OpinionAlgorithmic Cartel: When Technological Innovation Collides with Competition Law
Opinion
Algorithmic Cartel: When Technological Innovation Collides with Competition Law
"The case involving RealPage which is now before a North Carolina court, may represent a turning point in regulating algorithm-based technologies in the marketplace," writes Pearl Cohen Zedek Latzer Baratz's Tzahi Yagur.
In a precedent lawsuit in the U.S., it is alleged that a real estate software company used an algorithm for price coordination, effectively transforming it into a cartel. This case reignites the ongoing tension between technological innovation and existing competition laws with the outcome likely to shape the boundaries of AI use in competition law.
The case involving RealPage, a U.S. real estate software company, which is now before a North Carolina court, may represent a turning point in regulating algorithm-based technologies in the marketplace. In a recent lawsuit filed by the U.S. Federal Trade Commission (FTC) and several states, RealPage is accused of coordinating rental prices through an algorithm it developed. According to the lawsuit, RealPage's algorithm recommended rental prices to numerous real estate companies, effectively creating price coordination among them. Notably, access to the algorithm's data and recommendations was restricted to property owners who paid for the service. Additionally, it is alleged that RealPage sought to dominate the rental data market in various regions, including California, Colorado, and North Carolina. This is a landmark case where the U.S. competition authority has filed a lawsuit against an algorithm-based cartel.
A widely accepted principle in competition law is that as long as a company without market power independently uses an algorithm for pricing - whether developed internally or by a third party - the algorithm may benefit the market. It allows smaller companies to enter new markets and improve operational efficiency. However, when an algorithm is used alongside market power, or when multiple competing companies use the same algorithm, significant questions arise regarding its potentially harmful effects on market competition.
Can Existing Laws Handle Technological Innovation?
RealPage argues that its algorithm does not serve as a platform for sharing information or coordinating among competitors. Instead, it provides only aggregate market data, not insights into the actions of specific competitors. This stance is supported by economists like Joe Harrington, who argue that a cartel formed by algorithms does not violate the Sherman Antitrust Act of 1890, which was drafted long before robots and algorithms existed. According to this view, algorithms operate based on open, publicly available data, functioning within the framework of fair competition.
In contrast, another viewpoint focuses on the outcomes of algorithmic pricing. According to this perspective, any time an algorithm leads to coordination between competing companies or reduces competitive uncertainty, it constitutes a cartel. This school of thought asserts, "What is illegal for a person is illegal for an algorithm," and questions the legality of algorithmic pricing that leads to price coordination.
The legal debate over the legitimacy of algorithmic pricing, as anticipated in the RealPage case, may redefine the rules of competition and raises important questions about whether existing legal frameworks can keep up with technological advancements and the dynamic nature of the market. Other factors being examined in the lawsuit include the purpose of the algorithm - whether it was designed to maximize prices or optimize efficiency - and the market power of the companies involved in algorithmic pricing.
In my opinion, if RealPage's market share in the relevant markets exceeds 70% (as alleged in the lawsuit), and it is proven that the company’s stated goal was to "eliminate guesswork in the rental market" and that harm to competition in the relevant rental markets occurred, we are likely to see a precedent-setting ruling that the RealPage algorithm created a cartel, or at the very least, facilitated one.
Either way, the decision in this case will likely set a significant precedent that will define the limits of algorithmic pricing and serve as a roadmap for businesses in the U.S. and globally.
The author is an expert in competition law and Head of the Competition Law Department at the law firm Pearl Cohen Zedek Latzer Baratz.
