Courts Approving Algorithmic Pricing Without Explicit Agreement Ignore Reality

Yet again, a federal court has embraced sponsored research and advocacy to legitimize an obvious case of implicit collusion that results in higher prices for consumers. See  https://business.cch.com/ald/GibsonvCendynGroupLLC8182025.pdf.  In the 9^th Circuit’s rationale, if any and all hotels in Las Vegas use the same software to determine profit maximizing rates, antitrust law is not violated, because each hotel owner voluntarily opted to use the software and made no commitment to comply with its pricing recommendation.

In the real world, ventures would rather not devote sleepless afternoons enhancing consumers’ value proposition, if an expedient and less profit risky alternative exists.  This used to be called “conscious parallelism,” a horizontal restraint of trade when competitors collude.

Collusion can occur outside of smoke-filled room occupied by competitors.  The algorithm makes the calculation, and the competitors buy into the premise that higher prices will not encourage market entry and greater supply, which typically would create downward pressure on prices.

All Las Vegas hotels, wireless carriers, airlines, et al cannot possibly have the same operating costs, so that they all are bound to accept the same market-driven price, so-called price taking.  Until algorithmic pricing became the go-to strategy, a wider range of prices typically arose. Now, it’s easier and more profitable for just about every hotel to tack on a resort, amenity, or destination fee, in addition to items like parking that used to be free or bundled in the base rate.

Why should Southwest Airlines offer free baggage, open seating and other components that can be separately priced by an algorithm?  For that matter, why have a publicly available rate for carriage when an algorithm can “size up” individual potential passengers and determine a customized rate based on calculated demand and price elasticity?

Why should TMobile offer anything cheaper and innovative when a higher price umbrella offers higher profits?

Where have all the marketplace mavericks gone?  It looks like shopping for algorithms and clever antitrust lawyers and economists.            

Raising Consumer Rates with Sneaky Unbundling

           With talk about how a la carte pricing of video can reduce consumer costs, I offer a rebuttal.  First video consumers should understand that if they select the most expensive networks, such as ESPN (at about $6.04 a month), they may not see a significantly lower out of pocket cost despite the sizeable reduction in available channels.

            But there is a more important factor that most consumers and the media do not understand.  Ventures like Comcast can reduce or eliminate their financial harm in subscriber “cord shaving” by increasing billing line items and by raising the cost of a “naked” broadband subscription having no additional video service.

            Despite having to be on its best behavior as the FCC considers the proposal to acquire Time Warner, Comcast inserted a new line item ostensibly to help recover its cost of retransmitting broadcast television channels.  Of course basic cable rates already cover this costs, because broadcast signals constitute the vast majority of the available channels in this tier.  In my market Comcast just DOUBLED the rate even though it surely did not incur a doubling of its costs.

            Comcast also increases the broadband subscription price when customers don’t also take a video service.

 

            By inserting various billing line items, Comcast and other cable companies want consumers to think the costs are a mere pass through.  Many are not a tax or government imposed fee and in a competitive marketplace a venture might have to absorb such costs.

            The most egregious example of billing line item abuse comes from the electric utility serving central Pennsylvania.  West Penn Power charges me for a smart meter I do not yet have.  But the most obnoxious charge is a “Consumer Education Charge” which the company defines as “a monthly charge for ongoing consumer education concerning your bill, shopping for electricity, energy efficiency and conservation.” It’s annual $6 tuition charge for something they probably don’t want me to know about in the first place.  So why not charge consumer for having to tell them about electricity conservation. 

          Clever!