An economic test for an unlawful agreement to adopt a third-party's pricing algorithm.

The article focuses on the design and competitive implications of pricing algorithms developed by third-party software providers and adopted by firms in various markets. It distinguishes two scenarios: when firms independently decide to adopt the algorithm and when their adoption decisions are coordinated, potentially constituting an unlawful agreement. The study shows that under coordinated adoption, the third-party developer acts like a cartel manager, designing the algorithm to maximize joint profits, resulting in adopters’ average prices increasing with the adoption rate and exceeding non-adopters’ prices. Conversely, with independent adoption decisions, the algorithm maximizes individual firms’ willingness-to-pay without raising average prices above competitive levels, making adopters’ prices independent of the adoption rate and equal on average to non-adopters’ prices. These theoretical results underpin an empirical test—regressing adopters’ average prices on the adoption rate—to detect coordinated conduct, which can serve as economic evidence in antitrust investigations and litigation involving third-party pricing algorithms.