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Policing the digital cartels | Financial Times

President Barack Obama and leading Democrats such as Senator Elizabeth Warren have expressed concerns about a broader decline in competition in the US economy. Last April, Mr Obama’s Council of Economic Advisors released a report that found growing market share concentration in industries such as transportation, retail trade and insurance, which it blamed for slowing growth in living standards.

The White House also said new regulations may be needed to address specific antitrust concerns in the digital economy. “Price transparency can in some settings facilitate tacit collusion by enabling firms to see what other firms are charging, and hence easily detect any deviation from agreed-upon high prices,” the report said.

Smoke-filled rooms

The classic example of industrial-era price fixing dates back to a series of dinners hosted amid the 1907 financial panic by Elbert Gary, then chairman of US Steel.

In a narrow first-floor ballroom at New York’s Waldorf Astoria Hotel, men controlling 90 per cent of the nation’s steel output revealed to each other their respective wage rates, prices and “all information concerning their business”, one attendee recalled. Gary’s aim was to stabilise falling prices. The government later sued, saying that the dinner talks — the first of several over a four-year period — showed that US Steel was an illegal monopoly.

Algorithms render obsolete the need for such face-to-face plotting. Pricing tools scour the internet for competitors’ prices, prowl proprietary databases for relevant historical demand data, analyse digitised information and arrive at pricing solutions within milliseconds — far faster than any flesh-and-blood merchant could.

That should, in theory, result in lower prices and wider consumer choice. Algorithms raise antitrust concerns only in certain circumstances, such as when they are designed explicitly to facilitate collusion or parallel pricing moves by competitors.

“If the goal is to do bad things, automated systems and algorithms could help you do bad things faster,” says John Salch, technology leader with PROS Holdings Inc, a Houston-based pricing software company.

He does not believe such strategies are sustainable. But last year, German regulators warned that the competition-inhibiting effects of sophisticated algorithms could be difficult to prosecute. A report by the UK’s House of Lords last year, citing “the potential for anti-competitive behaviours” and “new forms of collusion”, called for the European Commission to conduct additional research on algorithms’ effects on competition.

“It’s an immediate concern,” says Mr Stucke, who along with his co-author Ariel Ezrachi of Oxford university, briefed antitrust officials in Washington and Brussels late last year. “We may have an anti-competitive result without necessarily having an antitrust fix.”

As an example, he cites a German software application that tracks petrol-pump prices. Preliminary results suggest that the app discourages price-cutting by retailers, keeping prices higher than they otherwise would have been. As the algorithm instantly detects a petrol station price cut, allowing competitors to match the new price before consumers can shift to the discounter, there is no incentive for any vendor to cut in the first place.

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Policing the digital cartels.