Strategic AI in Cournot Markets

Abstract: As artificial intelligence increasingly automates decision-making in competitive markets, understanding the resulting dynamics and ensuring fair market mechanisms is essential. We investigate the multi-faceted decision-making of LLMs in oligopolistic Cournot markets, showing that LLMs not only grasp complex market dynamics--demonstrating their potential as effective economic planning agents--but also engage in sustained tacit collusion, driving prices up to 200% above Nash equilibrium levels. Our analysis examines LLM behavior across three dimensions-(1) decision type, (2) opponent strategies, and (3) market composition--revealing how these factors may shape the competitiveness of LLM-based decision-makers. Furthermore, we show that regulating a few dominant agents by enforcing best-response strategies effectively disrupts collusion and helps restore competitive pricing. Our findings identify potential concerns associated with AI integration in competitive market environments and provide regulatory policy recommendations for the era of automation.