Using Algorithms To Set Rents Isn’t Price Fixing; Rent Control Is
By Roger Valdez, The Center for Housing Economics
It is an irony almost never noted that tenant advocates who support rent control, that is fixing prices to benefit the broad class of people who rent housing. Yet, in a novel legal challenge to shared price information, tenant advocates are suing housing providers for the exact same thing, allegedly trying to “fix prices” or forming a cartel to eliminate competition. The people filing the legal challenge, of course, aren’t concerned about consistency or competition, but fomenting the friction caused by inflation in the housing market when there is regulatory scarcity. The ongoing legal challenge has even gained support from the Department of Justice. From an economic standpoint, the challenge exposes the fundamental and deliberate misrepresentation of price in the housing economy and should be rejected by courts and the public.
It’s the most basic tenant of economics: price is the quantitative measure of supply and demand. That is, when demand for a product or service surges and supply is constrained, prices go up. People understand this, but they still resent higher prices. The class action lawsuit described in a post points out what is supposed to be “price fixing” by an online platform called RealPage (https://www.realpage.com/). “RealPage’s software uses an algorithm to churn through a trove of data each night to suggest daily prices for available rental units. The software uses not only information about the apartment being priced and the property where it is located, but also private data on what nearby competitors are charging in rents. The software considers actual rents paid to those rivals — not just what they are advertising,” the company told Pro Publica, Inc., is a nonprofit organization based in New York City dedicated to investigative journalism.
A Seattle Times article zeros in on this scary new thing as well, pointing out that “the cases, filed in federal court in Seattle, focus on the use of RealPage software, which gathers information about rental units and rent prices and uses an algorithm to recommend how much landlords should charge.” One can hear Captain Renault saying, “I’m shocked! Shocked to see algorithm’s being used to analyze rents!”
But how are prices set? There’s a useful article on how grocery prices are set posted here at Forbes almost two years ago called Where Do Grocery Prices Come From? The post is evergreen in its relevance. I’ll quote a big chunk of it. Prices are set by either retail category managers or pricing analysts according to their category role (competitive, destination, innovation, etc.), market intel, demand elasticity and the corresponding gross margins and sales targets. Any given retailer will have dozens of product categories based on particular purchase occasions, such as milk, yogurt, snack bars, citrus, berries, etc. These staff who negotiate prices with suppliers are accountable to financial targets set by executives. Pricing strategy is a major tool these workers use to achieve or exceed these expectations, lest they lose their jobs. Pricing is skilled work, akin to high stakes gambling with spreadsheets and algorithms” (emphasis mine).
What RealPage is doing is analyzing price data then offering it to its customers who are trying to figure out how to price their product. Have you ever sold anything? If you have, you know the grip of anxiety that can set in, especially if it is a larger item, about whether one is asking too much or too little. When selling something, the seller must base price on a feeling, an intuition about what the seller knows about the market. Guessing the market is critical, and setting a price too high could mean a product sits on the shelf, too low and potential returns are lost. The grocery post highlights what everyone from kids selling baseball cards on the playground (yes we used to do that) to how much to price a Bel Air mansion. The other thing people rely on is information.
In his foundational essay, “The Use of Knowledge in Society,” Friedrich Hayek opens with the following:
“If we possess all the relevant information…if we can start out from a given system of preferences, and…if we command complete knowledge of available means, the problem which remains is purely one of logic.”
The “ifs” are italicized by Hayek to emphasize the dependent nature of what follows. If we can get all the information, then all that we have to do is push a button. But Hayek points out that, “This, however, is emphatically not the economic problem which society faces. And the economic calculus which we have developed to solve this logical problem, though an important step toward the solution of the economic problem of society, does not yet provide an answer to it.”
The breathless investigation into price fixing rents and the lawsuit is built on the notion that big real estate companies have finally found the calculus of which Hayek spoke in the magical algorithm. By culling data “nightly” using the mystical magic of the algorithm, greedy landlords can figure out exactly how to squeeze renters. But here’s a shocker: rents go down! When supply rises so do vacancy rates and then the problem for people owning apartments is how to figure out a competitive price to go low without going too low.
If I own apartments and sit down in dark room filled with cigar smoke with all the other landlords to set prices, you can bet that if prices fall, so will our cartel. Think of when labor strikes fall apart because management can easily hire replacements. Individuals don’t control prices whether they are rent control advocates or people who own real estate trying to set competitive rents. And in the case of RealPage, using an algorithm in the dead of night hardly constitutes “price fixing.” The information is useful, but it will be put together with lots of other information and instinct to set prices. And in the end, it is always a guess.
The resentful tenants and their lawyers should consider English King Knute who told his aides to put his chair on the shore near the rising tide. As the water rose higher and higher, Knute commanded the waves to recede. They didn’t. His point was even a king can’t control the tide. Neither can an algorithm which is one knowledge tool, nor can rent control which just kills the incentive to create more housing and thus, creates the problem it was intended to solve, rent inflation. What will solve price problems is not lawsuits intended to generate donations for resentment pimps, but more housing. If we want low prices, we’ll be sure it’s easy to build all kinds of housing, everywhere and for people of all levels of income.
Roger Valdez is director of The Center for Housing Economics, a Seattle-based policy center researching progressive supply-side solutions to housing scarcity. In Ohio, the center is working with the Ohio Real Estate Investors Association on a proposal to change housing terminology in state law. For the last 25 years he has worked in the fields of education, public health, urban planning, and housing policy. This article was first published online at Forbes.com, and is being reprinted with permission of its author.
