Algorithmic Harm in Consumer Markets

TL;DR: Friedman et al. as discussed by the authors have shown that the use of machine learning algorithms can exacerbate the harm caused to imperfectly informed and imperfectly rational consumers, especially when consumers suffer from an absence of information or from behavioral biases.

Abstract: Machine learning algorithms are increasingly able to predict what goods and services particular people will buy, and at what price. It is possible to imagine a situation in which relatively uniform, or coarsely set, prices and product characteristics are replaced by far more in the way of individualization. Companies might, for example, offer people shirts and shoes that are particularly suited to their situations, that fit with their particular tastes, and that have prices that fit their personal valuations. In many cases, the use of algorithms promises to increase efficiency and to promote social welfare; it might also promote fair distribution. But when consumers suffer from an absence of information or from behavioral biases, algorithms can cause serious harm. Companies might, for example, exploit such biases in order to lead people to purchase products that have little or no value for them or to pay too much for products that do have value for them. Algorithmic harm, understood as the exploitation of an absence of information or of behavioral biases, can disproportionately affect members of identifiable groups, including women and people of color. Since algorithms exacerbate the harm caused to imperfectly informed and imperfectly rational consumers, their increasing use provides fresh support for existing efforts to reduce information and rationality deficits, especially through optimally designed disclosure mandates. In addition, there is a more particular need for algorithm-centered policy responses. Specifically, algorithmic transparency—transparency about the nature, uses, and consequences of algorithms—is both crucial and challenging; novel methods designed to open the algorithmic “black box” and “interpret” the algorithm’s decision-making process should play a key role. In appropriate cases, regulators should also police the design and implementation of algorithms, with a particular emphasis on exploitation of an absence of information or of behavioral biases. * William J. Friedman and Alicia Townsend Friedman Professor of Law and Economics, Harvard Law School. ** Robert Walmsley University Professor, Harvard Law School. For helpful comments and conversations, we thank Todd Baker, Omri Ben-Shahar, Ben Eidelson, Merritt Fox, Talia Gillis, Shafi Goldwasser, Zohar Goshen, Assaf Hamdani, Sharon Hannes, Howell Jackson, Louis Kaplow, Emiliano Katan, Avery Katz, Tamar Kricheli-Katz, Haggai Porat, Lucia Reisch, Ricky Revesz, Sarath Sanga, Alan Schwartz, Steve Shavell, Yonadav Shavit, Holger Spamann, Eric Talley, Rory Van Loo, and workshop and conference participants at Columbia, Harvard, Tel-Aviv University, [...] and at the 2022 Annual Meeting of the American Law and Economics Association. Ethan Judd, Rachel Neuburger and Davy Perlman provided excellent research assistance. *** Assistant Professor, Technion – Israel Institute of Technology, The Henry and Marilyn Taub Faculty of Computer Science. Electronic copy available at: https://ssrn.com/abstract=4321763