open-source, scalable simulator of heterogeneous consumers and profit-maximizing firms -- and train a reinforcement learning (RL) social planner (SP) that selects a bracketed fairness-tax while remaining close to a simple linear prior via an $\mathcal{L}_1$ regularizer. The learned policy is thus both transparent and easily interpretable. In two empirically calibrated markets, i.e., U.S. health-insurance and consumer-credit, our planner simultaneously raises demand-fairness by up to $16\%$ relative to unregulated Free Market while outperforming a fixed linear schedule in terms of social welfare without explicit coordination. These results illustrate how AI-assisted regulation can convert a competitive social dilemma into a win-win equilibrium, providing a principled and practical framework for fairness-aware market oversight.