In a significant move to address the growing concern over the use of algorithms in anti-competitive practices, Senator Amy Klobuchar (D-MN) has introduced the Preventing Algorithmic Collusion Act. This groundbreaking legislation aims to close loopholes in current antitrust laws and prevent companies from using algorithms to engage in price fixing and collusion.
The bill, co-sponsored by Senators Ron Wyden (D-OR), Dick Durbin (D-IL), Peter Welch (D-VT), Mazie Hirono (D-HI), and Richard Blumenthal (D-CT), comes in response to the increasing prevalence of algorithmic pricing in various industries, most notably in the rental housing market.
The Need for Stronger Antitrust Laws
Under current antitrust laws, price fixing and other forms of collusion are illegal. However, these laws may be insufficient when competing companies delegate their pricing decisions to an algorithm. Existing law requires proof of an explicit agreement to fix prices, which can be challenging to establish when pricing decisions are made by algorithms without direct human-to-human contact.
As Senator Klobuchar noted in the press release accompanying the proposal, the Preventing Algorithmic Collusion Act would impose liability even in the absence of “proof of an explicit agreement to fix prices” by presuming an unlawful agreement when a pricing algorithm is used by competitors to set or recommend prices.
Key Provisions of the Preventing Algorithmic Collusion Act
The Preventing Algorithmic Collusion Act (S. 3686) aims to strengthen current price fixing laws through several key provisions:
- Closing the loophole in current law: The bill would presume a price-fixing agreement when direct competitors share competitively sensitive information through a pricing algorithm to raise prices.
- Increasing transparency: Companies with an annual revenue of $5,000,000 or more that use pricing algorithms would be required to disclose this fact to customers. Antitrust enforcers would also be granted the ability to audit pricing algorithms when there are concerns about potential consumer harm.
- Banning the use of competitor data: Companies would be prohibited from using competitively sensitive information from their direct competitors to inform or train a pricing algorithm.
- Studying the impact on competition: The Federal Trade Commission (FTC) would be directed to study the impact of pricing algorithms on competition.
Addressing the RealPage Controversy
The introduction of the Preventing Algorithmic Collusion Act comes in the wake of several class action lawsuits alleging that the software provided by RealPage, a leading property management software company, allowed landlords to engage in algorithmic price fixing.
RealPage’s YieldStar software uses pricing and leasing information to suggest rents to its clients, allegedly enabling them to increase rents by 5% to 12%. The Department of Justice has also conducted an investigation into RealPage’s pricing algorithm.
The bill’s authors, Senators Wyden and Welch, specifically called out RealPage and another property management software provider, Yardi, in their press release, underscoring the need for stronger antitrust laws to prevent such practices.
Enforcement and Penalties
The Preventing Algorithmic Collusion Act would delegate enforcement to the Federal Trade Commission (FTC) and the Department of Justice (DOJ). If passed, the bill would make it unlawful for rental companies to use services that coordinate rental housing prices and unit supply information, and would prohibit price coordination between two or more owners.
Under the proposed legislation, a rental owner coordinating rents or supply information with another landlord, such as through an algorithm or software, would be considered a violation of the Sherman Antitrust Act.
Industry Reactions and Implications
The introduction of the Preventing Algorithmic Collusion Act has sparked discussions about the potential implications for businesses that rely on pricing algorithms. While some argue that the bill is necessary to prevent anti-competitive practices, others have raised concerns about the potential unintended consequences and the challenges of regulating rapidly evolving technologies.
Companies using algorithms to determine prices should assess the antitrust risk in the design and implementation of their systems and address any legal issues that may arise. The growing legislative and regulatory focus on AI-related competition issues serves as a wake-up call for firms utilizing AI tools, emphasizing the need for key decision-makers to ensure that their businesses are not deploying algorithms to engage in practices that would otherwise be clearly illegal.
The Broader Context of Algorithmic Regulation
The Preventing Algorithmic Collusion Act is part of a broader effort by lawmakers and regulators to address the potential harms associated with the use of algorithms and artificial intelligence in various sectors of the economy.
In addition to Senator Klobuchar’s bill, Senator Wyden has introduced the Preventing the Algorithmic Facilitation of Rental Housing Cartels Act, which specifically targets the use of algorithms to inflate rents in the housing market. This bill would crack down on companies that help landlords increase rents in already high-priced markets by using software and price-setting algorithms.
The Federal Trade Commission (FTC) and the Department of Justice (DOJ) have also been actively policing the anticompetitive use of pricing algorithms. In a recent joint statement of interest filed in the RealPage case, the agencies noted that “competitors may not agree to fix the starting point of pricing (e.g., agree to fix advertised list prices) even if the actual charged prices vary from the starting point”.
The Road Ahead
As the use of algorithms and artificial intelligence continues to grow across industries, the need for effective regulation to prevent anti-competitive practices becomes increasingly apparent. The Preventing Algorithmic Collusion Act represents a significant step towards addressing the challenges posed by algorithmic price fixing and collusion.
However, the bill’s passage is not guaranteed, as anything in the current legislative environment faces long odds. Nonetheless, the introduction of this legislation demonstrates a growing understanding among lawmakers of the legal challenges in bringing antitrust claims against AI-facilitated collusion and a willingness to evolve antitrust statutes to meet new forms of collusion in the AI age.
As the debate surrounding algorithmic regulation continues, businesses must remain vigilant and proactive in ensuring that their use of algorithms and AI tools complies with antitrust laws and does not engage in practices that could be deemed anti-competitive.
The full text of the Preventing Algorithmic Collusion Act (S. 3686) can be found on the official Congress.gov website: https://www.congress.gov/bill/118th-congress/senate-bill/3686
