E-commerce breeds “algorithmic-based pricing conspiracies”

A U.S. Department of Justice (DOJ) crack down on companies that collude to fix prices online highlights the role of new technologies in antitrust schemes as well as legal competitive activity.

“As more online marketplace activity occurs, both domestically or internationally, DOJ and other enforcers will be on the watch to see if there are any violations of antitrust laws,” said Mark Krotoski, a partner in Morgan Lewis’s litigation, antitrust, privacy and cybersecurity practices.

The most recent case involved Akil Kurji, owner and president of a company called Gennex Media. Kruji entered a guilty plea last week for conspiring to fix prices for customized promotional products – otherwise known as swag – sold online.

According to the DOJ, Kurji and his “co-conspirators” agreed to fix the prices of products sold from May 2014 until at least June 2016. The products included wristbands, lanyards, temporary tattoos and buttons.

Similar cases highlight the rising use of “algorithm-based pricing conspiracies,” and how federal prosecutors are enforcing antitrust laws in the digital age.

In January 2019 the U.S. District Court for the Northern District of California sentenced an e-retailer for colluding to fix prices on posters sold on Amazon.

The sentencing brought to a close the first prosecution by the antitrust division involving a computer algorithm-based pricing scheme.

In a recent blog post Krotoski, a former assistant chief in the DOJ’s antitrust division, explained how such schemes work.

“In the online marketplace, retailers offering the lowest prices typically appear at or near the top of search results. The algorithm would collect the price data of non-colluding sellers, identify the lowest price offered, and then set all of the colluding sellers’ prices slightly below that price, thereby slowing further price reductions by eliminating price competition between the colluding sellers.”

One key factor determining whether illegal activity takes place, Krotoski told FreightWaves, is that in the antitrust arena, you generally need an agreement to qualify as price-fixing – it’s the agreement between different companies, not the price setting, that constitutes collusion.

Many e-commerce companies use computer-based algorithms to unilaterally and legally adjust the cost of products they are selling, with the aim of responding to competitors’ price changes.

Encrypted communications further complicate online marketplace antitrust investigations. An agreement for conspiracy is needed, but that conspiracy can take place via different communication channels. It used to be face-to-face but increasingly revolves around encrypted channels.

According to the DOJ, Kurji and his co-conspirators communicated via social media platforms and encrypted messaging applications such as Facebook, Skype and Whatsapp.

Krotoski summarized the landscape for online retailers – “As technology emerges there can be many pro-competitive benefits,” he said. “But they need to be tailored because the DOJ is watching.”