Algorithmic Price Fixing: Understanding the Basics

Algorithmic price fixing is a modern twist on an old problem: companies colluding to set prices at an artificially high level. With the rise of artificial intelligence and automated pricing tools, concerns have grown that algorithms could facilitate or even automate collusion, making it harder for regulators to detect and prevent anti-competitive behavior.

What is Algorithmic Price Fixing?

Traditionally, price fixing involved direct communication between competitors to agree on prices. Today, companies can use sophisticated algorithms to monitor competitors' prices and adjust their own in real time. In some cases, these algorithms can be programmed to match or undercut competitors, but they can also be designed to maintain higher prices across the market without explicit communication between companies.

How do pricing algorithms work?

Pricing algorithms use data—such as competitor prices, demand, inventory levels, and market trends—to automatically set or adjust prices. These algorithms can be simple, like matching the lowest price in the market, or complex, using machine learning to predict optimal prices that maximize profit. The concern arises when multiple companies use similar algorithms that end up coordinating prices, either intentionally or unintentionally.

Is Algorithmic Price Fixing Illegal?

Price fixing is illegal under antitrust laws in most countries, including the United States and the European Union. However, proving that algorithmic pricing constitutes illegal collusion can be challenging, especially if there is no direct communication between companies. Regulators are increasingly scrutinizing the use of pricing algorithms and considering how to update laws to address these new risks.

What is the algorithmic price fixing bill?

In response to growing concerns, lawmakers in some jurisdictions have proposed bills specifically targeting algorithmic price fixing. These bills aim to clarify that using algorithms to coordinate prices is illegal, even if there is no explicit agreement between companies. The goal is to close loopholes in existing antitrust laws and give regulators more tools to combat anti-competitive behavior in the digital age.

Examples of Algorithmic Price Fixing

One notable case involved online sellers of posters on Amazon who used the same pricing software to automatically adjust their prices. The software was programmed to avoid undercutting each other, resulting in higher prices for consumers. Regulators in the US and UK have investigated similar cases in various industries, from e-books to hotel bookings.

What is a famous example of price fixing?

Conclusion

Algorithmic price fixing represents a significant challenge for regulators and businesses alike. As technology evolves, so too must the laws and enforcement strategies designed to protect consumers and ensure fair competition.