Over the past decade, computers have increasingly become more powerful and able to handle larger amounts of data at higher speeds. As Moore's Law postulates, the ability of computers to handle data will roughly double every two years. This continuing advancement has allowed sophisticated algorithms to analyze the world and predict how people will behave. An algorithm is a set of rules written to be executed in a specific order, designed to solve a problem or carry out a task. As computer systems have become more sophisticated, algorithms are increasingly being used by companies to automate complex and repetitive tasks that were previously much more costly when done by humans.

As noted by the Organisation for Economic Co-operation and Development (OECD) in the background paper to its June 2017 panel on algorithms, computational algorithms can be used by businesses for predictive analysis—where the algorithms measure the likelihood of future outcomes based on analysis of historical data—and also can optimize business processes, reduce transaction and production costs, segment consumers or set optimal prices in response to market circumstances. Indeed, the growing usefulness of algorithms has led many companies around the world to employ them in order to improve business decisions and automate processes.

Benefits, Risks of Algorithms

In the competitive arena, pricing algorithms present a number of unique opportunities to businesses to improve their processes and efficiency. Algorithms make the facilitation of business processes much easier and faster. This means that sellers can automatically adjust their conduct with the demands of the market, increasing efficiency and saving resources and money. Moreover, they allow businesses partially or fully to automate some of their key systems. This further reduces costs, improves efficiency and decreases the time and monetary or personnel resources that need to be spent on these processes. This automation of tasks can lead to more and better competition in markets, as businesses quickly respond to each other and to customers, which can increase efficiency and profitability at the same time.

However, this ease of coordination is not necessarily a universal boon. Critics of algorithms worry that because algorithms have become so advanced, they may enable new forms of anticompetitive coordination that were not possible before. For example, in situations where collusion previously could only be implemented using explicit communication, algorithms, in theory, could create new mechanisms that allow businesses to implement a common policy and to observe the behavior of other firms without any human interaction at all. As the OECD postulates, “algorithms may enable firms to replace explicit collusion with tacit co-ordination.”¹ The notion is that algorithms, properly programmed, can automatically detect when a cartel member is “cheating,” and thus can more effectively punish the deviant cartel member.