Could using algorithms to set hotel rates become illegal?

Is it illegal to estimate what hotel prices might be in the future?

Here’s the scenario: Imagine you run a lodging business and the news just dropped. Taylor Swift is coming to town! A surge of Swifties are impending. Your competitors are already upping their nightly rates. You’ve got roughly half an hour to decide what average daily rate ought to be for your soon-to-be-sold-out room inventory. Your average revenue management platform can make an algorithmic guess on what you ought to charge, based upon historical data plus whatever information other users on the platform chose to disclose. Is it a crime to click that tab?

According to some powerful people, it could be. Plaintiffs in several class-action lawsuits argue that merely having access to algorithmically informed price insights amounts to an illegal conspiracy among business competitors — that it’s fair to assume they’ll stop competing and just fix prices instead.

Plaintiffs have gotten mixed results in court so far, but that’s not the big story. Strong signals are coming from the U.S. Federal Trade Commission and the Justice Department’s Antitrust Division.

Two recent “statements of interest” filed by the FTC/DOJ warn that, in their view, consulting a platform like Rainmaker, now known as Cendyn Revenue Cloud (hotel rooms) or RealPage (apartment rentals), could be a per se violation of the venerable Sherman antitrust act of 1860, even when there’s no evidence that competitors were in agreement. Per Se is pretty bad for the defendant, if proven. In many cases it means “Case closed.”

I’m by no means an antitrust lawyer, but in my opinion the DOJ implies that the mere availability of algorithmic pricing solutions (like Cendyn’s) constitutes an “invitation” to join a price-fixing conspiracy; subscribing to the solution constitutes an “agreement” among users to unreasonably restrain trade.

That’s ominous. When the DOJ expresses interest in a civil lawsuit, what they mean is federal prosecution along the same lines could be next. The cost of a conviction can be brutal: triple damages and even jail time in some instances.

Of course, federal regulators and class action lawyers cite all sorts of precedent. But for thousands of ordinary people who use mainstream revenue management software, this is unprecedented. In the DOJ’s words: “algorithms are the new frontier.”

Sherman Act lawsuits are on a roll right now. More than 200 new complaints were filed in 2023. Ticketmaster was all over the news, thanks to their battle with Ticket.com. Ticket argued that Ticketmaster’s long-term contracts with live entertainment venues had effectively eliminated all competitors from Taylor Swift’s “Eras” tour. Ticket.com lost the case, but November 2023 brought another major newsmaker: A federal jury awarded almost $2 billion in damages to class action plaintiffs versus the National Association of Realtors (the NAR ultimately hashed out a $418 million settlement). The DOJ wasn’t idle on the tech front either, throwing down the gauntlet to Meta, Amazon and Google. Many believe the general uptick in antitrust litigation reflects the Biden administration’s priorities, including Biden’s executive order on “Promoting Competition in the American Economy.”

We’re all about healthy competition at Cloudbeds. Software products that level the playing field between big and small properties are what made us famous. We believe it’s a hotel’s prerogative to share or withhold their proprietary data from an algorithmic tool as they see fit. There’s never been an open invitation to collude on prices in our industry, and properties will often use a set-it-and-forget-it feature (somewhat like automated stock trading) to undercut, outsell or upstage the competition automatically. They use these solutions precisely to compete in the lodging market. Collusion is theoretically possible in any industry, but I ask you: When have we seen anything but major price swings, or when have we seen flat prices across peer properties, at any time since these revenue management solutions became widespread?

We think it’s a stretch. I asked Cloudbeds’ revenue management partners how they were thinking about this.

Ari Andricopoulos, CEO of RoomPriceGenie, said, “In the hotel space, collusion is difficult because there are so many players. Prices drop an average of 20% in the last two weeks as there’s too much competition to hold onto their inventory without lowering prices. This in itself is evidence that it’s not happening. Even if some hotels did get together to keep their prices high, there’d always be competition undercutting them. Compare this to the airline industry, where there are fewer players, and they manage to consistently raise prices closer to takeoff.”

Hospitality thought leader Shawn Walchef, founder of Cal BBQ Media, shared a similar opinion. “We are in the hospitality business, which means we build our business on the lifetime value of a guest. We would not be in business if we treated our guests like a transaction that we could surge to increase profitability. Revenue management software is by no means collusion with algorithms. I would, in fact, argue that revenue management tools like dynamic pricing benefit the consumer just as much as it benefits the business.”

Dynamic pricing by very definition serves to optimize yield by adjusting prices to variable demand. When demand decreases, prices will decrease, setting aside factors such as inflation, geopolitical disruption and major changes in supply.

Which brings us to what most people are going to miss as this unfolds. The FTC insinuates that algorithmic price-fixing lurks in hospitality. That might look like a business intelligence issue, but I think it’s really about rate shopping: Are hotel guests surfing an unrigged market when they surf Booking.com? We believe they are. Price fixing isn’t realistic.

This topic is something for every hospitality technology company to keep their eyes on because it has the power to transform how hoteliers think about and operationalize revenue management. I can’t speak for legacy chains and big box brands like the defendants in these cases, but I know the Cloudbeds customer through and through. What is best for their guest will always be the direction they’re moving in for their business. Like Shawn alluded to, that’s why we’re all in this industry, because we’re deeply committed to the art of hospitality, not the transactions.