The Colorado Senate recently rejected House Bill 1057, which sought to ban the use of algorithms to set rent prices. While the bill did not pass, its introduction reveals growing concern about algorithmic pricing and its potential impact on competition. Using algorithms to set rent prices is a fairly new concept, but the Colorado bill and other efforts like it would shut down a practice that has not been properly studied.
Algorithmic pricing uses large data sets to set prices rather than having landlords set prices manually based on market data and intuition. In recent years there has been growing concern that businesses will conspire together and use algorithmic pricing to keep prices artificially high. This fear has recently manifested itself in the Department of Justice and Federal Trade Commission (FTC) issuing joint statements of interest regarding several lawsuits filed against businesses accused of using algorithmic pricing in a collusive manner. In March, the FTC released a statement on this issue, describing how companies could potentially connivingly hide behind algorithms. Accusations have recently been made against several major Las Vegas hotels and casinos.
While rent-setting algorithms have taken the blame for rising prices, there is scant evidence they are responsible. Roger Valdez from the Center for Housing Economics argues that the rise in rent prices is caused by other factors in the market and that algorithms react to these factors when they compile data to determine the optimal price. He notes that prices often decline when implementing these programs but not to the point of being unprofitable, challenging the idea that greedy landlords are using the programs to raise rent on tenants. The government’s habit of blaming algorithms distracts from the wider issues driving rent prices upwards.
The idea that companies participate in collusion simply by using algorithmic pricing is not as clear-cut as its critics would have people believe. While the FTC is correct in the principle that harmful conduct should be illegal when done by both humans and AI programs, it does not necessarily follow that algorithmic pricing is harmful or represents collusion. As currently understood in antitrust law, collusion requires proof of coordination between companies to fix prices. Tacit collusion can manifest itself through parallel conduct or companies responding to the market by adopting the same strategies. Arising accidentally, it has not typically been viewed as illegal since it does not involve an actual agreement between companies. To paraphrase the FTC, algorithms should not be considered suspect for actions that would be considered innocent when occurring.
The Colorado bill failed, but worries about the use of algorithms to set prices remains. Critics contend that they are being used to drive up prices in the various sectors where they are employed, but existing evidence does not support this notion nor the idea that they constitute collusion. Using technology as a scapegoat for problems plaguing consumers does nothing to solve the underlying issues.
Trey Price is a policy analyst with the American Consumer Institute, a nonprofit education and research organization. For more information about the Institute, visit us at www.TheAmericanConsumer.Org or follow us on X @ConsumerPal.