How Market Volatility Shapes Algorithmic Collusion: A Comparative Analysis of Learning-Based Pricing Algorithms

TL;DR

This study examines how different learning-based pricing algorithms behave under various market structures and demand shocks, revealing their tendencies to sustain collusive prices and how market conditions influence their performance.

Contribution

It provides a comparative analysis of four reinforcement learning algorithms across multiple market models and demand regimes, highlighting their collusive behaviors and stability characteristics.

Findings

DDPG shows strongest collusive tendencies.

Demand shocks affect market models differently.

Relative algorithm rankings remain stable across environments.

Abstract

Autonomous pricing algorithms are increasingly influencing competition in digital markets; however, their behavior under realistic demand conditions remains largely unexamined. This paper offers a thorough analysis of four pricing algorithms -- Q-Learning, PSO, Double DQN, and DDPG -- across three classic duopoly models (Logit, Hotelling, Linear) and under various demand-shock regimes created by auto-regressive processes. By utilizing profit- and price-based collusion indices, we investigate how the interactions among algorithms, market structure, and stochastic demand collaboratively influence competitive outcomes. Our findings reveal that reinforcement-learning algorithms often sustain supra-competitive prices under stable demand, with DDPG demonstrating the most pronounced collusive tendencies. Demand shocks produce notably varied effects: Logit markets suffer significant performance declines, Hotelling markets remain stable, and Linear markets experience shock-induced profit inflation. Despite marked changes in absolute performance, the relative rankings of the algorithms are consistent across different environments. These results underscore the critical importance of market structure and demand uncertainty in shaping algorithmic competition, while also contributing to the evolving policy discussions surrounding autonomous pricing behavior.