The Texas company orchestrating what amounts to a nationwide apartment cartel

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Illegal price fixing used to require a lot of work. In the mid-1990s, to fix the price of the animal feed additive lysine, executives of some of the world’s biggest agribusinesses had to spend hours on airplanes flying to resorts where they spent days in conference rooms determining how much lysine each company could sell and at what price.

Now there’s an app for things like that.

The Justice Department alleged in a civil antitrust lawsuit filed Aug. 23 that a Texas company called RealPage is orchestrating what amounts to a nationwide apartment cartel by persuading major landlords to use its software to set prices for millions of apartments across the country. RealPage markets its software by boasting that it increases rents by 3% to 7%.

The case is important because it highlights the growing use of algorithms to set prices — and the potential for companies that are supposed to be competing to instead coordinate at the expense of their customers by using the same price-setting formulas. The suit is part of a broader effort by the nation’s antitrust enforcers to catch up with the methods that modern corporations are using to squeeze their customers — in this case, by increasing the price of housing, the most expensive part of American life.

“We are seeing these kinds of technologies emerge throughout our economy,” Jonathan Kanter, the assistant attorney general for antitrust, said in an interview. Technology, he said, “took something that may have been inherently difficult to do, in terms of putting a cartel together, and actually is making it much easier and more effective.”

Algorithms are changing enforcement, too. In the 1990s, the government needed an informant — or, in Hollywood’s retelling, “The Informant!” — to break up the lysine cartel. The RealPage complaint, by contrast, is substantially based on the work of a recently created team of Justice Department computer analysts who teased out the workings of the company’s algorithms by painstakingly examining its code.

What the team found, the government says, is that RealPage calculates target prices for individual apartments by using proprietary data from its clients and then urges clients to use those prices by arguing that if everyone cooperates, everyone wins.

The complaint quotes a RealPage executive explaining, “There is greater good in everybody succeeding versus essentially trying to compete against one another in a way that actually keeps the entire industry down.” This may be true, insofar as one is interested in the greater good of landlords. Society as a whole, however, benefits more when companies are forced to participate in vigorous competition. Their pain is our gain. In the apartment business, that means rents would rise more slowly — or even go down.

RealPage, for its part, says its software was “purposely built to be legally compliant.” A key part of the company’s argument is that it provides advice to landlords, who are not required to accept its recommendations. The company sees its role as advising landlords that an apartment could be rented at a higher price, rather than making it possible for them to do so by coordinating with other landlords.

The tech industry has made a lot of money in recent decades by convincing courts and regulators that business conducted by algorithm should not be subject to established rules and restrictions. Uber, for example, has built an empire on the assertion that an algorithmic taxi dispatch service is different from a taxi dispatch service. Google has won a string of legal victories, including a Supreme Court case last year, by arguing that algorithmic search results are different from editorial choices made by a human.

The RealPage case is an important reassertion of the principle that an algorithm is just a way for people to make decisions — and that they remain responsible for those decisions.

This can be described as the “Guy Named Bob” rule.

In a 2017 speech, Maureen Ohlhausen, then the acting chair of the Federal Trade Commission, proposed that antitrust regulators should evaluate the use of computer formulas by replacing the word “algorithm” with “Bob.”

“Is it OK for a guy named Bob to collect confidential price strategy information from all the participants in a market, and then tell everybody how they should price? If it isn’t OK for a guy named Bob to do it, then it probably isn’t OK for an algorithm to do it either,” she said.

The rise of algorithms also hasn’t changed the basic reality that it’s easier to fix prices in concentrated markets. RealPage can orchestrate pricing because the ownership of large apartment buildings in major markets is increasingly dominated by the same handful of big national landlords. The District of Columbia, which has filed its own antitrust suit against RealPage, estimates 60% of the units in large apartment buildings in the city are managed by RealPage clients — and an astonishing 90% of such units in the metro area are.

One reason cartels historically are hard to maintain is that new companies can enter the market by underpricing the collaborators. But RealPage and its clients are sheltered from competition by the difficulty of building housing in big cities.

Back in the 1990s, a few years before the lysine case, the Justice Department accused eight of the nation’s largest airlines of cooperating to fix airfares. They agreed to stop. But today, there are only four big airlines, which makes it easy for carriers to coordinate prices without meeting in a hotel room or plugging into an algorithm.

RealPage’s success, built on the market dominance of the biggest landlords, should be regarded as evidence that they have accumulated too much power. Ending algorithmic price fixing is a necessary first step to check that power. But if the big landlords continue to expand, the result of the RealPage case won’t matter, either.

Binyamin Appelbaum is the lead writer on economics and business for the New York Times Editorial Board.