Misspecified Explore-then-Exploit Leads to Supra-Competitive Prices
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arXiv
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| Natura: | Preprint |
| Pubblicazione: |
2026
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| _version_ | 1866909047133831168 |
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| author | Baek, Jackie Farias, Vivek F. Wu, Farrell |
| author_facet | Baek, Jackie Farias, Vivek F. Wu, Farrell |
| contents | We study whether simple algorithmic pricing systems can systematically produce collusive-like prices in multi-firm markets. We consider firms using an explore-then-exploit pipeline: they randomize prices during an initial exploration phase, then estimate demand from their own historical data and set prices myopically thereafter. The estimation step relies on a misspecified, monopoly-style model that omits competitors' prices. We characterize when this pipeline converges to supra-competitive prices above the Nash equilibrium, via a fluid-limit ordinary differential equation analysis. We show that supra-competitive prices arise when firms explore within similar price ranges on the same side of the Nash price. Moreover, prices can be substantially above the Nash price; we show that prices can reach monopoly levels under symmetric exploration. Simulations calibrated to a real multifamily rental market confirm that supra-competitive outcomes arise robustly beyond our theoretical assumptions, including under finite horizons, heterogeneous products, and nonlinear logit demand. |
| format | Preprint |
| id |
arxiv_https___arxiv_org_abs_2605_16064 |
| institution | arXiv |
| publishDate | 2026 |
| record_format | arxiv |
| spellingShingle | Misspecified Explore-then-Exploit Leads to Supra-Competitive Prices Baek, Jackie Farias, Vivek F. Wu, Farrell Computer Science and Game Theory Artificial Intelligence Theoretical Economics We study whether simple algorithmic pricing systems can systematically produce collusive-like prices in multi-firm markets. We consider firms using an explore-then-exploit pipeline: they randomize prices during an initial exploration phase, then estimate demand from their own historical data and set prices myopically thereafter. The estimation step relies on a misspecified, monopoly-style model that omits competitors' prices. We characterize when this pipeline converges to supra-competitive prices above the Nash equilibrium, via a fluid-limit ordinary differential equation analysis. We show that supra-competitive prices arise when firms explore within similar price ranges on the same side of the Nash price. Moreover, prices can be substantially above the Nash price; we show that prices can reach monopoly levels under symmetric exploration. Simulations calibrated to a real multifamily rental market confirm that supra-competitive outcomes arise robustly beyond our theoretical assumptions, including under finite horizons, heterogeneous products, and nonlinear logit demand. |
| title | Misspecified Explore-then-Exploit Leads to Supra-Competitive Prices |
| topic | Computer Science and Game Theory Artificial Intelligence Theoretical Economics |
| url | https://arxiv.org/abs/2605.16064 |