Why the DOJ and FTC Are Wrong on Algorithms and Antitrust

Generally speaking, algorithms are procedures for solving mathematical problems in a systematized finite number of steps. In contemporary economic settings, algorithms involve technologies that, by aggregating and sorting through historical data, help service providers better understand market pricing in their respective industries. They have become instrumental to the modern-day digital economy. The car rental industry, hotels, property managers, and even the government (e.g., for toll roads) are a few of the many economic actors presently utilizing algorithms to better serve their customers, ensure fair and reasonable pricing, and prevent excessive shortages and surpluses. 

The economic benefits realized from generative artificial intelligence (AI) are nothing short of astounding. Some estimates predict generative AI will increase global gross domestic product  (GDP) by nearly $7 trillion over the next 10 years. That is why it is so concerning that the Department of Justice (DOJ), the Federal Trade Commission (FTC), and a small choir of members of Congress seem intent on regulating algorithms out of the economy on antitrust grounds. 

The action they have recently taken against RealPage, a software company whose algorithm helps inform property managers’ pricing decisions, might be the first example of Washington’s crusade against this technology, but more actions against similarly profiled algorithms will undoubtedly follow. The officials and politicians in question should become more informed and ultimately reconsider their stance. They are alleging, with few facts, that a company which provides statistical data to landlords is somehow violating antitrust laws.

That is not how antitrust laws work. Data collection and prediction do not violate any laws. In the end, consumers and the rest of society will suffer in the absence of these valuable generative AI tools—and others like them in other sectors. 

Algorithms Don’t Violate the Sherman Antitrust Act 

In their lawsuit against RealPage, the DOJ and FTC contend that the company (and the property managers who utilize its solution) are in violation of the Sherman Antitrust Act, which condemns “[a]ny combination which tampers with price structures” because such a combination “directly interfer[es] with the free play of market forces.” However, the DOJ and FTC appear to be forgetting one crucial fact: Proving “collusion” requires demonstrating that the parties in question entered into an agreement or understanding with the goal of price fixing. In other words, the government needs to establish an intent to engage in an illegal activity. 

Property managers do not collude when utilizing RealPage; they do not even communicate with one another. Nor do most of the other actors who use algorithms across a wide range of economic sectors. Business owners use algorithmic services because they are efficient, just like most good real estate agents reference comparable past closings on the MLS before listing their clients’ properties. They do not depend on RealPage pricing recommendations or follow them blindly; they just use the solution as a tool to ensure their pricing remains dynamic and competitive. The fact that multiple entities use the same software is hardly proof of a general intent to price fix—it is not even proof of any two entities colluding together—so it cannot be a violation of the Sherman Act.

The property managers’ actions are a classic example of conscious parallelism, which is perfectly legal. Conscious parallelism refers to a business practice where companies change their prices to match those of competitors within a market without colluding or communicating with one another. Unlike price fixing, which involves a conscious agreement between competitors and violates antitrust laws, conscious parallelism occurs when businesses independently adjust their prices in response to competitors’ actions. The fact that property managers use a service like RealPage to better understand the market does not make the use of such a service an agreement to collude. 

DOJ and FTC’s Case Law ‘Evidence’ Doesn’t Hold Up 

In their lawsuit, the DOJ and FTC are alleging the existence of a Sherman Act violation by citing a variety of price-fixing cases, but neither their analysis nor their cases hold up. 

First, the DOJ and FTC cite Plymouth Dealers’ Association, which dealt with competing dealers agreeing on a “fixed uniform list price” for Plymouth cars. Plymouth may very well be an example of a Sherman Act violation, as the Supreme Court found (lower courts disagreed), but this case involved companies banding together in a coordinated fashion. RealPage does not, nor do most of the other algorithms that other sectors utilize today. Their users are not engaging in price fixing in any sort of coordinated fashion. 

Next, the DOJ and FTC cited High Fructose Corn Syrup Antitrust Litig., but this case dealt with fixed list prices, and the case’s plaintiffs had demonstrative evidence of collusion: 

“The plaintiffs presented evidence that the defendants had excess production capacity, yet they still bought HFCS from one another and resold it to customers. Additionally, the defendants’ market share remained stable even as output grew. The plaintiffs presented noneconomic evidence in the form of statements from the defendants suggesting a conspiracy, including references to ‘an understanding within the industry not to undercut each other’s prices’ and to new entrants having to ‘play by the rules.’ The district court held there was not enough evidence for a reasonable jury to find the existence of a price-fixing conspiracy and granted summary judgment to the defendants. The plaintiffs appealed.”

Again, the DOJ and FTC do not have such evidence for RealPage or other algorithms, so the comparison proves disingenuous.

Then, the DOJ and FTC cited the infamous Gelboim case, the scandal that involved numerous banks working in concert to manipulate the London Interbank Overnight Rate (LIBOR). They referenced this case to make the point that “antitrust law is concerned with influences that corrupt market conditions” and that consumers’ ability to negotiate prices up or down has no impact on whether collusion presents an antitrust violation. This point is valid, but again, the difference here is that clients utilizing RealPage or other economic algorithms do not engage in any sort of collusion; they merely engage in making sound independent individual business decisions. 

Finally, the DOJ and FTC raised United States v. National Association of Real Estate Boards, which involved controversial NARB code of ethics that stipulated “brokers should maintain the standard rates of commission adopted by the board, and no business should be solicited at lower rates.” The two agencies found this case to be significant and relevant to its RealPage action because the Supreme Court found the NARB to have committed an antitrust violation even though the organization did not mandate that brokers maintain its commission rates. But RealPage (and most the other algorithms used today) does not even provide suggested collective rates to the entities that utilize its software—all the rates it recommends are customized to each customer’s unique data and circumstances. So, again, the DOJ and FTC’s comparison falls flat. 

The DOJ and FTC’s misguided suit against RealPage is not supported by antitrust jurisprudence, and $7 trillion in economic growth is on the line. No court should allow this precedent against algorithmic use moving forward. The actions against RealPage by the government should be dismissed before it is too late. The continued progression of the U.S. digital economy depends on it.

See also:

• What ChatGPT Means for Finance
• Microsoft Calls for a New U.S. Agency to Regulate AI
• SEC Chair Gensler Warns About Centralization of AI in Financial Sector

Ediberto Roman, professor of law, Florida International University, is a national legal scholar specializing in a host of fields, including corporate law, constitutional law, administrative law, immigrational policy, and civil rights.

From: Law.com