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.            

Maverick Capitulation: Why TMobile and Southwest Airlines Abandoned Their Core Values

     Once upon a time, TMobile prided itself as the “uncarrier” wireless company.  After acquiring Sprint, it quickly abandoned a strong commitment to innovate and enhance its value proposition.  See https://telefrieden.blogspot.com/2018/06/life-in-antitrust-wonderland-suspension.html; https://telefrieden.blogspot.com/2019/11/more-overstatements-about-lovefest.html.

          TMobile quickly realized that it did not have to spend sleepless afternoons competing with AT&T and Verizon.  The market had become so concentrated that TMobile could increase their profit margin through what antitrust experts call conscious parallelism: a go along, get along, strategy that comes close to collusion. Now, little differentiates the three national carriers aside from what “free” video streaming they offer high margin subscribers.

        Southwest Airlines, perhaps reluctantly, has followed the T Mobile strategy.  For many ears, the airline differentiated itself from the other large, legacy carriers, by offering lower fares, open seating without additional charge, and free carriage of two bags.  Eventually Southwest realized it did not have to offer the lowest rates for every route.  Recently, it announced the cancellation of open seating, disingenuously characterizing the decision as a revenue neutral response to consumer demand. See https://www.cnn.com/2024/07/26/business/southwest-boarding-history/index.html.

       Does anyone really believe Southwest will not monetize seat access just like the other carriers?  Southwest realized that it could eliminate this perk and convert seat access into a new profit center, just like the other airlines.  Why not make a bundle on decoupling air carriage from where a passenger sits.

         It is not rocket science to detect an obvious outcome: when markets concentrate, through mergers, acquisitions, barriers to market entry, and lax antitrust enforcement, the surviving businesses have little incentive to reduce rates and enhance the customer experience.  

          Because consumers have limited choices in airlines and wireless carriers, we cannot vote with our pocketbooks and take our business elsewhere when we suffer from bad—vary bad—customer care. 

          TMobile is not the fearless, iconoclastic uncarrier anymore and neither is Southwest. 

 

              

Self-serving Self-regulation

            In most transactions, my instincts favor market-driven outcomes.  Typically fair outcomes result when stakeholders act on competition-induced incentives.  But when and how do apparently competitive playing fields clearly tilted in favor of sellers?  Put another way, under what circumstances can and will competitors collude and agree not to spend sleepless afternoons competing?

            I often examine the wireless marketplace for lessons.  I part company with the party line that the U.S. marketplace is “vigorously competitive.”  Yes there are aspects of competition, but on closer examination virtually all of the pricing and service initiatives come from Sprint and T-Mobile when they decide not to join a single, consensus party line on service terms and conditions established by Verizon and AT&T.  For years all 4 of the top 4 national carriers offered pretty much the same rates and enforced the same rules.  Some of these rules imposed more significant restrictions on subscribers than anything the FCC would consider imposing.     Sure some of these restrictions might have technological justifications, e.g., spectrum scarcity and congestion concerns.  But most of them worked to lock in subscribers, raise the cost of service and restrain consumer sovereignty.  I cannot think of any legitimate reason a wireless carrier would have in prohibiting any of the so-called Carterfone freedoms available to wireline service subscribers including the right to use any FCC-certified handset, for any available service. 

            Restrictions on handset use and pricing decisions—embraced and enforced by all four national carriers—collectively accrued benefits.  For a single carrier to deviate from the deliberately shared consensus it would have to calculate what market share and revenues it might acquire offset by the likelihood that a relaxation would reduce revenues.  Consider a recent initiative by TMobile to offer a flat 20 cent per minute foreign roaming charge instead of country specific rates that can exceed $1.00 a minute.  One can see the sweet deal so-called competitors can achieve by implicitly agreeing not to deviate from extortionate roaming rates.  But if a market is “robustly competitive” how can obviously rip off rates persist in the marketplace?  Even after factoring the cost of date base interrogations and backhaul no one can justify as cost-based foreign roaming charges that exceed conventional domestic rates by 1000s of percentage points.

            So there exist instances where competitive, self-regulating ventures can agree not to compete.  TMobile becomes the maverick, party pooper, perhaps now that it realizes that the big payday of a merger will not happen.  But so many sponsored researchers swore that the merger would “enhance competition” and “serve consumers” no doubt enhanced by trip digit roaming margins.

The Dubious Rule of Three

            Some economists have asserted that markets can remain competitive even when mergers and consolidation reduces the number of major players to three.  Advocates for DOJ and FCC approval of the AT&T-TMobile merger invoked this “Rule.” I have expressed misgivings about economists establishing rules and treating them as unimpeachable.  Is three the optimal number that balances efficiency and scale on one hand and the potential for noncompetitiveness and consumer harm on the other hand?

            Perhaps three ventures can continue to compete robustly, particularly if one of the three refrains from the clear incentives to match prices and go easy on innovation.  AT&T and Verizon may compete on advertising, yet they seem to refrain from aggressive pricing.  Have you ever seen a wireless service sale?  From my perspective if AT&T had acquired TMobile consumers would suffer as the remaining Big Three would control about 90% of the market and have even less incentives to deviate from the profit maximizing consensus on rates, terms, and conditions for both handset and service.

            Now that TMobile has to stay in the marketplace the company has embraced the role of maverick and refused to go along with the consensus, a practice antitrust economists term “conscious parallelism.”  TMobile actually competes with the Big Two by offering lower prices, particularly for consumers who bring their own device (“BYOD”) thereby eliminating the need for a carrier subsidy.  The company offers lower rates—not just month-to-month service for BYOD subscribers.  In doing so TMobile has generated some clarity on the actual cost of those “free” handsets. 

            Consumers now have a choice between paying higher monthly rates for a two year term to pay handsomely for a subsidized handset, or to buy/lease the handset so that the monthly service rate drops, because it only covers wireless service.  That’s what I call competition, something that would not have occurred if the Rule of Three had applied.

Cable and Telephone Giants: Embracing, Extending and Extinguishing the Competition

           You may have heard that the major cable and telecom players have entered into joint venturing agreements that appear to have the effect of eliminating cable operators as wireless telecom competitors and reducing the zeal with which telecom players, such as Verizon, will pursue video ventures.  See http://tales-of-the-sausage-factory.wetmachine.com/my-insanely-long-field-guide-to-the-verizonspectrumcocox-deal/#more-2824.

           I marvel how something so transparently anticompetitive can be framed as economically efficient and of course job creating.  I believe the big lesson here is that when incumbents face destructive new technologies, they respond with a predictable playbook: embrace, extend, extinguish.  We're in the embrace mode now.  Isn't it wonderful that the Bellheads and Cableheads are thinking out of the box and embracing new technologies?  Of course the goal is to extend market dominance and to foreclose and eventually destroy competition.

            So is there anyone out there to perform the destructive technology role?  Sprint, Clearwire, Dish?  Or are we at the "game, set and match" conclusion at least for our lifetime?  At the very least before our very eye incumbents erect even higher barriers to market entry making competition that much more difficult to achieve.