Illegal Pricing Algorithms

Warnings to developers of algorithms, the data they use, and even the smartest of contracts.

Law and Technology: Illegal Pricing Algorithms  By Michal S. Gal 
Communications of the ACM, January 2019, Vol. 62 No. 1, Pages 18-20  10.1145/3292515

 On June 6, 2015, the U.S. Department of Justice brought the first-ever online market-place prosecution against a price-fixing cartel. One of the special features of the case was that prices were set by algorithms. Topkins and his competitors designed and shared dynamic pricing algorithms that were programmed to act in conformity with their agreement to set coordinated prices for posters sold online. They were found to engage in an illegal cartel. Following the case, the Assistant Attorney General stated that "[w]e will not tolerate anticompetitive conduct, [even if] it occurs...over the Internet using complex pricing algorithms." The European Commissioner for Competition endorsed a similar position, stating that "companies can't escape responsibility for collusion by hiding behind a computer program."

Competition laws forbid market players from engaging in cartels, loosely defined as agreements among market players to restrict competition, without offsetting benefits to the public. This prohibition is based on the idea that competition generally increases welfare, and that for competition to exist, competitors must make independent decisions. Accordingly, price-fixing agreements among competitors are considered the "ultimate evil" and may result in a jail sentence in the U.S., as well as in other jurisdictions, unless the agreement increases consumers' well-being.

Until recently, formation of a cartel necessitated human intent, engagement, and facilitation. But with the advent of algorithms and the digital economy, it is becoming technologically possible for computer programs to autonomously coordinate prices and trade terms. Indeed, algorithms can make coordination of prices much easier and faster than ever before, at least under some market conditions. Their speed and sophistication can help calculate a high price that reacts to changing market conditions and benefits all competitors; the speed at which they can detect and respond to deviations from a coordinated high price equilibrium reduces the incentives of competitors to offer lower prices. Indeed, if one algorithm sets a lower price in an attempt to lure more consumers, a competitor's algorithm may be designed to immediately respond by lowering its price, thereby shrinking the benefits to be had from lowering the price in the first place. Moreover, as John von Neumann suggested, algorithms serve a dual purpose: as a set of instructions, and as a file to be read by other programs. Accordingly, by reading another algorithm's accessible source code, algorithms, unlike humans, can determine how other algorithms will react to their own actions, even before any action is performed by the other side. This enables competitors to design their coordinated reactions, even before any price is set.

The questions thus arise when the use of pricing algorithms constitutes an illegal cartel, and whether legal liability could be imposed on those who employ algorithms, as well as on those who design them. The stakes are high: if we cast the net too narrowly and algorithmic-facilitated coordination falls under the radar, market competition may be harmed and prices may be raised; if we cast the net too widely, we might chill the many instances in which algorithms bring about significant benefits. .... "