The U.S. Justice Department (DOJ) and the Federal Trade Commission (FTC) are advancing two major antitrust cases that will have significant implications for the American public.
The DOJ, joined by eight states, announced Aug. 23 that it was suing RealPage Inc. for an “unlawful scheme to decrease competition among landlords in apartment pricing and to monopolize the market for commercial revenue management software that landlords use to price apartments.” This case could have economywide ramifications for businesses’ use of algorithms to set prices.
The FTC’s effort to block the $24.6 billion merger of supermarket chains Kroger and Albertsons (joined by nine states) ramped up with the Aug. 26 start of a three-week federal district court trial in Los Angeles that could temporarily halt the merger. The resolution of this case could have large implications for the state of retail-grocery competition.
US v RealPage Inc
The DOJ complaint
RealPage is a software producer. The DOJ complaint alleges that RealPage contracts with competing landlords who agree to share with RealPage nonpublic, competitively sensitive information about their apartment rental rates and other lease terms to train and run RealPage’s algorithmic-pricing software. This software then generates recommendations for participating landlords—including on apartment-rental pricing and other terms—based on their and their rivals’ competitively sensitive information.
The complaint further asserts that, in a free market, these landlords would otherwise compete independently to attract renters, based on pricing, discounts, concessions, lease terms, and other dimensions of apartment leasing. RealPage also allegedly uses this scheme and its substantial data trove to maintain a monopoly in the market for commercial revenue-management software.
The complaint seeks to end RealPage’s alleged illegal conduct and restore competition for the benefit of renters in states across the country.
Does RealPage involve illegal price fixing?
U.S. antitrust law forbids agreements among competitors to set or “fix” prices. It also condemns “hub and spoke” agreements, whereby a third party “hub” (in this case, the software producer RealPage) facilitates coordination on price among competitor “spokes” (landlords).
But did RealPage actually collude with landlords to raise rents, as the DOJ charges? Some antitrust experts point out potential problems with this theory. According to Jay Ezrielev, former economic adviser to FTC Chairman Joseph Simons:
DOJ is trying to argue that firms using a common third-party vendor are engaging in a concerted action to implement a price-fixing conspiracy even if there is no agreement among them, tacit or explicit, to manipulate pricing.
Indeed, there is no allegation that the firms know if their rivals are complying with a recommended algorithmic price. Moreover, each firm is free to accept or reject a RealPage recommendation, based on its own perceived self-interest. In the 2007 Twombly case, the U.S. Supreme Court held that parallel conduct is not sufficient to show an anticompetitive agreement if it could be explained as being in each competitor’s independent self-interest.
Ezrielev notes that “[c]onsidering the remarkably low threshold for identifying concerted action, the DOJ’s analysis is likely to find concerted action even when a price-fixing conspiracy is implausible.” Syracuse University’s Subha Ghosh also expresses doubts that the DOJ’s theory is sufficient to establish an illegal price-fixing agreement.
Cases like RealPage threaten to chill the beneficial use of pricing algorithms that allow firms to adjust more swiftly to changing market conditions by pricing more efficiently. The fact that a particular algorithmic software package is favored by many firms in an industry may merely indicate that the package is widely seen as superior. Disincentivizing individual reliance on a favored business tool undermines, rather than promotes, competition.
FTC v Kroger and Albertsons
The Kroger and Albertsons court challenge comes at a time when Vice President Kamala Harris has, as part of her campaign for the White House, called for a federal ban on alleged “price gouging” by the food and grocery industries.
The FTC filed suit against this merger in February, claiming that it would raise prices for consumers. The FTC’s complaint also said that the merged firm’s unionized employees would incur harm, due to their loss of the collective-bargaining leverage they previously enjoyed in pitting Kroger and Albertsons against each other.
The ongoing trial in Portland, Oregon, will determine whether the court agrees to temporarily enjoin (halt) the merger. That decision could be appealed in federal court. Whatever the ultimate result, the FTC could still challenge the merger in its in-house administrative tribunal. Thus, a final decision on the merger may take time. It is also possible that litigation delays could lead Kroger and Albertson’s to abandon the merger.
The FTC faces several major challenges in making its case.
First, the FTC narrowly defines the “relevant market” affected by the merger as merely involving supermarkets. This definition ignores the rising competition from superstores (e.g., Walmart and Costco), specialized stores (e.g., Aldi, Trader Joe, and Whole Foods), and online sellers (Amazon), which account for a growing portion of grocery sales. If it rejects the FTC’s market definition, the court could find that competition is not seriously threatened.
Second, the FTC rejected the merging parties’ offer to deal with competitive overlaps in local markets by selling 579 stores to C&S Wholesale Grocers, an established company. The FTC will argue that C&S has insufficient experience in retail-grocery sales to successfully run the stores, and will cite failed grocery divestitures involving other firms in prior mergers.
Kroger points to assurances that “no stores will close as a result of the merger and that all frontline associates will remain employed, all existing collective bargaining agreements will continue, and associates will continue to receive industry-leading health care and pension benefits alongside bargained-for wages.” The judge’s view of the case may turn on how she views the proposed divestiture package.
Third, the FTC’s theory of harm in a “unionized labor market” due to loss of leverage is problematic. The Supreme Court has stressed that antitrust is concerned with consumer welfare. If anything, a reduction in “union clout” might reduce labor costs, and lower consumer prices, thereby benefiting consumers. Furthermore, “workers have a wide range of alternative employment options – both in and out of the retail sector.” The judge could, however, halt the merger, even if she rejects the labor-market argument, by finding that the tie-up would substantially reduce competition and harm shoppers.
Fourth, the merging parties point to significant efficiencies. Indeed, “Kroger says it will invest in lower prices, capital improvements and associate wages and benefits at Albertsons stores across the country – specifically, Kroger will invest $1 billion dollars in lowering prices at Albertsons stores.” Depending on the evidence presented, the judge may weigh these factors heavily in determining whether the proposed merger likely will be anticompetitive.
In sum, the FTC faces significant challenges in seeking to halt the Kroger-Albertsons tie-up. Nevertheless, it is impossible to predict the outcome of the trial, which will turn on the judge’s reading of the evidence. A win for the FTC could discourage other supermarkets from seeking mergers to obtain efficiencies. This might weaken supermarkets’ competitive hand vis-à-vis huge superstores and online merchants.
What Do These Cases Foretell?
While they involve different industries and antitrust issues, the RealPage and Kroger/Albertsons cases both reveal an aggressive federal effort to “push the legal envelope” in bringing antitrust challenges. These challenges send a strong signal to firms that using new technologies or acquisitions to enhance business efficiency is no insurance against tough antitrust scrutiny.
Government officials understandably are concerned about high prices in today’s economy. Nevertheless, enforcers should employ caution before challenging conduct that plausibly is aimed at enhancing the quality or reducing the cost structure of commercial operations. Advancing high-risk antitrust theories in such situations may cause firms to “pull their competitive punches” in the future, to the ultimate detriment of consumer welfare and the American economy.
