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Buyer-Optimal Algorithmic Consumption

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  • Ichihashi, Shota
  • Smolin, Alex

Abstract

We analyze a bilateral trade model in which the buyer's value for the product and the seller's costs are uncertain, the seller chooses the product price, and the product is recommended by an algorithm based on its value and price. We characterize an algorithm that maximizes the buyer's expected payoff and show that the optimal algorithm underrecommends the product at high prices and overrecommends at low prices. Higher algorithm precision increases the maximal equilibrium price and may increase prices across all of the seller's costs, whereas informing the seller about the buyer's value results in a mean-preserving spread of equilibrium prices and a mean-preserving contraction of the buyer's payoff.

Suggested Citation

  • Ichihashi, Shota & Smolin, Alex, 2023. "Buyer-Optimal Algorithmic Consumption," CEPR Discussion Papers 18476, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:18476
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    More about this item

    Keywords

    Algorithmic consumption;

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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