DOJ and FTC Examine When Use of Computer Algorithms to Set Prices Might Violate Antitrust Laws
On May 26, 2017, the Antitrust Division of the U.S. Department of Justice (DOJ) and the Federal Trade Commission (FTC) released a policy paper expressing their views on when the use of algorithms to set prices might violate U.S. antitrust law.1 The DOJ and FTC examined whether the use of computer algorithms might facilitate price fixing, and ultimately concluded that existing antitrust principles remain capable of addressing the potential harm to competition presented by the use of new technological tools.
Agreements among competitors relating to prices are per se violations of Section 1 of the Sherman Act. 15 U.S.C. § 1.2 When competitors merely respond to and follow each other's prices, with no agreement or understanding that they will do so, that behavior does not violate the antitrust laws. In fact, as the DOJ and FTC observe, "a core principle of free market competition is that firms adjust prices in response to competitive conditions, including the prices charged by competitors. Antitrust laws views such behavior as generally procompetitive."3
Many companies now use pricing algorithms to automatically and instantly adjust their prices in response to changes in prices charged by competitors or based on information the companies possess about the likely price sensitivity of individual consumers.
While an individual firm's independent decision to use a pricing algorithm would not violate Section 1 of the Sherman Act, the DOJ and FTC caution companies not to enter agreements with competitors to adopt a common pricing algorithm. If they do so, "the anticompetitive agreement is between the firms, and the algorithms are simply the means of effectuating the agreement and the mechanisms through which the collusive prices are set."4
In 2015, the DOJ brought criminal price-fixing charges against poster sellers who pursued such a scheme, using a pricing algorithm to eliminate competition between them in sales through an online retailer. The poster sellers allegedly "agreed to adopt specific pricing algorithms for the sale of certain posters, with the goal of offering online shoppers the same price for the same product and coordinating changes to their respective prices."5 The alleged conspirators set their pricing algorithms to match, and not undercut, the leader's prices, preventing competition between them from placing downward pressure on poster prices.
The DOJ and FTC's guidance, as well as the success of the DOJ's prosecution of the poster sellers, serve as confirmation that, from the perspective of the U.S. antitrust authorities, existing antitrust principles are sufficient to safeguard the competitive process in e-commerce markets.
Notes
1 OECD, Directorate for Financial and Enter. Affairs Competition Comm., Algorithms and Collusion – Note by the United States (DAF/COMP/WD(2017)41), available at https://one.oecd.org/document/DAF/COMP/WD(2017)41/en/pdf [hereinafter Algorithms and Collusion].
2 See United States v. Socony-Vacuum Oil Co., 310 U.S. 150, 223, 224 n.59 (1940) ("Under the Sherman Act, a combination formed for the purpose and with the effect of raising, depressing, fixing, pegging, or stabilizing the price of a commodity in interstate or foreign commerce is illegal per se . . . Whatever economic justification particular price-fixing agreements may be thought to have, the law does not permit an inquiry into their reasonableness. They are all banned because of their actual or potential threat to the central nervous system of the economy.").3 Algorithms and Collusion at 3.
4 Id. at 5.
5 Press Release, U.S. Dep't of Justice, E-Commerce Exec and Online Retailer Charged with Price Fixing Wall Posters (Dec. 4, 2015), available at https://www.justice.gov/opa/pr/e-commerce-exec-and-online-retailer-charged-price-fixing-wall-posters.