The Algorithmic Hand

Abstract

The information age is replacing the Invisible Hand with an algorithmic hand. Where once markets were governed by uniform prices determined for large groups of anonymous consumers by impersonal forces of supply and demand, today there is increasingly no such thing as a market price. Instead, firms use consumer data and sophisticated algorithms to charge individualized, personalized prices to each consumer in the market. That has transformed firms from price takers, forced by the Invisible Hand to charge market prices over which they have little control, into price makers, able to charge a tailored price to each consumer who clicks through to an online checkout. Left to their own devices, firms will use this new power to increase profits, by charging prices personalized to the maximum that each consumer is willing to pay. But the new power to personalize prices can also be used to benefit consumers, and virtually all of the legal rules needed to do so are already in place. Both the antitrust laws and state and federal rate regulatory regimes require enforcers to act to maximize consumer welfare, and both give enforcers the power to demand that firms personalize low, rather than the highest possible, prices. Before the information age made personalized pricing possible, enforcers hesitated to act aggressively to push prices down, because of efficiency concerns associated with manipulating market prices. But personalized prices are always efficient, whether set high by firms, or low by regulators, creating an unprecedented opportunity for government to do distributive justice.