DOJ’s flawed case against AI’s incredible rent machine

In Tom Smith and The Incredible Bread Machine, the famous political poem about an inventor at first hailed for his machine that slashes the price of bread and then villainized as a rapacious profiteer, one of the most remembered lines centers on the word “collusion.”

After the antitrust bureaucrats explain to bread machine inventor Smith that “the rule of law in complex times has proved itself deficient,” they warn Smith not to “gouge” by charging “more than the rest,” or engage in “unfair competition” by charging less. They then add to that edict their “second point”:

“To help avoid confusion, Don’t try to charge the same amount: That would be collusion!”

Based on a recent antitrust action from the Department of Justice, a new verse might have to be added to capture the new madness of antitrust policy. Now, not just charging the same price, but merely using the same AI software, can be considered “collusion.”

In its lawsuit with 8 state attorneys general against the real estate software company RealPage, the DOJ charges that RealPage’s AI-utilizing programs enable price fixing by landlords who utilize it. A DOJ press release characterized the company as putting forth an “unlawful scheme to decrease competition among landlords in apartment pricing.” 

Supporters of the lawsuit accuse RealPage and other AI software firms of enabling what they call “algorithmic collusion.” In an Atlantic article entitled “We’re Entering An AI Price-Fixing Dystopia,” writer Roge Karma concedes that while rental market software does not enable “getting together with your rivals and agreeing not to compete on price,” he argues it can foment collusion “if enough landlords use it.” According to Roge, the reason this would be collusion is that “the result could look the same as a traditional price-fixing cartel: lockstep price increases instead of price competition, no secret handshake or clandestine meeting needed.”

Yet if using the same software to help decide prices to charge or to pay is the new “collusion,” then to paraphrase a remark associated with an infamous politician, we’re all colluders now.  As veteran business journalist Robert Freedman writes in LegalDive, landlords using RealPage “have no contact with each other or know each other’s identity; they’re unaware of the commercial terms of dealings between the vendor and other firms; they don’t know whether others are complying with the alleged price-fixing scheme; they’re free to deviate from what the algorithm recommends if they want; and there’s no evidence to suggest each firm isn’t simply acting in its own self interest.”

Freedman quotes Jay Ezrielev, former economic advisor from 2018 to 2021 to then-Federal Trade Commission Chairman Joseph Simons, making this point about the precedent the DOJ lawsuit is setting for common usages of pricing software in business. “Although the DOJ is targeting rental markets, the DOJ’s legal theory has broader implications,” says Ezrielev. “Applied more broadly, the theory would raise considerable obstacles for the commercial use of algorithms, proprietary data, and artificial intelligence, resulting in significant harm to innovation and efficient operation of markets.”

And it is not just businesses that use algorithmic platforms and types of AI such as machine learning to find the best deal. Consumer travel sites such as Priceline, for instance, help consumers navigate to a lower price through AI and algorithms. “Priceline’s proprietary machine learning algorithms analyze historical booking data and customer preferences to predict future travel patterns, enabling the company to optimize its Express Deals offerings and maximize customer satisfaction,” notes the travel web site Mighty Travels Premium.

Will the DOJ next accuse consumers using Priceline of “price fixing” for using the same data and algorithms? Let’s not give the antitrust bureaucrats there any bright ideas!

Despite frequent accusations of enabling “rent gouging” from critics of RealPage, there is little evidence that the software by itself is leading to rent hikes. As the popular economics blog Truth on the Market notes, a pricing platform “can help the market to clear more quickly by recommending higher or lower prices.”

The big issue for rental rates is supply, and regulatory barriers to creating more supply. The availability of RealPage and other real estate AI software has not stopped rents from decreasing in cities where housing supply is growing steadily under rational state and local regulatory regimes. As my CEI colleague Ryan Young has pointed out: “Austin, Texas is allowing new housing to be built at ten times the rate as in San Francisco. As a result, Austin rents are falling 7 percent per year, while Bay area rents continue to soar.”

Both software bans and rent control policies have been introduced as populist responses to rent hikes mainly stemming from shortages in the housing markets. Yet the result of both policies will be more scarcity, as landlords lose incentives to build and maintain housing.

As author and RealClearMarkets editor John Tamny observes, building apartments and other housing  is a risky endeavor. “With housing of any kind,” he points out, “there’s enormous risk involved in bringing the product to market given the substantial capital costs associated with constructing houses and apartments, and putting them on the market.”

He adds that RealPage is providing an “essential service,” as “the software is the provider of pricing information that makes it possible for competition to enter the space.” Tamny notes that “without the clarity” provided by RealPage and other housing-related technology, the risk of building and maintaining rental housing would be too great for many landlords, and “this would reflect in reduced supply at higher prices.”

In sum, the products of RealPage and other real estate software firms can be said to be “incredible rent machines” that enable a bigger rental housing supply. Let’s not put shackles on today’s Tom Smiths building those machines!