This week I interviewed Senator Amy Klobuchar, Democrat of Minnesota, about her Preventing Algorithmic Collusion Act. If you don’t know what algorithmic collusion is, it’s time to get educated, because you could be its next victim.
Algorithmic collusion is where companies illegally coordinate to raise prices through the use of an algorithm that they supply their data to. There is no explicit or even wink-and-a-nod agreement among the competitors, the usual standard for collusion. Instead, each company has its own contract with the algorithm provider. That provider uses the companies’ data to make pricing recommendations that make them all richer — at the expense of their customers.
Algorithmic collusion made the headlines this month when Vice President Kamala Harris vowed to crack down, should she be elected, on “corporate landlords” that use price-setting software to jack up rents. Last week, the Justice Department sued RealPage, charging that the company, which uses an algorithm powered by artificial intelligence to help landlords set rental rates, referred to its products as “driving every possible opportunity to increase price.”
Klobuchar introduced her bill in February. She told me she worries that “you can see this going economywide,” extending into more and more businesses. Last year, for example, the Justice Department sued Agri Stats for, it claimed, organizing and managing anticompetitive information exchanges among processors of broiler chicken, pork and turkey. This year, The Times found that MultiPlan, a data analytics firm, was working with big health insurers to lower reimbursement for out-of-network spending.
Such cases could be just the start, Klobuchar told me. The more companies sign up for price-setting services, the easier it will be for participants to raise prices because there won’t be anyone left to undercut them. “It’s mind-blowing what could go wrong here unless something is done about algorithm price-fixing,” she said.
Collusion in the artificial intelligence era is still collusion. “When you really go into it, the concept is pretty straightforward,” Klobuchar said. “Companies are sharing confidential data” via algorithms, she said, just as they once did in smoke-filled rooms.
Attorney General Merrick Garland clearly believes that his department can persuade a federal court that RealPage has violated the Sherman Act, even though the 134-year-old law doesn’t specifically prohibit algorithmic collusion. But Klobuchar told me that having a law on the books would make prosecutors’ jobs easier.
Although Klobuchar’s bill covers much more than apartment rentals, it’s worth looking at the RealPage case as an example of what people are worried about. Concerns about the company grew after a blockbuster investigation by ProPublica in 2022.
For the record, I don’t know if RealPage broke the law. The company argues that the real causes of high apartment rents are undersupply, increasing demand, inflationary pressures and “inefficient or unnecessarily onerous permit and zoning requirements,” among other factors.
I think that’s mainly true, but not a full defense. The relevant question is whether RealPage is contributing at all to higher rents, not whether it’s the sole cause. The supply-and-demand squeeze that it cites makes it easier for landlords to (potentially) engage in algorithmic collusion.
The Justice Department’s complaint alleges that when the market for apartments is soft, “rather than lowering the price to stimulate demand, the algorithm reduces the target number of leases.” That is, it recommends leasing fewer apartments. RealPage denies that, saying its software “does not recommend withholding any apartment units.” That is a disagreement on facts that’s likely to be explored in depth if this case goes to trial.
For more on this I interviewed Maurice Stucke, a professor at the University of Tennessee at Knoxville College of Law, who has written several books and papers on the topic. “As more companies outsource pricing to algorithms, algorithmic collusion will become a bigger issue,” he told me. “The invisible hand is replaced by the digital hand.”
Stucke pointed me to the Federal Trade Commission lawsuit last year alleging that Amazon.com created a secret algorithm, code-named Project Nessie, to raise prices on products selectively, based on the algorithm’s judgment of whether competitors will follow Amazon’s lead and raise their own prices. Amazon has responded that its pricing practices “benefit consumers and are the essence of competition.”
I asked Stucke if Klobuchar’s bill was redundant, since price-fixing is already illegal and algorithmic collusion seems to be just another form of it. “No, it’s important,” he said. “The algorithm learns on its own to collude. That is hard to get at under the antitrust laws.”
What’s more, he said, it’s important for Congress to make clear what it wants regulators to do, because the Supreme Court limited their discretion in a landmark ruling this year eliminating what’s known as Chevron deference.
There’s nothing evil about pricing software per se, whether or not it involves artificial intelligence. Conversely, pricing software doesn’t have to be supersmart to enable cartelization. Thirty years ago, the Justice Department settled an antitrust suit against six airlines that it said used a computerized reservation system to fix airfares.
For that reason, Klobuchar’s bill doesn’t implicate all pricing algorithms — just ones that mash up confidential information from two or more competitors. If a pricing algorithm chews on nonpublic data from multiple competitors, it can spit out pricing recommendations that benefit all of them while allowing them to deny that they colluded.
“We can’t not act,” Klobuchar said.
The Readers Write
You wrote about a proposal for a trade defense coalition against China. My prediction is that even if implemented, it would be ineffective. It would merely confirm Beijing’s fear that the advanced economies are determined to encircle China.
Lyric Hughes Hale
Chicago
The writer is the editor in chief of EconVue, a Chicago-based economics website.
In China we have a country much bigger than ours, with a population that’s becoming better educated than ours in subjects that contribute to growth — notably science, technology, engineering and mathematics. It therefore makes sense to find a way to coexist. Unfortunately, the military-industrial complex always wants to prepare for war, and heaven protect the politician who is “weak on defense.”
Jeff Hendy
El Dorado Hills, Calif.
You dislike Vice President Kamala Harris’s proposal for a down payment grant to first-time homebuyers. Other countries have tried this policy. We did here in Australia. It quickly became known as the home sellers grant — all it did was push up house prices.
Richard Meyers
Brisbane, Queensland, Australia
My favorite recession indicator? Excursions on the cruise ship dock here in Juneau. The word from my friends on the dock is that after two banner years of post-Covid spending, spending on excursions is declining — people are doing less stuff and are spending less on the stuff they are doing.
Thomas Fletcher
Juneau, Alaska
My low-tech, simple recession indicator is the count of semi and delivery trucks (not pickups or vans) in a given stretch of road relative to a previous count on that same stretch. When more than half of economists were declaring recession or an imminent recession in 2023, I was telling my friends and others on the basis of my truck count that there was not a recession and that one was not on the horizon.
Burton S. Floraday
Michigan City, Ind.
Quote of the Day
“On average, consumers would be willing to pay about a 5 percent price premium for convenience.”
— Michelle Weaver, the U.S. thematic strategist for Morgan Stanley, in a company podcast (June 12)
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