Why digital cartelisation will be a new challenge for the anti-trust regime

ecommerce, ecommerce, industry, economy Proof of agreement is key in determining whether the conduct between competitors amounts to a cartel.

The digital revolution has led to a significant growth in companies’ ability to capture, store and analyse data of their customers and competitors to price products and services by taking into account a vast set of factors. With the help of a pricing algorithm, companies can track online prices; adjust them instantly to undercut prices offered by competitors; modify products being offered to consumers; or assist consumers to find the lowest price. Several recent antitrust proceedings point to the fact that competition regulators around the world have begun to look at possible anti-competitive effect of algorithms. There has been a considerable debate on both side of Atlantic on the way in which use of algorithms results in anti-competitive effects on the market. Recently, in a public seminar last month, the chairman of the Competition Commission of India (CCI) disclosed that the CCI is looking into the possibility of cartelisation by airlines and the use of algorithm for pricing of air tickets. The legal question which arises therefore is, whether and when behaviour of such companies would fall within the traditional of ‘cartel agreement’, so as to fall within the scope of the Indian competition law.

An algorithm enables digital decision-making, by converting digital inputs into digital outputs. Algorithms carry the potential of self-learning, amending rules depending on data gathered from past interactions/experiences. They are so pervasive in a modern society that they track, predict and influence how individuals behave in nearly all aspects of life. They are designed to achieve particular goals, and it is people who determine the goals and then choose or design the appropriate algorithms to achieve the goals.

The effective use of algorithms bears the potential of making companies efficient and reducing costs. Indeed, a core principle of free market competition is that firms adjust pricing in response to competitive conditions, including the prices charged by competitors. But algorithms also have the potential to “learn” collusive (cartel) behavior and aid in the implementation of cartel agreements. This is the digital equivalent of the smoke-filled room agreement: algorithms can be used intentionally to monitor, implement and police cartels. In this scenario, humans agree to collude and machines execute the collusion, acting as mere intermediaries or messengers. Renowned professors Ariel Ezrachi and Maurice E Stucke in their recent book foresee increasing use of algorithms on markets as the “end of competition as we know it”.

From a legal perspective, the use of algorithms to execute a cartel has the same effect as a cartel executed by humans: humans are guilty for agreeing to fix prices, while the computer merely facilitates the task which humans would otherwise have carried out. In a recent speech, European Commissioner for Competition, Margrethe Vestager asserted that “companies can’t escape responsibility for collusion by hiding behind a computer programme”.

There have already been few decisions that show how competition law, as it stands, can deal with algorithms: Poster and Frames cases in the UK and Topkins case in the United States. In these cases, competing online sellers adopted specific pricing algorithms and computer software to coordinate prices for posters they sold through Amazon.com. The algorithm coordinated changes to the prices for posters and ensured that the prices remained in conformity with the cartel agreement. Because of this conduct, consumers faced the same prices for the same products regardless of what seller they chose, thereby eliminating any price competition among the online sellers.

In hub-and-spoke type of cartels, the competing firms (the spokes) use a common third-party algorithm (as the hub) to determine pricing and react to changes in the market. Professors Ezrachi and Stucke, in their book, spoke of a scenario involving Uber to illustrate this. Uber drivers don’t compete among themselves over price; some drivers might be willing to offer you a discount, but Uber’s algorithm determines your base fare and when, where, and for how long to impose a surcharge. This by itself is legal. But, as the platform’s market power increases, this cluster of similar vertical agreements may create a classic hub-and-spoke conspiracy, wherein the algorithm developer, as the hub, helps orchestrate industry-wide collusion—leading to higher prices.

In 2016, the Lithuanian Competition Council imposed fines on Eturas (the hub) and 30 travel agencies (the spokes) for applying a common cap on discounts applicable to services provided through the Eturas online booking platform. The agencies used the travel booking system E-TURAS, developed by Eturas, to offer tour packages to customers. In August 2012, the administrator of this system sent a notice to the agents informing them that they should apply a maximum discount of 3% to their bookings. In addition, a technical restriction was introduced by Eturas to cap the discounts that could be entered in the booking system at 3%. The Court of Justice of the European Union made clear that travel agents who knew of the message could be presumed to have participated in a cartel, unless they publicly distanced themselves from the message.

Proof of agreement is key in determining whether the conduct between competitors amounts to a cartel. Under the competition law, an agreement can be a mere arrangement or understanding, notwithstanding that it is in writing, or legally binding. The competition law does not prevent companies from using information available in the market to “adapt to existing and anticipated conduct of their competitors”. This can best be explained by a recent example given by Maureen Ohlhausen, former chair of the US Federal Trade Commission at a conference, where she described two situations: One where the owners of two gas stations on opposite sides of a road signal price increases to each other by changing the prices on the board; and the other, where each of the gas station owners determines the price to charge using a computer programmed to take into account the price of the other. As long as the gas station owners are acting unilaterally, their actions are outside the scope of antitrust liability, but if they get together and agree on a course of action, they would be liable for price-fixing cartel.

If pricing practices are illegal when implemented offline, they are very likely to be illegal when implemented online as well. Companies should be on their toes when using software tools such as pricing or monitoring algorithms that check and adjust prices automatically. It is imperative that the CCI take cautious steps in assessing new market practices and ensuring that the appropriate distinctions are drawn between varying practices. Most commentators argue that the currently available competition law instruments are generally sufficient, but that they could be modernised (instead of being overhauled) and applied more efficiently. Hence, until the CCI run into “un-addressable” problems that require novel approaches there seems to be no basis for changing competition rules.

Source: Financial Express