Are you delegating your pricing decisions to a common algorithm software platform? If so, you might violate the antitrust laws. It may not even matter whether you actually communicated with your competitors. All it might take is for the antitrust agencies—The Department of Justice or the Federal Trade Commission—to allege illegal collusion is the use by your company of an algorithm-software tool trained using competitively sensitive data, with knowledge that some of your competitors are doing the same thing. Even deviation from the algorithm's recommended pricing might not save you from antitrust liability.
The FTC's Blog Post: Price Fixing by Algorithm is Still Price Fixing
On March 1, 2024, the Federal Trade Commission (FTC) published a blog post explaining how relying on a common algorithm to determine your pricing decisions might violate Section 1 of the Sherman Act.
In the blog post, the FTC includes a previous Statement of Interest ("SOI") filed in the Duffy v. Yardi Systems, Inc. case to explain the legal principles applicable to claims of algorithmic price fixing. First, price fixing through an algorithm is still price fixing. Second: (1) you can't use an algorithm to evade the law banning price-fixing agreements, and (2) an agreement to use shared pricing recommendations, lists, calculations, or algorithms can still be unlawful even where co-conspirators retain some pricing discretion or cheat on the agreement.
The blog concludes with two important remarks:
- "Agreeing to use an algorithm is an agreement. In algorithmic collusion, a pricing algorithm combines competitor data and spits out the suggested "maximized" rent for a unit given local conditions. Such software can allow landlords to collude on pricing by using an algorithm—something the law doesn't allow IRL. When you replace once-independent pricing decisions with a shared algorithm, expect trouble. Competitors using a shared human agent to fix prices? Illegal. Doing the same thing but with an agreed upon, shared algorithm? Still illegal. It's also irrelevant that the algorithm maker isn't a direct competitor if you and your competitors each agree to use their product knowing the others are doing the same in concert.
- Price deviations don't immunize conspirators. Some things in life might require perfection, but price-fixing arrangements aren't one of them. Just because a software recommends rather than determines a price doesn't mean it's legal. Setting initial starting prices or recommending initial starting prices can be illegal, even if conspirators deviate from recommended prices. And even if some of the conspirators cheat by starting with lower prices than those the algorithm recommended, that doesn't necessarily change things. Being bad at breaking the law isn't a defense."
This is a bold statement from the FTC. Algorithmic collusion is not only on the agency's radar now, but it is also one of its priorities.
Final Conclusions
Algorithm collusion is on the crosshairs of the FTC and DOJ, so expect more cases soon. And not only in the real-estate industry, as highlighted from existing investigations on the online retailing and meat processing industries. Indeed, it is becoming common practice for more industries and businesses to implement and rely on algorithms to set their pricing strategies.
The DOJ and the FTC have also withdrawn past guidance on permissible forms of information sharing among competitors via third parties. The main reason? You guessed it––AI and pricing algorithms. The use and aggregation of historical data is rapidly becoming more problematic for antitrust authorities to analyze when learning machine and pricing algorithms are involved.
Lawmakers have also put pricing algorithm on the spotlight: As one example, on January 20, 2024, Sen. Amy Klobuchar (D-Minn.) introduced S. 3686 (Preventing Algorithmic Collusion Act of 2024), which would "prohibit the use of algorithmic systems to artificially inflate the price or reduce the supply of leased or rented residential dwelling units in the United States."
Considering the heightened ongoing scrutiny in the AI industry in general and algorithm collusion in particular, companies are subject to increasing antitrust risk when using a software platform to set prices or share competitively sensitive information. That's why it's important you understand how a common software platform gathers information from all your competitors, the type of information is shared, and whether you and your competitors are jointly delegating any part of the decision-making process to the algorithm.
You might also call your antitrust attorney and prepare an antitrust compliance program, covering AI, algorithms, and digital information exchanges. As part of this, make sure you train your business team and document all procompetitive effects of the algorithm, such as lower prices and higher outputs.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.