The Perils of Algorithmic Pricing

Some revenue management systems based on algorithms may lead to unintended collusion and antitrust violations.

- By Chris K. Anderson and Fredrik Ødegaard

FOR DECADES, HOTELS, AIRLINES, casinos, and other companies have used revenue management systems to help them set prices, maximize revenues, and gain competitive advantage.

Now, in a series of legal cases, plaintiffs have argued that some of those systems' pricing algorithms could be used to facilitate illegal price-fixing in violation of federal antitrust law.

Typically, collusion over pricing requires explicit coordination among competitors, the kind one might imagine occurring in the stereotypical smoke-filled room. What makes the recent lawsuits worth paying attention to is the idea, expressed by federal regulators, that the use of pricing algorithms can lead to collusion without such overt agreements — and even if companies didn't intend to collude. If this view of collusion prevails, it could pave the way for even more antitrust lawsuits over algorithmic pricing.

In this article, we want to highlight the possible antitrust risks posed by algorithmic pricing and provide an analytical framework for understanding how the algorithms use data and guide pricing decisions in ways that can lead to illegal collusion.

The Legal Cases Alleging Collusion