How A Little-Known Company Used An Algorithm To Raise Rents On Millions Of Americans
“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices,” wrote Adam Smith in his classic, The Wealth of Nations. It is a lesson we seem to need to learn over and over again.
It is also at the heart of a recent suit brought by the Justice Department, along with eight state Attorneys General, against a little known real estate software company named RealPage. It may seem obscure, but its ripple effects are bound to be far reaching, affecting not only regulation and competition, but the distinctions we make between machine and man.
How did an obscure company, that few ever heard of, manage to drive up rent for millions of Americans? At what point does an algorithm become collusive? Is there any real difference between sharing information in some back room or on a server mediated by an algorithm? These are all questions we need to answer in an increasingly algorithmically-driven world.
How We Got Here
The Gilded Age in America that took place at the end of the 19th century was marked by rapid industrialization and amassing of great wealth. As railroads stretched across the continent, the fortunes of the Rockefellers, Vanderbilts, Carnegies and Morgans were built. Much like Elon Musk and Bill Gates today, the power of these men rivaled governments themselves.
It was also an era of great financial instability. The Panic of 1873 and the Panic of 1893 devastated a populace already at the mercy of the avaricious tycoons who dominated the marketplace. The Sherman Antitrust Act of 1890 and the Clayton Antitrust Act of 1914 were designed to rebalance the scales and bring competition back to the market.
For the most part these were successful. The breakups of companies like Standard Oil and AT&T helped protect consumers and unleash innovation. Antitrust action against IBM paved the way for the era of the PC and regulatory action against Microsoft helped promote competition on the Internet. American markets were the most competitive in the world.
Still, competition is an imprecise term. In 1978, the legal scholar Robert Bork published the Antitrust Paradox in which he argued against the rule of reason standard for antitrust cases that required judges to use their discretion when deciding what constitutes a practice that “unreasonably” restricts trade. In its place, he suggested a consumer welfare standard, which would only take into account whether the consumer was harmed by higher prices.
Bork’s supporters argued that there was a need for an objective standard and that regulators shouldn’t have the power to make subjective judgments. Yet by shifting the burden wholly to the government, it made it much harder to bring antitrust cases and enforce the laws designed to preserve competitive markets.
The Costs Of Undermining Competition
As efforts from activist groups like the Federalist Society put more judges in favor of the consumer welfare standard on the bench, antitrust regulation wavered. When George W. Bush won the presidency in 2000, his administration moved quickly to settle the Microsoft case on fairly lenient terms. It would be the last major antitrust suit brought until recently.
The next 20 years became a period of largely laissez faire policies. The Bush administration was not interested in bringing action against corporations. The aftermath of the Great Recession made it politically untenable for the Obama administration to regulate business aggressively for much of his presidency and Donald Trump couldn’t have cared less.
The results have been clear. Despite the claims that new technologies such as the Internet would spur competition, an analysis by the Federal Reserve Bank found that the concentration of power in virtually all industries greatly increased in the 20 years between 1997 and 2017. Economic analysis found that businesses were able to use that power to increase prices while decreasing wages for workers.
Yet it wasn’t just consumers that were harmed. As established firms gained power, it became increasingly difficult for startups to gain traction and our economy became less dynamic and productive. A comprehensive report compiled by economist Jason Furman found that the weakened competitive environment led to a decline in productivity.
Perhaps most of all, the decrease in competitive pressures made the economy less resilient and more vulnerable to shocks. Consider the baby formula shortage in 2022, which by that point was dominated by just three companies. When one, Abbott, went offline due to lax quality standards, there weren’t enough suppliers to fill the gap and a major crisis ensued.
The Pendulum Swings – The New Brandeis Movement
The fundamental principle of Bork’s argument was that by protecting inefficient firms from their more efficient competitors, the government was harming consumers. That’s why he and his allies thought the burden of proof should be on the government to show that dominant firms were causing some harm before being allowed to intervene.
Yet as the consumer welfare standard became predominant, a New Brandeis Movement began to emerge, based on the famous Supreme Court Justice’s doctrine that corporate power in itself could be corrupting. In a now famous essay, Lina Kahn pointed out that Amazon has attained massive network power by making itself the central node in then American retail industry. Because Amazon controlled the platform and competed on it, the market could not be free.
It’s not just Amazon either. The Federal Reserve found that corporations have been increasing their power over the US economy in recent decades, leading to excessive market concentration in most industries. The evidence began to mount that as corporations became bigger, prices would go up as quality and innovation declined.
When the Biden administration came to power in 2021, it brought on all three leaders of the New Brandeis Movement, including Lina Kahn and the FTC, Jonathan Kantor to head up the Antitrust division at the Department of Justice and Tim Wu at the White House. Within the first year, the administration issued an expansive executive order promoting competition and bright new suits against tech giants such as Meta and Google.
Yet it’s still not clear whether anything substantial has been accomplished. Antitrust cases take years to play out and corporations have the means to finance extensive appeals. Much like in 2000, another administration could easily come in and settle all the cases on terms favorable to the defendants. Yet probably the biggest question is whether century-old laws can still be effective in markets driven by 21st century technology.
Antitrust In A Digital World
Back in the Gilded Age of the 19th century, it was taken for granted that industrialists were all powerful. Men met in smoke-filled back rooms, traded information and, much like Adam Smith described, conspired against the public to raise prices and increase profits. Eventually, the public could bear no more, political pressure built, and legislation was passed to prevent collusive and predatory behavior.
As ProPublica described in an investigative article about RealPage’s “Yieldstar” software, companies are using algorithms to do essentially the same thing. As they point out, if we wouldn’t let “a guy named Bob,” collect and pool private information of market participants and then make pricing recommendations, then we shouldn’t let algorithms do it either.
The problems will only get more pervasive as we constantly feed information into artificial intelligence platforms like ChatGPT. As I wrote along with Josh Sutton five years ago in Harvard Business Review, we need algorithms that are explainable, auditable and transparent. Yet it seems like we’ve gone in the opposite direction.
Many would argue that, today, we are in a new Gilded Age, in which powerful industrialists, unbeholden to the rule of law, regularly engage in predatory behavior, but their actions are often shielded from view by technology, buried in complexity. When they are called before congress, the people’s representatives seem lost, unable to penetrate technical jargon.
Yet as the RealPage case shows, the situation really isn’t that complicated. The burden of proof should be on corporations to show that they aren’t screwing us, not the other way around. The standards of explainability, audibility and transparence aren’t unreasonably onerous. We should demand they be met.
Greg Satell is Co-Founder of ChangeOS, a transformation & change advisory, an international keynote speaker, host of the Changemaker Mindset podcast, bestselling author of Cascades: How to Create a Movement that Drives Transformational Change and Mapping Innovation, as well as over 50 articles in Harvard Business Review. You can learn more about Greg on his website, GregSatell.com, follow him on Twitter @DigitalTonto, his YouTube Channel and connect on LinkedIn.
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