Top 5 Antitrust Issues Facing Companies in the U.S. Today: #3 Pricing
Prices provide crucial information to buyers and sellers, and so have always been critical to a competitive economy and antitrust law. But the emergence of new online information-harvesting technology and instantaneous transmission of pricing information may lead to new versions of antitrust issues, including anticompetitive price fixing arrangements and disputes about distributors’ pricing.
Pricing Algorithms and Price Scraping
New pricing technology has emerged rapidly over the past few years, and with it new challenges for companies trying to maintain their competitive edge while avoiding costly antitrust lawsuits and investigations. Online services, such as Mozenda and Upstream Commerce, promise to “optimize” product pricing through the acquisition of competitors’ prices and product information. Commonly referred to as “price scraping,” these services use computer software (called “bots”) to extract price and product data from competitors’ websites and then use pricing algorithms to instantaneously match price changes.
Sounds pretty great, right? After all, companies can now more readily maintain competitive prices, which should help them maintain their foothold in highly competitive markets. And consumers benefit, too. More real-time competition means lower prices. One may conclude these technological advancements in pricing pose no antitrust problem at all.
Not so fast. Instantaneous price-matching technology may actually decrease incentives for companies to lower prices, especially if they know their competitors (all of whom also likely use similar pricing software) will instantaneously match their price drops. If a company believes its price decreases will be matched, the competitive benefit to lowering prices could be significantly reduced. More troubling, however, is what may happen when one market participant increases its prices. Especially in markets characterized by more inelastic demand, price increases by one company may precipitate price increases by others, which could result in artificially inflated prices for sustained periods of time.
What This Means for Pricing in the Digital Age
Why is all of this important to companies? Antitrust enforcement authorities understand the potential anticompetitive misuses of these technologies and will investigate them just like any old-fashioned price fixing. Consider the recent DOJ investigation into the unlawful coordination of online poster prices through the agreed-upon use of a pricing algorithm. In that case, the conspirators agreed to set the prices first, and then implemented the same pricing algorithm to uniformly set the prices on online posters. Because the agreement preceded the algorithm, the DOJ found it to be a clear case of price fixing. (We also discussed that matter in an earlier article on competitor collaboration in this series.)
But as the technology advances, explicit human interaction may not always be necessary to result in anticompetitive effects, and the extent of enforcement activity under those circumstances remains to be seen. As former Federal Trade Commission (FTC) commissioner Julie Brill recently commented, the regulatory process often lags behind technological advancements, and as markets evolve, so too will the views of regulators and enforcement officials. Indeed, such heightened scrutiny of these pricing practices has already begun abroad. The EU Directorate-General for Competition, for example, has recently opened two investigations into electronics companies for the alleged use of price matching software and algorithms for anticompetitive purposes.
Even if the enforcement agencies see no antitrust issues with the use of such technologies, the threat of private antitrust actions remains. The ongoing price-fixing suit against Uber in the Southern District of New York, Meyer v. Kalanick, provides an interesting example. In that case, the plaintiff has argued that Uber takes part in a hub-and-spoke, algorithm-based price fixing scheme; specifically, that Uber’s “price surging” algorithm, which automatically and uniformly increases prices for rides as demand increases, constitutes an unlawful horizontal price-fixing agreement among Uber’s independent contract drivers. Two weeks ago, the Second Circuit Court of Appeals heard oral argument on whether that claim should be arbitrated or litigated, which may turn on whether Uber users have proper notice of the arbitration clause in the Uber user agreement. A ruling on that issue is expected at any time.
Distributor Pricing – What’s Old is New Again
Manufacturers have worried for decades about the resale price distributors or retailers might charge for their products. For some manufacturers, a resale price that was “too low” could harm the reputation of the brand or discourage other retailers from providing expensive pre- and post-sale services. For nearly a century, manufacturers knew that the Dr. Miles Supreme Court case prohibited them from simply forcing a retailer to charge a certain price – resale price maintenance was a per se antitrust violation. As a result, manufacturers developed other strategies to influence the resale price set by their distributors, such as minimum advertised pricing programs, so-called Colgate programs, and manufacturers’ suggested prices.
The Court overruled Dr. Miles in 2007’s Leegin decision and made such “vertical price fixing” subject to the more defendant-friendly rule of reason; however, that does not mean that manufacturers wishing to control the resale price of their products have complete freedom. In addition to the negotiating strength of some online and brick and mortar retailers, manufacturers must deal with state laws like those in California and New York that still make vertical price fixing per se illegal. So while online sales and new pricing technologies have made the issue of low resale prices even more acute, many manufacturers continue to rely on the pre-Leegin tools to try to control the distribution of their products.
Reemergence of the Robinson-Patman Act?
Those same manufacturers might also need to contend with the reemergence of Robinson-Patman Act. Before the recent election, some antitrust commentators called for reinvigorated Robinson-Patman enforcement. While the FTC has largely stopped bringing Robinson-Patman Act enforcement actions, private actions remain. The recent Woodman’s v. Clorox case, for example, shows that private challenges brought under the Act are very much alive and well.
Under the Robinson-Patman Act, a seller charging competing buyers different prices for products of like grade and quality (or discriminating in promotional allowances or services) may be violating the act. What does this mean for companies utilizing advanced pricing technology? If, based on the information extracted from the pricing software, the algorithm is designed to offer different prices to different competing buyers for the same product and such discrimination appears to produce anticompetitive effects, a disfavored buyer might have a successful Robinson-Patman Act claim.
While the use of online pricing technology can often yield procompetitive benefits, it can also be used in ways that at least raise antitrust issues. Companies and their counsel looking to avoid lengthy and costly antitrust challenges must carefully evaluate the use of technologies before implementing them.