The FTC needs a lesson in economics IRL

As I said, I’m not an economist. I’m not a lawyer either. But recent efforts by the Federal Trade Commission (FTC) to crack down on what they call “price fixing” are absurd on their face. Antitrust law is complex and cases can take many years to come to court. The FTC charges that property management platforms used by some rental housing providers extract data from the rental market, share it with their subscribers, and then suggest that the maximum rents that can be charged for rentals constitute “price fixing.” FTC lawyers may be great trial lawyers, but they are poor economists. Even I know that algorithms don’t set prices, markets do.

It is worth taking a look at the entry on the FTC website titled: Algorithmic pricing is still pricingwhich determines what the agency considers to be a problem. The whole thing sounds as if it was being said by someone looking over his glasses and with his hands on his hips, like a parent lecturing a child. And the arguments are strange to anyone who knows even a little about running a business and prices. “Your algorithm can’t do anything that would be illegal if done by a real person,” the FTC says. The allegation is that accessing data processed by the algorithm and using it to set prices constitutes, in a sense, collusion with other people using the software, regardless of whether they are in the same market or not, and whether they use that information or not.

“Consent to use an algorithm is consent. In algorithmic collusion, the pricing algorithm combines competitor data and spits out a suggested “maximum” rent for the premises, taking into account local conditions. Such software could allow owners to collude on prices through an algorithm, which the law does not allow IRL (sic).” If you can’t handle TLA, that means “in real life.” This is just a side note, but it’s fascinating to see how texting is creeping into government communications.

What if the housing provider shrugs at the algorithm’s recommendation and makes a different choice? “Some things in life may require perfection, but pricing arrangements are not one of them. Just because software recommends rather than specifies a price doesn’t mean it’s legal.” What? The logic of this is breathtaking. Here are some examples to show why.

If an investor is considering purchasing an apartment building and attends a meeting of other apartment providers and asks them, “Hey, I just bought a building at 4th and Main. I think the rents are maybe a little low, what do you think?” Is this collusion and price fixing?

If the same investor uses Zillow and Apartments.Com to check the prices of nearby apartments before purchasing a building, is this collusion and price fixing? Remember that the FTC says that simply using an algorithm to set prices is illegal, even if you don’t use it.

If that same investor looks at his balance sheet and notices that most of his colleagues after interviewing have more job vacancies and higher prices, and thinks that he can beat their prices by offering lower rents and bringing the vacancy rate to near zero, then does this mean pricing? Does the FTC’s theory of price fixing rule out the possibility that data sharing could cause prices to fall?

I asked Jeffrey May, attorney and editor-in-chief of Wolters Kluwer Legal and Reguly US, for his thoughts. May is responsible for the company’s antitrust policy, which helps ensure corporate compliance in many areas, and has spent much of his career tracking and analyzing antitrust issues and matters. May explains “price fixing” in an antitrust context this way:

‘In order to fix prices between competitors, there must be an express or tacit agreement to fix prices. Price fixing agreements are themselves illegal and are widely challenged in criminal proceedings. Exchanging price information is rather a gray area. This could make it easier to reach a tacit agreement in violation of the Sherman Act. The prosecutor’s office has more discretion here, and these types of cases are handled as civil suits.”

The lawsuit filed in federal court against Yardi, a property management platform, alleges that “the competing owners violated Section 1 of the Sherman 22 Act, 15 U.S.C. § 1 (“Section 1”), by, among other things, unlawfully consenting to “use Yardi pricing algorithms to artificially inflate rental prices for multi-family apartments.” Where’s the consensus? What about the price, which is “artificial”? Are prices like food, some organic and some not? Again, if I’m selling my house, car, or anything else, how does collecting data constitute a “contract” with other sellers? And does the FTC really believe that some rental property owners talking about their rents is a crime?

May argues that “sometimes the government sees information sharing as a step towards crossing the line into pricing agreement. In its civil lawsuit against RealPage, the government maintains that owners using RealPage’s software agreed with the company to provide nonpublic information to train the software in order to raise prices. RealPage also got caught up in the FTC’s, well, madness. What’s amazing is that the same group of people who are bringing criminal and civil charges against people for logging into a management platform are the same group of people who are advocating for rent control, which is when the government tries to “fix prices” through decree and force.

I would recall the FTC of the Roman Emperor Diocletian, who tried to “fix prices” with an edict in 301 AD. Despite the edict containing a strong enforcement tool, the death penalty, controls were widely violated. By AD 307, Diocletian had repealed this edict. Markets have a funny thing about it, and even the threat of death doesn’t stop people from seeking better prices, whether they’re buying or selling. When a product is scarce in a given market and demand is high, prices will increase. This motivates sellers to find ways lower their prices so they can compete. As Milton Friedman noted in his story about the pencil, it is impossible to identify the motives of individuals in a market until after the fact. Controlling prices is as impossible as trying to “artificially” schedule the tides.

“The magic of the pricing system,” Friedman explains, is “the impersonal action of prices.” If all the lemonade stands on the block conspired to all sell lemonade for a dollar, it would only take one stand to sell it for 90 cents if the owner thought he could still make a profit from it. This would motivate others to lower prices. The opposite situation may also happen, if costs and demand increase, their prices will also increase.

The legal challenge is purely for show purposes. There’s nothing wrong with that and it will get thrown out eventually, or at least it should. It’s a total waste of time. It assumes that diverse and highly competitive property owners will keep rents high if they have every incentive, if possible, to lower rents in order to attract more tenants. The algorithm is simply a faster way to determine what my competition is doing, rather than “setting” prices. Ultimately, the problem of rising rents is not about algorithms, but about lack of supply due to regulation and rising demand. This is how it works IRL, FTC.