Price Algorithms as a Compliance Risk
Price algorithms, meaning software that searches the internet for prices and adjusts own online prices in accordance, are increasingly coming into the focus of competition authorities. Due to a lack of decision-making practice, however, the relevant legal issues are still open, which is why the associated competition law risks are all the greater.
The relevant competition law provision is the prohibition of cartels in Article 101 TFEU / § 1 Act against Restraints of Competition. This provision prohibits agreements and concerted practices between undertakings which have as their object or effect the restriction of competition. A mere „contact“ between companies may be sufficient to be deemed an infringement of the prohibition of cartels. For example, if one company unilaterally communicates competitively sensitive information to another company and the other company does not expressly distance itself from it. Nor does a coordination have to take place directly between the parties; it is sufficient to deliberately and intentionally communicate via a third party (so-called hub-and-spoke constellations). These cases must be distinguished from “parallel conduct” which is permitted under competition law, i.e. when companies autonomously adapt to the behaviour of their competitors on the basis of their own market observations.
Against this background, the use of price algorithms can be divided into three main case groups:
The first group of cases, for which decision-making practice already exists, concerns cases in which agreements infringing competition law are made elsewhere and the price algorithms merely serve to enforce it. An example of this is the Eturas ruling of the ECJ (ECJ, judgment of 21.1.2016, C-74/14). In this case, the administrator of an online travel booking system informed the participating travel agencies of an upper limit which was to be observed for price reductions. When this limit was exceeded, a price adjustment was made automatically by the online platform. The ECJ ruled that any travel agencies which did not openly dissociate themselves from this notice or report it to the competition authorities infringed the prohibition of cartels. Another US and UK case concerned the sale of posters via Amazon (DoJ, Case US v. Daniel William Aston and Trod Limited; CMA, 12.8.2016, Case 50228 – Online sales of posters and frames). In this case, the parties had decided to implement their price-fixing agreements by means of price adjustment software. In a similar vein, the European Commission decided that the use of price algorithms by online retailers exacerbated the effects of fixing online retail prices by manufacturers of consumer electronics (European Commission, Cases AT.40465 (Asus), AT. 40469 (Denon & Marantz), AT. 40181 (Philips), AT 40182 (Pioneer)).
A second group concerns cases where companies deliberately and intentionally use the same price algorithms as their competitors to coordinate prices. A prominent case in the US is the case against Travis Kalanick, former CEO and co-founder of Uber (S.D.N.Y., 31.3.2016, 174 F.Supp.3d 817 – Meyer v. Kalanick). Uber drivers are obliged to use the Uber app and the associated price algorithm. The drivers report their respective availability on the app, which calculates the trip price on this basis, taking into account any shortage of availability. While, in the Uber case, it could be decisive whether the drivers are perceived as „undertakings“ or rather as employees to whom competition law does not apply, similar constellations need an in-depth assessment. What is critically decisive is a clear demarcation from the third case group, the permissible parallel conduct.
From our point of view, the use of price algorithms is a classical hub-and-spoke constellation. It therefore requires intent to coordinate with other companies using these algorithms in order to infringe the prohibition of cartels. According to this, parallel behaviour is permissible if companies use price algorithms without knowing that their competitors also use the same algorithms. If the respective user can individually adapt the software used and thus pursue an autonomous pricing strategy, a concerted practice cannot be assumed either. This is all the more true when companies use price algorithms that they themselves have developed. This is merely an autonomous adaptation to the observed market behaviour of competitors. However, it remains to be seen whether the competition authorities and courts will concur with this view.
Finally, it should be noted that price algorithms may not only be relevant under competition law in the context of the prohibition of cartels, but also in the context of the prohibition of abuse of a dominant market position. For example, the Bundeskartellamt investigated Lufthansa for allegedly excessive prices following the insolvency of Air Berlin (but in the end did not initiate formal proceedings against Lufthansa). The President of the Bundeskartellamt, Andreas Mundt, countered, when Lufthansa pointed to automatic pricing that was generated by an algorithm, with the statement that „such algorithms“ were not „written by the dear Lord above“.