Not entirely relevant to the article, but another factor that is rarely discussed. You need to assume people know about both widget companies.

You often see a McDonalds or Wendy's outcompete lower price/higher quality alternatives, simply because it's a brand people can recall.

> I always found this statement to be rather wishful. Individual lowering of prices makes sense if and only if your competitor is capable of saturating the market. Otherwise, demand elasticity becomes very relevant. Sure, your competitor may take the larger share of the market, but then you can compensate with higher per item profit.

You should check the distinction between Bertrand and Cournot competition. Bertrand competition is price competition where the competitor can saturate the market, as you mention. Cournot competition, on the other hand, captures your intuition of competition on quantities rather than prices.

You shouldn't lower prices as a direct reaction to your competitor. You should lower prices as a reaction to your customers willingness to buy at a given price. It's an indirect reaction but it factors in the actual market.

I once did an internship in a small town in Germany. There were 2 bakeries in this town. One closed for all of July as vacation, the other took all of August as vacation. They had coordinated this with each other so that everyone could always buy bread and pastries, but the bakers could also get their vacations.

I feel like in the US or Asia this would never happen. Both bakeries would jump on the opportunity of extra business, and neither would take any vacation.

In the real world there are always things other than price to compete on. Business school will tell you constantly that best quality is where you want to compete in almost all cases. Quality has many different options and so you can compete with something that is different from someone else by enough that if someone prefers your quality you are the only option.

It's funny how much "rational behavior" in economics often comes down to psychological inference

> I always found this statement to be rather wishful.

The principles behind the free market are flawed. Copyright and patents are flawed. We're being played. But somehow the incumbents always get away with "but we have fair rules", when everybody who has ever entered a game of monopoly late knows this is not true.

if you've ever shopped at Giant Eagle instead of Kroger you'll understand the flaw in the logic.

higher prices usually equals better service, less busy shopping. get in and get out.

so if your time is worth more than your money you aren't sensitive to price at the widget scale. most widgets are bundled with some kind of service.

I bought some printing and it was super cheap but no service not an email not a phone number nothing. not ordering from their again.

I find double-action[0] a really useful mental model of market.

[0] https://en.wikipedia.org/wiki/Double_auction#Game-theoretic_...

It is an intentional oversimplification.

Although a good proxy for the situation in the real world is gas stations, as long as you ignore that gas stations tend not to make much, if any, profit on gas sales.

This feels like a variation of prisoners dilemma.

I think what you say is true for well established markets. In growing markets the incentive to capture market share may well override any profit considerations.

The idea is that a third, fourth and fifth widget manufacturer pops up and undercuts everyone

There are many industries where that doesn’t happen, but there is also opportunity to make it happen

> Imagine a town with two widget merchants. Customers prefer cheaper widgets, so the merchants must compete to set the lowest price.

Imagine a town with two widget merchants. The two go out to dinner one night, and next week they both double their prices. Both widget merchants are pleased.

> I always found this statement to be rather wishful. Individual lowering of prices makes sense if and only if your competitor is capable of saturating the market.

Like Walmart/Dollar Tree/Costco/Aldi/Target/Kroger/Amazon etc can (and have)?

And on a macro scale, like China can (and has)?

Imagine a town with two landlords who own all rental properties. Yes consumers prefer cheaper rentals, but all the landlords have to do is write an app that they can use to set prices as high as they can while not having too many units empty. If the homeless population in the town increases, that's an externality - especially if the landlords themselves don't live in the town.

You want to get an economist to shut up? Point out that we're now in a situation that for nearly any physical good, one producer is able to saturate the market, that nearly every factory is operating below capacity, that individual farms are so big they can easily produce what an entire state needs and in fact operates below capacity for financial reasons. Both factories and farms: A LOT below capacity. Because 1% of a modern factory's capacity is able to saturate a very large local market, and the rest depends on international treaties, not on supply, demand, or even price.

Which means increasing supply for just about anything ... doesn't actually change price, and in fact the issue you're pointing out is not just one of the influences on prices, but almost the only one.

The market is saturated and producers have no incentive to lower prices, for nearly every good. Which means increasing supply ... does not lower prices. Increasing demand does not raise prices ... that's just not how it works anymore.

The only influence on price is international relations, or to put it more bluntly: various kinds of taxes are the only influence on prices (going from import/export tax, vat/sales tax, subsidies, raw material availability (effectively mostly meaning a tax in the form of export restrictions), what loan conditions are for good X, ...), and so economics just doesn't really apply anymore to the vast majority of goods.

The price of widgets from water balloons to air fryers is controlled by government subsidies in particular countries.

The price of houses is controlled by mortgage conditions, which are set in law. Meaning they are different between countries in both ways that matter (so, for example, Freehold vs Leasehold, Australia's Negative Gearing, whether 30 year fixed price is available, immigration policy, whether foreign investment is allowed ...) and in weird ways that don't matter. Supply and demand don't control price.

The price of labor and services is around 80% tax in most of Europe. Measured by taking $100 that the employer pays to have labour done, so including for example France's "patronal" tax, compared to what the employer would receive and not have to pay to the government in his bank account if the employee chose to spend all of his pay on whatever his labor produces. Yes there is still some supply/demand here ... but not much.

The problem is that for nearly everything "taxes" (as in taxes and tax-like regulations) determine who produces, and the tax swings are so large (going from -10%, yes minus, to 80% and more) depending on location and good, and their effect swamps any economic concern in nearly all sectors of the economy.

Regulators could ensure that detailed financial data of companies is public. If everybody understands how much profit and opportunities are in a certain thing that will encourage other people to do the same thing.

I always think that in this day and age financial secrecy benefits mostly the richest people and adds to the informational imbalance (which does not help even the model of free markets).

What's interesting is that the surprise seems less about the behavior itself and more about how minimal the assumptions were

> (i.e. in practical terms, there's no way regulators can police what algorithms sellers use - I can't think of exceptions to this, but perhaps there are some special cases)

Regulators can already police the data used as inputs in decision-making in industries like insurance, so policing the algorithms that operate on that data doesn't seem like too much of a reach.

that doesn't even consider the buying the competitor across the street and paying lobbyist to have congress ignore you for the benefit of the consumer because with the combined stores you can gain market efficiencies. of course ignore the price gouging that actually happens.

> what can regulators do?

Regulators could say "you're not allowed to make more than X profit". They already do that with utilities, so it's not a matter of practical impossibility.

> (i.e. in practical terms, there's no way regulators can police what algorithms sellers use - I can't think of exceptions to this, but perhaps there are some special cases)

One obvious answer would be to introduce a publicly-owned, zero-margin competitor not constrained by this algorithm, thus reintroducing an incentive to drive down costs or drive up quality.

> but they only modestly extorted the economy's consumers.

This is rational in the metagame where a maximally extortionate behavior invites attention and regulation.

A parasite's goal is to suck as much blood as it can without killing the host.

Feels more like a system design failure than malice

The Problem is that "using the algorithm" doesn't require you to use a computer. You can do this with pen and paper and it still works. You just have to ensure your competitor is aware of how the algorithm works, which is impossible to make illegal.

Yeah, dynamic pricing isn't just for airlines anymore, it's quietly baked into everyday retail, and most don't even notice

You can see this happening all the time on Amazon these days if you use a price tracker. Most items are swapping between two prices that are maintained for periods and little peaks just a little bit lower and higher to test response. Then when you take that and look across different countries stores you can see they are running different pricing and running tests globally while the price is being sustained in others.

Enormous amounts of price testing with a very clear strategy that is easy to see in pricing charts.

> Modern price collusion is more apt to happen with A/B testing if prices at locations to see what the local market will bear.

One of my first thoughts as well. If you're big enough, you collect so much data and run so many experiments all the time that you know exactly what you'd do if/when there's any competitor on the scene. Not only is there no need to talk to them and make backroom deals, but barely any need to even observe them. You priced like they did/would/could at some point already anyway. At a certain scale and if you already know the price that the market can tolerate.. the most relevant hidden information you want to know is how much cash your competitor has access to. That tells you whether you can win the price-war to sell at a loss for long enough to ruin them, buy them, move on to integrating verticals etc.

Game theory is interesting but also a bad model to the extent that it assumes persistent players with changing strategies, whereas average case in late-stage capitalism is more likely to have players eating players, no new players can enter, players changing rules, etc. As a CS nerd I still like a game theoretical approach better than most econ, but at some point we need to give up on tidy formulas and closed-form answers, and go all in on messy simulations.

Labor and land prices in more affluent areas will be higher, so it is expected COGS will be higher.

However, Walmart now displays in store and online for pickup prices on their website. I walked into the Walmart and paid $1.11 more than if I were to have ordered it via the app on my phone or website for pickup.

And Walmart was very upfront about it, and I knowingly paid $1.11 more because their online order and pickup option sometimes makes you wait 20min+ for a Walmart employee to come out and give you what you bought (even after it says your order is ready for pickup).

I had the same question about N-player settings. My intuition is the more players, the more competition and the more chaotic the dynamics, and the harder it would be for any strategy like they describe to emerge. But intuitions can be wrong.

In any event, it would be interesting to know how the dynamics change with increases in the number of players — I wondered if it might provide some kind of rationale for having a certain number of competitors in a market.

Intuitively, stability might also be easier to achieve here since there is a human check in the loop, oftentimes someone with considerable experience and knowledge of the current market state.

That sounds actually really cool. Do you have a link to any of your papers?

> Austin, Texas in 2021 saw several of my friends who were renters see a 1 year price increase that more than doubled their rent, I had friends who we're doctors who we're forced to move out of one bedroom apartments, even if it wasn't the plan, it's still a great way to displace people like local musicians so hack comedian can move in.

Hack comedians are moving in while doctors are priced out? What are you even talking about?

>"Algorithm" has got to be the least useful word in English today.

On the contrary, it's the word that's going to justify balkanization and government control of speech on the web. It's spooky magic that controls people's minds to most people. You know we're cooked when it becomes common on HN of all places to claim that "algorithmic feeds" should be illegal because they're the source of all society's ills, toxicity and political dissent.