The use of computer code to set prices on such staples as rent and groceries is adding a new and intricate layer to the larger battle inside the federal government to rein in high costs.
Discussions about inflation have dominated the presidential campaign, with Vice President Kamala Harris and former President Donald Trump vowing to take on high food and gasoline prices. How algorithms and artificial intelligence fit into that price equation is also drawing scrutiny from the Federal Trade Commission and Justice Department.
And lawsuits like the DOJ’s Friday complaint against RealPage, a Thoma Bravo-backed software provider for the multifamily rental industry, over an “algorithmic pricing scheme” inflating rent prices are also helping spur pushes for new laws.
“What is becoming clear is companies are using technologies to experiment with new pricing strategies,” said Lindsay Owens, executive director at the liberal Groundwork Collaborative. “As regulators take a look at this, the North Star should be how to restore fair prices.”
It’s unclear how prolific the use of algorithms or artificial intelligence is in setting prices today. But data shows algorithms can impact pricing in “so many ways,” including in the form of price hikes, said Ai Deng, an economist at Charles Rivers Associates who studies artificial intelligence and its effects on prices.
Still, Deng cautioned against moving too aggressively with a policy response, noting there isn’t strong evidence that algorithms can collude without the human intervention key to traditional antitrust actions. “It’s so dangerous to impose restrictions on what firms can and cannot do at this stage,” he said. “We’re learning new things every day.”
A wave of private and government actions alleging collusion aided by algorithms in industries such as housing and hotels will likely uncover more about the technology.
Beyond alleged algorithmic collusion, the FTC has also turned its sights on what Chair Lina Khan calls the “shadowy ecosystem of pricing middlemen.” The FTC opened an inquiry this summer into how companies and software providers deploy AI and user data to vary prices for individual consumers, a practice it referred to as “surveillance pricing.”
Digital Pricing
Digital pricing tools, in one respect, are part of the age-old quest by businesses to maximize profits. But what is gaining scrutiny is the technology’s sophistication, as well as the use of third-party software providers and consultants working in that paradigm.
In an Aug. 16 speech in North Carolina, Harris called out landlords’ use of “algorithms and price-fixing software” as a driver of high rent prices and vowed to push a law cracking down on the practice. A week later, the Justice Department and eight states accused RealPage’s algorithmic pricing software of illegally distorting competition in the housing market.
The moves followed the July 23 launch of a “surveillance pricing” study from the FTC. The commission kicked it off by sending information orders to eight finance, software, and consulting firms asking for information on pricing products they produce or license and how they affect prices.
Among those targeted were credit card company Mastercard Inc.consulting giant McKinsey & Co., and Revionics Inc., a software firm that bills its “AI solutions for retail price optimization.” A copy of the orders shows the FTC’s definitions of what it called “targeted pricing solutions” would cover any pricing algorithm, said Deng.
Revionics said in a statement that it “does not develop software that recommends pricing targeted to specific individuals.” The company said it’s confident the FTC’s study “will affirm the benefits” of its programs.
Mastercard said it’s cooperating with the FTC’s request, adding “all of our services and platforms are designed with a commitment to protect consumers and their privacy.” McKinsey declined to comment.
Algorithmic Collusion
The DOJ’s RealPage lawsuit, meanwhile, adds to a flood of actions zeroing in on alleged algorithmic collusion. Class action lawyers and attorneys general in Arizona and Washington, D.C., pursued some of the first cases against the software firm, which feeds proprietary housing data from landlords across the US into an algorithm and adopts price recommendations.
RealPage, which has denied price-fixing claims, says its software aggregates anonymous data and that landlords don’t have insight into competitors’ pricing.
“RealPage’s revenue management software is purposely built to be legally compliant, and we have a history of working constructively with the DOJ to show that,” the company said in a statement Friday.
The FTC and DOJ used some early cases to make new arguments on collusion. Competitors agreeing to use a common software provider’s pricing recommendations can be illegal, even if the parties retain some discretion, the agencies said in a joint court filing.
In the case of RealPage, a “significant number of landlords” have effectively agreed to “outsource their pricing function” to the firm, the DOJ suit said.
“We want firms to be setting prices unilaterally,” said Hal Singer, an economics professor at the University of Utah who has testified before Congress about antitrust issues. “When you turn over your prices to a third party, it’s much easier to coordinate and enact monopoly prices.”
Other steps from the DOJ indicate its interest goes beyond any one software provider.
The antitrust division is building out a new tech economics team to “augment our expertise around algorithms and other technologies,” Deputy Assistant Attorney General Andrew Forman said during a conference in June.
Lingering Questions
The increased focus sparks questions about whether existing competition laws will be adequate, however. It’s not illegal for firms to have the same price; what’s illegal is a so-called meeting of the minds to set those prices, said Bill Baer, head of the DOJ’s antitrust division during the Obama administration.
The DOJ and FTC appear to be “of the view that you’re responsible for the results that your math produces,” said Baer, now a fellow at the Brookings Institution.
But how a court responds to a possible situation where an algorithm fixes prices without any evidence of human intervention is an open question, said Baer. “There’s not a lot of case law on that.”
In May, a Nevada federal court tossed one class action alleging a hotel price-fixing ring in Las Vegas facilitated by a software provider’s algorithm. The hotels were “not required to and often do not accept” that firm’s pricing recommendations, the judge said in dismissing the case, which is now on appeal.
What the FTC calls “surveillance pricing” also raises potential issues over companies’ ability to alter prices based on precise data about an individual, rather than broader trends. But it remains unclear how privacy or antitrust laws would apply to some of the practices that officials say are compounding high costs, legal experts and economists say.
‘Larger Economic Point’
Harris’ proposed crackdown on algorithmic pricing in the housing rental market, mirroring one being adopted in San Francisco, came as part of an economic platform that included a call for fighting “price gouging” in the food industry.
Days earlier, Sens. Elizabeth Warren (D-Mass.) and Bob Casey (D-Pa.) sent a letter to Kroger Co.the largest grocery chain in the US, suggesting its growing use of electronic shelf labels leads to high prices.
That focus—on pricing technology and the economy—has engendered broader debates about what’s behind substantial price hikes and how to address them.
Pointing to algorithmic pricing can sometimes miss “the larger economic point,” said John Yun, a George Mason University law professor and former FTC economist, citing zoning and property costs hurting housing development.
A Kroger spokesperson said “any test of electronic shelf tags is to lower prices more for customers where it matters most. To suggest otherwise is not true.”
Still, such technology is only in its infancy. “If anything,” said Owens of the Groundwork Collaborative, “it’s an argument for putting appropriate guardrails around this before it gets out of control.”
The DOJ case against RealPage is US v. RealPage Inc., M.D.N.C., Docket No. 1:24-cv-00710, complaint 8/23/24.
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