Algorithms as Illegal Agreements

Michal Gal

Berkely Technology Law Journal

Gal, Michal, Algorithms as Illegal Agreements (May 2, 2018). Berkeley Technology Law Journal, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3171977

Abstract

Despite the increased transparency, connectivity, and search abilities that characterize the digital marketplace, the digital revolution has not always yielded the bargain prices that many consumers expected. What is going on? Some researchers suggest that one factor may be coordination between the algorithms used by suppliers to determine trade terms. Simple coordination-facilitating algorithms are already available off the shelf, and such coordination is only likely to become more commonplace in the near future. This is not surprising. If algorithms offer a legal way to overcome obstacles to profit-boosting coordination, and create a jointly profitable status quo in the market, why should suppliers not use them? In light of these developments, seeking solutions – both regulatory and market-driven – is timely and essential. While current research has largely focused on the concerns raised by algorithmic-facilitated coordination, this article takes the next step, asking to what extent current laws can be fitted to effectively deal with this phenomenon.

To meet this challenge, this article advances in three stages. The first part analyzes the effects of algorithms on the ability of competitors to coordinate their conduct. While this issue has been addressed by other researchers, this article seeks to contribute to the analysis by systematically charting the technological abilities of algorithms that may affect coordination in the digital ecosystem in which they operate. Special emphasis is placed on the fact that the algorithms is a “recipe for action”, which can be directly or indirectly observed by competitors. The second part explores the promises as well as the limits of market solutions. In particular, it considers the use of algorithms by consumers and off-the-grid transactions to counteract some of the effects of algorithmic-facilitated coordination by suppliers. The shortcomings of such market solutions lead to the third part, which focuses on the ability of existing legal tools to deal effectively with algorithmic-facilitated coordination, while not harming the efficiencies they bring about. The analysis explores three interconnected questions that stand at the basis of designing a welfare-enhancing policy: What exactly do we wish to prohibit, and can we spell this out clearly for market participants? What types of conduct are captured under the existing antitrust laws? And is there justification for widening the regulatory net beyond its current prohibitions in light of the changing nature of the marketplace? In particular, the article explores the application of the concepts of plus factors and facilitating practices to algorithms. The analysis refutes the Federal Trade Commission’s acting Chairwoman’s claim that current laws are sufficient to deal with algorithmic-facilitated coordination.