AI agents in Algorithmic Electricity Markets: On the Emergence of Tacit Collusion

As algorithms increasingly mediate competitive decision-making, their influence extends beyond individual outcomes to shaping strategic market dynamics. In our experiment, we examined how algorithmic advice affects human behavior in a classic economic game with a unique, non-collusive, and analytically traceable equilibrium. Participants (N = 129) played a Cournot quantity competition with equilibrium-aligned or strategically biased algorithmic recommendations. While individualized equilibrium advice supported stable convergence, collusively downward-biased advice led to sustained underproduction and supracompetitive profits - hallmarks of tacit collusion. Participants' quantities converged faster and more consistently toward individualized than collective equilibrium advice, potentially due to an objective quality advantage or greater perceived ownership of the former. These findings demonstrate that algorithmic advice can function as a strategic signal, shaping coordination even without explicit communication. The results echo real-world concerns about algorithmic collusion and underscore the need for careful design and oversight of algorithmic decision-support systems in competitive environments.

On a platform with many sellers, should a pricing algorithm explicitly model competitors' prices when learning demand? Classical arguments suggest that ignoring competitors induces model misspecification and inefficiency, yet findings from algorithmic collusion suggest that ignoring competitor prices may, surprisingly, facilitate collusive outcomes and improve profits. We study this problem in a competitive market with unknown noisy demand, in which sellers repeatedly set prices, either incorporating competitor prices in learning their demand models (informed), or ignoring them (oblivious). We show that, relative to a monopolist, an oblivious seller in a competitive market must conduct more aggressive price exploration to compensate for the loss of dynamic competitor information. When all sellers are oblivious, prices converge to the competitive outcome under persistent exploration, while a continuum of pseudo-equilibria arises when exploration is "insufficient." In markets with a mix of oblivious and informed sellers, the informed strictly out-earn the oblivious. In game-theoretic terms, the unique Nash equilibrium is the all-informed market, in which prices converge to the competitive outcome efficiently, and oblivious modeling does not robustly lead to collusive patterns.

Empirical work on algorithmic collusion asks one question of the data: are prices supracompetitive? We show this can be answered "no" by a conspiracy that is nonetheless profitable. Consider bidding agents that couple only through the joint distribution of their unexplained bid components, leaving every agent's own bid law exactly at the competitive law. Any test whose input is a single agent's price or bid history then has power exactly equal to its false-positive rate, for every coupling strength up to comonotonicity. The published detection methodology is therefore blind to this conduct by construction rather than underpowered, and no sample size repairs it. Three empirical results follow. First, the mechanism appears in real language-model agents: twenty models from nineteen independent developers, three deployment prompts each, show residual correlation of $+0.053$ between two deployments of one model against $+0.0001$ across models, with a 95% interval clustered by developer of $[0.030, 0.078]$, under an auditor that sees every order feature and is fitted out of sample. Second, the coupling falls monotonically as sampling temperature rises ($p=0.002$), turning a deployment parameter into a candidate mitigation. Third, on 24 days of Ethereum block-building auction data covering 77,684 bids from 39 bidders, the honest population of bidder pairs is itself so dependent that a screen held at a 5% false-positive rate must sit above a floor of $+0.50$ to $+0.81$, which is 20 to 32 times the family-wise sampling threshold and does not fall as the audit window grows. Since lawful multi-identity operation and conspiracy are behaviourally indistinguishable here, the tractable regulatory target is not detection but counting: resolving 40 bidding identities into 23 operators raises the Herfindahl index by 247.5%, and adding behavioural clusters from public bid streams reaches 324.5%.