Limitations of Nature-Inspired Algorithms for Pricing on Digital Platforms

Abstract

Digital platforms have begun to rely more on algorithms to perform basic tasks such as pricing. These platforms must set prices that coordinate two or more sides that need each other in some way (e.g., developers and users or buyers and sellers). Therefore, it is essential to form correct expectations about how both sides behave. The purpose of this paper was to study the effect of different levels of information on two biology-inspired metaheuristics (differential evolution and particle swarm optimization algorithms) that were programmed to set prices on multisided platforms. We assumed that one platform always formed correct expectations (human platform) while the competitor always used a generic version of particle swarm optimization or differential evolution algorithms. We tested different levels of information that modified how expectations were formed. We found that both algorithms might end up in suboptimal solutions, showing that algorithms needed to account for expectation formation explicitly or risk setting nonoptimal prices. In addition, we found regularity in the way algorithms set prices when they formed incorrect expectations that can help practitioners detect cases in need of intervention.