The rules, contracts, algorithms, and power behind prices — and the institutional architecture that produces them while the dominant U.S. discourse calls them the operation of the market.
A patient who undergoes a magnetic resonance imaging procedure at a large American hospital is presented, over the following weeks, with a series of documents indicating different prices for the same procedure. The hospital’s published chargemaster rate may indicate $4,200. The patient’s insurance Explanation of Benefits, if the patient has commercial coverage, may indicate that the insurer’s contracted rate with the hospital was $1,400 and that the patient’s responsibility, after deductible and coinsurance, is $300. If the same patient is covered by Medicare, the federally administered fee schedule sets the procedure rate at approximately $400. If the same patient is covered by Medicaid, the state administered rate may be $300. If the same patient is uninsured and pays cash, the hospital’s self-pay discount policy may offer the procedure for $700. The hospital’s contractual rate with a different insurer, for the identical procedure, may be $900 or $1,800 or $2,100, depending on the negotiated contract terms. The procedure is the same. The supply is the same. The demand is the same. The price varies by a factor of approximately fourteen across the documented payment categories.
This is, in U.S. healthcare, a routine and unremarkable arrangement. It is also, in any meaningful descriptive sense, a refutation of the framework most commonly used to explain how prices are formed. In the supply-and-demand framework that organizes most U.S. graduate economics curricula, most introductory economics textbooks, most financial press coverage, and most regulatory analysis, prices emerge from the interaction of supply and demand in markets. The framework treats price as a market-clearing quantity that adjusts until supply meets demand. The framework cannot, on its own terms, explain the fourteenfold price variation for an identical procedure delivered by the same provider on the same day to identical patients. Something other than supply and demand is forming the price.
That something — across U.S. healthcare, across U.S. real estate, across U.S. telecommunications, across U.S. financial services, across U.S. transportation, across U.S. retail, and across most of the consumer economy — is a combination of four mechanisms: administrative rules, contractual arrangements, algorithmic systems, and structural power. This article is about each of these mechanisms, the institutional architecture that produces them, the discursive role of the supply-and-demand framework that obscures them, and the public-economy alternatives the framework has foreclosed.
Begin with the question almost no one in mainstream U.S. coverage asks: how are U.S. prices actually formed?
The dominant U.S. answer, embedded in the introductory economics curriculum and in most financial press coverage, is that prices are formed by the interaction of supply and demand in markets. Sellers offer goods and services at various prices; buyers indicate willingness to purchase at various prices; the market clears at the price where the quantity supplied equals the quantity demanded. The framework is presented as descriptive of how prices are formed across the economy, as predictive of how prices will respond to changes in supply or demand conditions, and as normative — the resulting market-clearing prices are presented as efficient outcomes that public policy should be reluctant to disturb.
A different framing is operationally relevant. Across most of the contemporary U.S. economy, prices are not formed by supply-and-demand interactions. They are set, rather, by combinations of four mechanisms.
The first is administrative rule. A regulatory body — federal, state, or local — sets a rate, fee, or schedule, and the price is what the rule says it is. Medicare’s Physician Fee Schedule sets approximately one billion provider payments annually. State Public Utility Commissions set electricity, natural gas, and water rates for tens of millions of households. State insurance commissioners review and approve auto, homeowners, and health insurance rate filings. The Federal Communications Commission sets interconnection rates among telecommunications carriers and Universal Service Fund contributions. The Postal Regulatory Commission sets first-class mail rates. The Federal Maritime Commission regulates ocean shipping common carrier rates. State alcohol beverage control commissions set wholesale and sometimes retail liquor prices. The Department of Agriculture administers price support programs for selected agricultural commodities. Federal student loan interest rates are set by statute. Federal income tax rates, capital gains rates, and credit phase-outs are set by statute. Approximately twenty to twenty-five percent of U.S. household consumption expenditure, by Bureau of Economic Analysis estimates, flows through prices set by some form of administrative rule rather than through supply-and-demand interaction.
The second is contractual arrangement. Two or more parties — a buyer, a seller, sometimes intermediaries — write a contract specifying what one party will pay another, and the price is what the contract says it is. The contracts are often confidential. The contracts often include most-favored-nation clauses, exclusive dealing provisions, rebate arrangements, performance bonuses, and other terms that decouple the contracted price from any market-clearing equilibrium. In healthcare, the negotiated rates between insurers and providers — which determine approximately ninety-five percent of U.S. healthcare spending — are contractual arrangements protected by long-standing confidentiality agreements that the 2021 Hospital Price Transparency Rule has only partially disturbed. In pharmaceuticals, the rebate structures negotiated between drug manufacturers and pharmacy benefit managers shape the difference between list prices and net prices, with the spread typically retained by the PBM. In real estate, until the August 2024 Sitzer/Burnett settlement of the National Association of Realtors litigation, the NAR’s contractual arrangements set seller-paid commission structures for buyer agents at a near-uniform rate across the U.S. residential real estate market. In food retail, slotting allowances paid by manufacturers to retailers for shelf space are contractual arrangements that affect the prices consumers see. In music streaming, the contractual rates negotiated between platforms and rights holders determine artist payouts. The contracts are not public. The contractual prices are not the result of supply meeting demand. They are the result of negotiation between parties of varying bargaining power, often constrained by regulatory frameworks but rarely by market clearing.
The third is algorithmic system. A pricing algorithm — proprietary software running on a server — adjusts prices in real time based on input data. The inputs include historical sales, competitor pricing, weather, time of day, customer behavior, and increasingly, customer-level personal data. The outputs are prices that change continuously. In ride-share, Uber and Lyft surge pricing systems adjust per-ride rates in response to real-time demand-supply imbalances and willingness-to-pay estimates. In airline ticketing, yield management systems running on Sabre, Amadeus, and similar platforms adjust seat prices continuously across hundreds of millions of bookings annually. In hotel pricing, revenue management software produces nightly rate adjustments across the global hotel industry. In e-commerce, Amazon adjusts prices on millions of products multiple times per day, with some product categories seeing hourly adjustments. In rental housing, RealPage’s YieldStar software — at the center of the Department of Justice’s 2024 antitrust lawsuit alleging coordinated pricing across landlords using the platform — has been documented in approximately four million U.S. rental units. In stock markets, algorithmic trading produces the bulk of U.S. equity trading volume. In digital advertising, real-time bidding auctions on Google’s, Meta’s, and the major programmatic platforms produce the prices for approximately ninety percent of digital ad inventory. Each of these systems produces prices that the supply-and-demand framework cannot meaningfully describe — the prices are outputs of code rather than of market-clearing.
The fourth is structural power. As the companion piece on pricing power in this collection documents, concentrated U.S. sectors exercise pricing discretion within ranges that reflect their market position rather than market-clearing equilibria. Concentrated firms set prices through internal pricing committees, signal pricing intentions through earnings calls, and observe one another’s pricing through public communications. The four-firm beef-processing oligopoly, the three-firm wireless oligopoly, the three-firm pharmacy benefit manager oligopoly, the three-firm container shipping alliance structure, and dozens of other concentrated U.S. sectors set prices through structural power rather than through supply-and-demand interaction.
These four mechanisms — administrative rule, contractual arrangement, algorithmic system, structural power — together account for the bulk of U.S. price-setting. The supply-and-demand framework, as a description of how prices are actually formed, applies to a residual portion of the economy: spot commodity markets, certain financial markets, and small-scale transactions in fragmented retail markets. The residual portion is real and consequential. It is also, on the available data, a minority of U.S. price-setting activity.
Narrative laundering is the substitution of a familiar but misdirecting story for the unfamiliar but accurate one. In the price-formation context, the operation is specific: the supply-and-demand framework, which describes a minority of contemporary U.S. price-setting accurately, is presented through institutional repetition as describing the whole. The result is a discourse in which the actual mechanisms — administrative rule, contractual arrangement, algorithmic system, structural power — are obscured by the dominant frame, and in which the political-economic implications of those mechanisms are foreclosed because the mechanisms themselves are not named.
The mechanism rarely operates alone. Its dominant pairing across the four price-setting mechanisms is narrative laundering plus algorithmic opacity (Family 7) plus information asymmetry (Family 5) plus lock-in engineering (Family 5), with margin defense (Family 1) and monopoly tolling (Family 1) operating in the structural-power dimension. This is a Family 7 + Family 5 + Family 1 signature, with Family 7 leading because the article’s central move is challenging the supply-and-demand frame as misdirection.
Algorithmic opacity operates centrally in the algorithmic-pricing dimension. The pricing algorithms that set U.S. ride-share rates, hotel rates, airline rates, e-commerce rates, rental rates, and digital ad auction rates are proprietary software whose inputs, weights, and decision logic are not disclosed to the customers whose prices they set. The customer cannot, in any operational sense, audit the price. The customer cannot, in any operational sense, contest the price. The price is what the algorithm says it is. The 2024 Department of Justice antitrust lawsuit against RealPage alleged that the YieldStar software’s opacity served not merely to obscure the algorithm from customers but to coordinate pricing across landlords using the platform — a function that, in the absence of the algorithmic intermediation, would constitute illegal price-fixing under the Sherman Antitrust Act of 1890. The lawsuit’s central claim is that algorithmic intermediation has been used to convert what would be illegal coordination into a routine business practice. The institutional question it raises — whether algorithmic systems can be used to coordinate pricing in ways that explicit communication cannot — is one of the most consequential antitrust questions of the contemporary period.
Information asymmetry operates across the contractual dimension. The negotiated rates between insurers and providers in U.S. healthcare are confidential. The rebate structures negotiated between drug manufacturers and pharmacy benefit managers are confidential. The slotting allowances paid by food manufacturers to retailers are confidential. The interchange fees set by Visa and Mastercard’s network rules are technical and accessible only to acquiring banks and merchants. The streaming royalty rates negotiated between music platforms and rights holders are confidential. The household consumer cannot, in any operational sense, evaluate the contractual prices that flow through to consumer-facing prices because the underlying contracts are not public. The 2021 Hospital Price Transparency Rule and the 2022 Transparency in Coverage Rule have begun to disturb the healthcare confidentiality architecture but have not displaced it. The asymmetry of information between the parties to the underlying contracts and the consumers absorbing the price is the structural condition under which contractual price-setting reproduces itself.
Lock-in engineering operates across the algorithmic and contractual dimensions. The deliberate design of switching costs — long-term contracts with early-termination fees, ecosystem dependencies in software platforms, learning costs in proprietary software, network effects in social platforms, formulary tier structures in health insurance, in-network provider restrictions in narrow-network insurance plans — produces consumer relationships that are not contestable through ordinary market competition. The customer who is locked into one wireless carrier through device financing, one cloud platform through ecosystem dependencies, one health insurance plan through employer-determined coverage, or one rental property through lease commitments cannot meaningfully discipline the price through the supply-and-demand mechanism the framework presumes. The lock-in is engineered, not accidental. It is a deliberate institutional feature that converts the supply-and-demand framework’s predictive claims into descriptive irrelevance.
Margin defense and monopoly tolling operate across the structural-power dimension, as the companion piece on pricing power in this collection documents.
The structural pillars that produce the contemporary U.S. price-formation architecture are five.
The first is the regulatory architecture for administrative pricing — a complex network of federal agencies (the Centers for Medicare and Medicaid Services, the Federal Communications Commission, the Federal Energy Regulatory Commission, the Federal Maritime Commission, the Postal Regulatory Commission, the Federal Aviation Administration), state regulatory commissions (Public Utility Commissions, insurance commissioners, alcohol beverage control commissions), and statutory schedules (federal income tax rates, federal student loan rates, federal minimum wage). Each of these regulatory architectures sets prices for a defined subset of the economy. The architectures vary in the scope of their coverage, the rigor of their oversight, and the susceptibility of their decisions to industry capture. As the companion piece on access institutions in this collection documents, the regulatory architecture is the institutional foundation for public-economy price-setting in essential domains.
The second is the contract law and antitrust framework that permits and protects contractual pricing arrangements. U.S. contract law generally treats negotiated prices as private arrangements between consenting parties, with antitrust law constraining only the most explicit forms of price coordination. The post-Bork antitrust framework, as documented in the companion piece on pricing power, has further narrowed the antitrust constraints on contractual arrangements. The cumulative effect is a contractual environment in which most-favored-nation clauses, exclusive dealing arrangements, rebate structures, and other complex pricing terms can be deployed at scale without regulatory challenge. The 2021 NCAA v. Alston Supreme Court decision and the August 2024 Sitzer/Burnett settlement against the National Association of Realtors represent recent challenges to specific contractual pricing arrangements; the broader contractual framework remains intact.
The third is the platform-software ecosystem for algorithmic pricing. The pricing software running across U.S. ride-share, hotel, airline, e-commerce, rental housing, and digital advertising sectors is produced by a relatively small number of vendors — Sabre, Amadeus, RealPage, Salesforce Pricing, Pros Holdings, and similar firms — and integrated into the operational systems of customer-facing companies. The vendors operate under intellectual-property protection that exempts the algorithms from public scrutiny. The customer-facing companies operate under contractual agreements with the vendors that further constrain disclosure. The cumulative effect is a pricing infrastructure that operates across major U.S. consumer sectors without any public-economy oversight equivalent to the rate-setting frameworks for administrative pricing or the antitrust frameworks for contractual pricing.
The fourth is the antitrust regime for structural pricing power, documented in the companion piece on pricing power in this collection. The post-Bork framework has produced and sustained the concentrated-sector pricing power that operates as the fourth price-formation mechanism.
The fifth is the discursive infrastructure — the introductory economics curriculum, the financial press coverage conventions, the regulatory analysis vocabulary — that organizes public discussion of U.S. price formation around the supply-and-demand framework. As the companion pieces on inflation narratives and on number numbness in this collection document, the discursive infrastructure produces a public economic conversation in which the actual price-formation mechanisms are not named. The mechanisms operate. The discourse does not engage them. The structural choice between administrative price-setting, contractual price-setting, algorithmic price-setting, and structural-power price-setting is made operationally, in the institutional architecture, but is not made discursively in the public conversation. The discursive infrastructure is the structural condition under which the operational choices reproduce themselves across electoral cycles.
These five pillars are mutually reinforcing. The regulatory architecture for administrative pricing, where it operates, produces price-setting outcomes that the supply-and-demand framework cannot describe. The contract law and antitrust framework permits the contractual arrangements that further depart from market clearing. The platform-software ecosystem produces algorithmic pricing that operates beyond public scrutiny. The post-Bork antitrust regime sustains the structural power that produces the most consequential departures from competitive equilibrium. The discursive infrastructure obscures all four. The architecture is institutional. It can be modified.
The beneficiaries of the contemporary U.S. price-formation architecture are the firms whose prices are set by the four mechanisms and the asset-holders whose ownership of those firms appreciates through the resulting margin extraction. In the administrative dimension, the beneficiaries are sector-specific — utility holding companies in regulated electricity markets, insurance companies in administered insurance markets, hospital systems in administered Medicare and Medicaid markets, telecommunications carriers in administered interconnection markets. In the contractual dimension, the beneficiaries are the parties to the underlying contracts whose negotiated rates are not subject to consumer-side discipline — pharmacy benefit managers, hospital system contracting offices, real estate brokerage chains, payment-network operators. In the algorithmic dimension, the beneficiaries are the platform operators whose algorithms set the prices and the customer-facing firms whose pricing decisions are intermediated by the platforms. In the structural-power dimension, the beneficiaries are the concentrated-sector firms that the companion piece on pricing power documents in detail.
The burden falls on households, particularly lower-income households, whose consumption is dominated by goods and services priced through the four mechanisms and whose ability to discipline those prices through ordinary market mechanisms is structurally limited. The Bureau of Labor Statistics Consumer Expenditure Survey data document that the lowest-income quintile of U.S. households spends approximately seventy percent of after-tax income on the categories where the four mechanisms dominate — housing (rental and homeownership prices both heavily intermediated), healthcare (administrative and contractual pricing), telecommunications (administrative and contractual pricing), transportation (algorithmic ride-share and airline pricing, structural-power gas station pricing), food (structural-power retail and processor pricing, slotting allowance pricing), and energy (administrative and structural pricing). The consumer who is told that prices reflect the operation of supply and demand is not given the analytic vocabulary to engage with the actual price-setting mechanisms.
The burden falls on small businesses and on the broader productive economy. Small businesses whose input costs are set by structural-power pricing in concentrated sectors, whose payment systems are intermediated by oligopolistic interchange fees, whose health insurance is set by contractual arrangements between PBMs and insurers, and whose digital advertising costs are set by platform algorithms operate within a price environment they cannot meaningfully shape through ordinary market participation.
The burden falls on the public economy. Federal regulatory agencies operate under flat or declining real budgets while the price-formation mechanisms they would oversee grow in scale and complexity. The Federal Trade Commission’s algorithmic-pricing investigations, the Department of Justice’s RealPage lawsuit, the Centers for Medicare and Medicaid Services’ price-transparency enforcement, and the various state attorneys general’s healthcare-pricing investigations represent the operational signature of public-economy capacity at its current level. The capacity is meaningful but is operating under-resourced against the scale of the price-formation architecture it is tasked with overseeing.
The phrase doing the most work in defending the contemporary U.S. price-formation architecture is the market. The phrase carries an implicit causal direction: prices are set by the market, and the market is the aggregate of voluntary exchanges between consenting parties whose preferences and constraints produce equilibrium outcomes. The phrase is, in specific applications, technically defensible — there are markets in the U.S. economy where supply and demand interact to produce price outcomes that approximate the framework’s predictions. The phrase is, on the operational record of contemporary U.S. price-formation, a substantial misdescription of how most U.S. prices are actually formed. The phrase functions as narrative laundering: the substitution of a familiar but misdirecting story for the unfamiliar but accurate one.
Adjacent variants perform the same function. Market forces directs causation to anonymous aggregates rather than to identifiable institutional actors making particular pricing decisions. Supply and demand directs causation to the framework that the actual mechanisms have substantially superseded. The price mechanism directs causation to a generic system rather than to the specific administrative, contractual, algorithmic, or structural mechanism producing the price under examination. Competitive markets directs causation to a competitive condition that the actual concentration data documents as substantially absent. Each of these phrases is, in specific applications, technically defensible. None is, on the operational record, a sufficient description of the U.S. price-formation architecture.
When the actual mechanisms enter the discourse — when, for example, the Department of Justice files an antitrust lawsuit alleging algorithmic price coordination — the framework deploys a specific set of dismissals. The DOJ’s RealPage lawsuit was characterized in much of the U.S. financial press as an overreach by activist regulators, with the substantive claim that algorithmic intermediation had been used to coordinate pricing among landlords being treated as a contestable proposition rather than as the empirical question the litigation will adjudicate. The dismissals function as legitimacy shielding: the conversion of a specific analytical claim into a generalized rhetorical category that can be excluded from serious consideration without engaging the substance.
The counter-mechanisms the dominant frame rules out are well-established categories of public economic action. Price regulation and rate-setting would operationalize public price-setting in essential sectors directly rather than through the indirect mechanisms of administered markets. Algorithmic accountability would impose disclosure, audit, and contestation requirements on pricing algorithms operating at scale. Mandatory disclosure of methodology would impose disclosure requirements on the construction of pricing algorithms equivalent to the disclosure requirements for federal statistical methodology. Antitrust enforcement and structural separation would address the structural-power dimension. Public ownership of natural monopolies and public production at scale would directly compete with private price-setting in essential domains. Disintermediation by mandate would remove the contractual intermediaries — pharmacy benefit managers, payment-network operators, real estate brokerage chains — whose contractual price-setting extracts rents from the underlying transactions. None of these counters is hypothetical. Each is operational somewhere in the world, and several have operated in the United States.
The first precedent is American and historical. The Office of Price Administration, established by the Emergency Price Control Act of 1942 and operational through 1947, regulated prices on roughly ninety percent of U.S. consumer goods at peak. The OPA represented a federal price administration architecture at scale that the postwar dismantling has not been replaced. The OPA’s institutional design — sector-specific pricing commissions, professional pricing analysts, public hearings on pricing decisions — is a documented operational template for federal administrative pricing that remains available.
The second precedent is foreign and continuous. The Vienna municipal housing rate-setting (in operation since the 1920s, with approximately sixty percent of the city’s residents in municipally built or subsidized housing), the German Mietpreisbremse (rent brake) framework, the French and Belgian rent-control architectures, and the Singapore Housing and Development Board pricing structure represent operational rent-setting frameworks that have produced housing affordability outcomes substantially different from the U.S. market-rate rental architecture. Each is contested in specific design choices. The category of operational rent regulation is, across these systems, well-established.
The third precedent is foreign and recent. The European Union’s Digital Markets Act, in force since 2022, imposes algorithmic accountability requirements on designated gatekeeper firms — including disclosure of ranking algorithms, restrictions on self-preferencing in algorithmic outputs, and interoperability requirements that constrain lock-in engineering. The DMA represents the most operationally consequential algorithmic accountability framework currently in force. The U.S. has not adopted equivalent legislation. The category of operational algorithmic accountability is, in the European framework, established.
The fourth precedent is American and recent. The 2021 Hospital Price Transparency Rule, the 2022 Transparency in Coverage Rule, and the August 2024 Sitzer/Burnett settlement against the National Association of Realtors each represent partial counter-movements within U.S. policy. They are limited in scope and in enforcement. They establish the category of price-transparency action without yet operationalizing it at the scale that would meaningfully discipline the contractual-pricing architecture.
The reframing is this: prices in the contemporary U.S. economy are not, for most goods and services, formed by supply and demand. They are formed by combinations of administrative rules, contractual arrangements, algorithmic systems, and structural power. The supply-and-demand framework persists in U.S. economic discourse not because it describes the operational reality of contemporary price-formation but because it organizes a discourse that allocates causation to the market rather than to identifiable institutional decisions made by named actors.
Each of the four actual price-formation mechanisms is the product of institutional choices that named actors made at identifiable moments. The administrative pricing architecture was constructed through specific federal and state legislation across the Progressive Era, the New Deal, and the post-1960s consumer-protection wave, and partially dismantled through the deregulatory choices of the 1970s and 1980s. The contractual pricing architecture was permitted to expand through the post-Bork antitrust framework’s narrowing of constraints on negotiated arrangements. The algorithmic pricing architecture was enabled by the absence of disclosure or accountability requirements equivalent to those in administrative or financial regulation. The structural-power pricing architecture was constructed through forty years of permissive merger review, as documented in the companion piece on pricing power.
Each of the four can be modified. The historical record of administrative pricing demonstrates that the federal government has the institutional capacity to set prices at scale in essential sectors. The historical record of antitrust enforcement demonstrates that contractual pricing arrangements can be constrained by public action. The European Union’s Digital Markets Act demonstrates that algorithmic accountability can be operationalized. The 2023 Federal Trade Commission and Department of Justice Merger Guidelines demonstrate that the post-Bork structural-power framework is institutionally reversible.
What the supply-and-demand framework does, as the dominant U.S. discourse on price formation, is foreclose the political conversation about which of the four mechanisms should set prices in which sectors. The political conversation about whether American healthcare prices should be set primarily by administrative rule (Medicare-style fee schedules), by contractual arrangement (the present hybrid system), by algorithmic system (insurance company AI billing systems), or by structural power (concentrated hospital systems and pharmaceutical manufacturers) is the most consequential pricing conversation in U.S. political economy. It cannot be conducted in a vocabulary that names only the market. The vocabulary that names the actual mechanisms is the precondition for the political conversation that the U.S. discourse has not yet learned to have.
Infinite Economics covers the political economy of U.S. price formation, the institutional architecture of administrative, contractual, algorithmic, and structural pricing, and the public-economy alternatives the dominant supply-and-demand framework has foreclosed. This piece is part of our ongoing investigation of how prices are actually set in the contemporary U.S. economy.
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