The average American is a living, breathing fountainhead of data. Each day, we generate gobs of the stuff, from our web browsing history, Spotify selections, driving habits, Netflix surfing, credit card splurges and other electronic interactions.

Individually, these data create a unique digital portrait of you. Assembled across millions, the potential of enormous data sets is informing increasingly larger portions of U.S. business, especially when it comes to selling more effectively.

Airlines, movie theaters, gas stations, hotels, retailers – and numerous other businesses – benefit from algorithmic pricing, or the synthesis of huge data streams into the most effective revenue management to improve a company’s financial performance. 

“In the process of providing these services you learn more and more information and in the process you get really good at understanding markets and being able to identify market trends – and that’s a really good thing,” says Jay Ezrielev, a former economic adviser to the Federal Trade Commission and managing principal of Elevecon LLC, a consulting firm on antitrust and federal regulations.

Algorithmic pricing enables businesses to price more dynamically and respond to market conditions quickly, allowing for near real-time pricing adjustments.

“Dynamic pricing, which is essentially what algorithmic pricing achieves, is not inherently bad,” said Ed Rogers, an antitrust attorney with Ballard Spahr who has written about how algorithms intersect with antitrust law. “It’s created markets that didn’t exist before. It created secondary markets for theater and sports events and concerts. And that arguably is pro-consumer.”

Multifamily rental suits

Apartment managers use similar revenue management techniques to set rents. 

On Aug. 23, the Justice Department sued real estate software company RealPage, alleging that the company helps apartment managers coordinate pricing to raise rental rates for consumers by pooling proprietary data used in two of its revenue management systems, AI Revenue Management (AIRM) and YieldStar. 

RealPage acquired its third platform, called LRO, in 2017. The company plans to retire LRO and YieldStar later this year, according to the lawsuit.

The government alleges that RealPage’s customers – landlords in large metro areas – provide “nonpublic, material, and granular rental data” that includes rental prices from executed leases, lease terms and future occupancy. 

“RealPage’s revenue management software ingests on a daily basis nonpublic rental rates, future apartment availability, and changes in competitors’ rates and occupancy,” and then “feeds it to an algorithm” to produce a daily suggested rental price for each apartment, according to the lawsuit.

The government’s case rests largely on competitors’ tacit pooling via RealPage of sensitive, proprietary data and how that sharing affected consumers’ costs, Rogers said.

“It’s the idea that I’m sharing with you data that it is not in my economic interest to share with you, unless we have a deal,” Rogers told Legal Dive. “They don’t pay (RealPage) money for nothing, so they must be getting some benefit.”

The DOJ also accuses RealPage of violating Section 2 of the Sherman Act by operating as a monopolist in commercial revenue management software for multifamily housing rentals with a market share surpassing 80%, according to the lawsuit, which cited “internal documents and other information.”

“By amassing its massive reservoir of competitively sensitive data from competing landlords and the follow-on benefits that scale and its feedback effects provide in terms of blunting competition among landlords, RealPage’s conduct excludes commercial revenue management rivals from competing on the merits in a lawful manner,” according to the DOJ complaint.

RealPage has denied the DOJ claims and said it will “vigorously defend” itself. The company has also posted a six-page rebuttal to price-fixing accusations, which were lodged previously in private lawsuits that have been consolidated in a federal court in Nashville, Tenn.

“RealPage’s revenue management software is purposely built to be legally compliant, and we have a long history of working constructively with the DOJ to show that,” spokeswoman Jennifer Bowcock said in an email to Legal Dive. RealPage, based in suburban Dallas, said the Justice Department analyzed its products in 2017 with the LRO purchase and did not object to them.

On Monday, an attorney representing RealPage, Stephen Weissman of Gibson Dunn, said the company was open to considering changes in its software to address DOJ concerns. “We want to comply with the law," Weissman told USA Today. “We believe strongly in the legality of our product, but if there are solutions here that allow us to continue innovating and competing in the market, we’re open to those solutions.”

Rogers said it was interesting that RealPage “came out swinging” in the private civil suits but appears to have adopted a more conciliatory stance regarding the government case.

In December, U.S. District Judge Waverly Crenshaw Jr. ruled against RealPage’s motion to dismiss the private suits, noting that the company’s customers would not find it beneficial to share their data with RealPage unless they knew their competitors would do the same.

That case is now in mediation with a court-appointed mediator; several defendants have previously settled.

Fair to consumers?

The RealPage litigation could obscure some of the benefits of algorithmic pricing and its pro-consumer potential, Ezrielev and others say. Algorithms dramatically lower the cost and manual administrative burdens of gathering market data, efficiencies that could produce savings companies may partially pass to consumers.

“It’s a Big Data economy where you get good results by acquiring as much data as you can and harnessing as much of that data as you can,” Ezrielev said Wednesday. “What RealPage does is really universal in the economy.”

United Airlines, for example, has migrated to “continuous pricing” of fares as distribution technology and its understanding of consumer behaviors have advanced in recent years. Revenue-management algorithms react to near real-time market price data supplied by the internet and to United’s metrics for demand and other internal data. 

Once limited to only 26 fares per flight and the need to file fares exclusively through a distribution clearinghouse, airlines can now price tickets in real time and tailor their prices far more strategically.

For flight shoppers, continuous pricing means carriers like United and Lufthansa may lower the fare on a particular route by $2 or $3 if you declined to purchase the trip on a prior visit to their websites. Or that a fare increase might be higher or lower than it would have been in the era when airlines’ fare buckets were limited and they could file new fares only a few times per day, after having analyzed competitors’ previously filed fares.

Algorithms also “can expand the features on which owners and managers compete because they can compare far more variables relevant to pricing in far less time than human employees,” Rogers and two Ballard Spahr colleagues wrote in a recent article on such pricing.

Yet the algorithms also wield the power to coordinate prices today in ways far more sophisticated than cartels of an earlier age ever could. Plaintiffs lawyers, for example, have likened the alleged RealPage collusion as a new twist on the cigar-and-bourbon filled rooms of the Standard Oil monopoly days.

“It’s too early to say what the ultimate effect will be but this (DOJ lawsuit) could be interpreted as a step towards broader enforcement of the antitrust laws against algorithmic pricing and similar techniques,” Rogers said.

The RealPage case is an overly broad assault on algorithmic pricing and the reality of how the economy functions using large data collections, Ezrielev said Wednesday.

“That is what I find troubling with the RealPage case,” he said. “It is failing to put a limit around things that may somehow be anticompetitive and things that might be really efficient and driving innovation.

“I think the challenge here is what exactly is collusion? What is it exactly that is anti-competitive or somehow limiting competition? The challenge with these Section 1 cases, especially when it comes to things like algorithmic pricing, is that it’s very difficult” to define through case law what constitutes anti-competitive behavior, Ezrielev said.

What should companies do?

Algorithmic pricing comes with potential legal risks, “especially the use of proprietary information from competitors to set prices,” the Ballard Spahr attorneys wrote. “Firms should consider revising compliance policies, providing clearer direction to employees involved in pricing and competitive analysis, and staying current with legal developments.”

Ezrielev predicts that courts will need to decide exactly how laws on price-fixing apply to situations where large sets of aggregated data are used to determine real-time pricing. The case could also lead to “thousands and thousands” of lawsuits in numerous other industries, he said.

“I think the RealPage case is really opening a Pandora’s Box because we’re going to have to figure out how to deal with this issue of algorithm pricing,” Ezrielev said. “Because the kinds of issues that are happening, that are being attacked in RealPage, they’re all across the economy.”