On Thursday, March 16, 2017, in a speech at the Bundeskartellamt’s 18th Conference on Competition, European Commissioner for Competition, Margrethe Vestager, discussed the specter of automated price fixing cartels. She mentioned the Department of Justice suit against the poster vendor on Amazon as well as Google, which apparently prefers its own comparison shopping service over others. These are very, very different things. This post will focus on the legal and philosophical issues associated with price fixing bots. Whatever Google is doing, it’s not price fixing.
Most Anglo-Saxon crimes require a mens rea, a guilty mind, in order for there to be crimes. Price fixing is interesting in that it is illegal irrespective of the rationale. Parties wanting a market to charge customers a fair price are just as guilty as parties wanting to end ruinous competition and make a decent return on investment. To be guilty of price fixing, however, there does, in fact, have to be an agreement—a bilateral understanding that the parties agree on the minimum price they will charge their customers. The agreement doesn’t have to be successful in terms of achieving the agreed upon price; but there has to be an agreement. In short: (1) Attempted price fixing is the same as price fixing, and (2) Parallel conduct and conscious parallelism, without more, is not price fixing and not illegal.
Obviously the number of competitors and potential competitors affects prices. If you were a fish monger and you know the only other place in town one could find fresh salmon is charging $20 a pound, you’ll probably charge around $20 a pound.[1] On the other hand, if there were so many shops where customers can get fresh salmon, you’d be more likely to price closer to your cost to maximize profits.
Now let’s say you were the fish monger in the smaller market, and you happened to walk past the local grocery store and saw that they had raised the price of their salmon to $25 a pound. Would you be guilty of price fixing if you rushed back to your store and raised your price to $25? Would you be guilty of price fixing if you saw the manager of the store at the local pub and suggested to him that he raise his price to $25 because you are going to do the same tomorrow? In the former case, you would likely not be guilty of price fixing. It’s parallel behavior perhaps facilitated by the concentrated structure of the market. In the latter, you would. The latter is an invitation to collude that, if acted on, would be an agreement on price that violates Section 1 of the Sherman Act.
Another important case to consider is Airline Tariff Publishing. In that case, the airlines used their electronic tariff publishing system to discipline price competition. Say Braniff Airlines is dominant in the Dallas/Seattle city pair, and PanAm is dominant in the Chicago/Seattle city pair. Braniff decides to go aggressive in Chicago/Seattle and drops prices by 50%, cutting into PanAm’s profits significantly. PanAm knows that it can stick it to Braniff on the Dallas/Seattle pair just as Braniff did to PanAm. Rather than drop prices, however, PanAm signals a steep discount for flights booked six months in advance. Braniff sees the potential discount, realizes that its “competition” in Chicago/Seattle will cost it significant profits, and restores pricing in Chicago/Seattle. Justice did not challenge these signals as per se illegal price fixing. There wasn’t an agreement on price. The parties were just taking advantage of an electronic price list which, for the most part, inured to the benefit of consumers, who could compare prices and rates across an entire market. One might argue, in fact, that in the case of Airline Tariff Publishing, the market was behaving just as one would expect a concentrated market to behave. Instead of the fish monger posting its aggressive pricing in its window for the public , including the grocery store manager to see, they did it online. Had the market been unconcentrated, the pricing competition would have resulted in permanently lower prices.
A bot that sets a price based on a competitor’s pricing cannot be evidence of an illegal agreement without more. If a market is concentrated, the bots’ actions will result in higher pricing to consumers. If it is unconcentrated, the bots will lead to lower prices for consumers. The bot that prices 25% above its closest competitor will never work, and the company that deploys that bot deserves its lost sales. If a product is sufficiently differentiated to merit a 25% surcharge over its competitor, it is effectively a different product with a different demand curve. Pricing such a product using the demand curve of an inadequate substitute will result in either lost profits because the price is too low, or lost sales because the price is too high.
The Internet facilitates information exchange—it makes information more easily available to more people. More information should generally inure to the benefit of consumers.[2] Consumers can see more producers at different prices and pick the one that best addresses its needs. That could be in speed of acquisition (the guy down the street) or on price (the cheapest guy who’s across the country). The internet adds participants to local geographic markets —the metes and bounds of which are defined by how far the consumer is willing to travel for the product. I might buy from a seller in Seattle, but I’m not going to fly there. On the other hand, I might realize that there is a car dealer in Pennsylvania that has the particular make and model I’m looking for at a good price. I’d be willing to drive a little father for that car than I would had I not utilized the internet.
It’s also entirely possible for markets that are otherwise susceptible to conscious parallelism, but are competitive because they lack a policing mechanism to behave oligopolistically as a result of the Internet. This is what happened in Airline Tariff Publishing. Absent Sabre, the parties couldn’t readily police each other’s pricing behavior. Bots offer the same advantage.
Posters is an important case because it actually attacks a bot created to support an underlying anticompetitive agreement, rather than parallel behavior that was facilitated by an advance in technology. For the most part, the presence of a comparison shopping or other pricing bots should, by and large, result in lower prices. It would be wrong to conclude that the market is necessarily behaving anticompetitively.
The most you can say is that if prices are harmonizing at some level above marginal cost, the market may be behaving anticompetitively. This possibility should be sufficient to merit an investigation, but not a conviction. Only if one could show an actual agreement between parties (and then tie that agreement to the actual code of the bots) then I think one has a case. One cannot infer an agreement to set price from a bot coded to set price at what a competitor is pricing no more than one could infer an agreement, without more, in the real world.
[1] Depending on advantages or disadvantages you offer customers such as freshness of your salmon, location of your store, etc.
[2] Before the Internet, figuring out what a firm’s price was for a particular good or service required some meaningful effort. Estimating the “market price” required even more effort. A general tenant of competition theory is that firms obtain market power due to consumers’ incomplete information about prices and qualities. If a firm raises prices and consumers know the prices of other competitors the decline in the sales of the price raiser will be significantly greater than if consumers are unaware of the existence (and prices) of other firms. The internet provides consumers with information and, thus, increases competition. In other words, the internet reduces market power derived from consumer ignorance.
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