Federal Trade Commission Acting Chairman Ohlhausen and Commissioner McSweeny recently gave two very different speeches on algorithmic pricing. Commissioner McSweeny’s speech seemed to express concern that algorithms would lead to price fixing, coordination and higher prices. The Chairman seemed less concerned. The Chairman is likely correct. Pricing bots are not a new, sinister specter haunting society like the trusts of the late 19th Century. Nor are they boogeymen hiding under your bed waiting to raise price and siphon off what little money you have left after rent, clothing and food. Pricing bots are digitized, more efficient versions of the same thought processes that any rival engages in to set price. Because they are digital, they are not constrained by volume. They can take into account significantly more variables than the human mind is incapable of keeping track of—and do it much faster. Using a bot to set price unilaterally is not an antitrust problem. It is the essence of the free market. By contrast, sharing your algorithms, your pricing formulae, with competitors can very well be a problem because it can lead to collusive behavior, like any other exchange of competitively sensitive business information. Setting up encrypted, digital communications systems to suggest and agree on price increases and market allocations is easier today, but it’s still illegal. And it’s sufficiently difficult to do now that a trove of evidence to prove its existence and illegality will be available.
Generally, it’s important to remember that if a market is otherwise competitive, a pricing bot cannot make it less competitive. If a firm can raise price after implementing a pricing bot, it means that the firm was not maximizing profits because it lacked sufficient information. In short, in the pre-bot days, the costs of additional information outweighed the expected benefits of additional information. The bot reduces the cost of additional information. The fact that it raised prices (or lowered them) does not tell us anything about the state of competition in the market.
Pricing bots cannot be coded to “agree” to raise price absent the intent of the human coders. Coders must specifically design their systems to seek out competitors, determine collusive prices and police those prices. Given the highly disparate systems and price setting methodologies that exist across even a commoditized market, the amount of time and effort needed to create such a system is vast. Extrinsic evidence of those efforts must exist. That will include all of the normal evidence of collusion. For a more thorough discussion of what exactly a price-fixing bot might look at, please see our discussion on price fixing bots.
The rest of this brief addresses specific issues raised in each of the speeches.
Commissioner McSweeny Algorithms and Coordinated Effects May 22, 2017
Chairman Maureen Ohlhausen Should We Fear the Things that Go Beep in the Night? May 23, 2017