How Big Hotels Use an Algorithm to Make It Rain

Spoiler alert: More price fixing.

Photo credit: C.C. Chapman

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The Department of Justice and Federal Trade Commission recently filed what’s called a statement of interest in a New Jersey lawsuit in which the plaintiffs allege that major hotel casinos in Atlantic City are colluding to fix and raise prices using a software platform called — and no, I am not kidding — “Rainmaker.” The DoJ and FTC used their filing to argue that “hotels cannot collude on room pricing and cannot use an algorithm to engage in practices that would be illegal if done by a real person,” and to push back on several allegations the casinos made in an attempt to get the case dismissed.

If this all sounds vaguely familiar, that’s because it is: I’ve written about the same situation in rental housing a couple of times. It’s worth highlighting the similarities between the housing and hotel-casino cases to show just how pervasive and problematic these pricing cartels based on algorithmic price-setting are becoming.

First, the New Jersey case is not the only one involving hotel price fixing. There is also a similar case in Washington State, and an attempt was made to advance one in Las Vegas, but that was dismissed by a judge (for reasons I’ll explain in a bit).

The allegations in all three are the same: Hotels use software to share private data such as occupancy and room rates, and that software employs an algorithm to suggest prices for individual hotel rooms, allowing the hotel owners to fix prices without ever communicating directly with each other. They essentially outsource their pricing decisions to a third-party that has all the data on the market and can ensure prices stay high and that no one individual owner deviates too much and undercuts the market.

The data across the housing and hotel lawsuits is strikingly similar. In both, there’s high penetration of industry players using the software: The New Jersey case alleges that 80 percent of the Atlantic City market is held by hotels that use Rainmaker; in the various rental housing cases around the country, plaintiffs allege anywhere from 50 to 90 percent of the market for multi-family apartments is held by landlords using common algorithms to set prices, most prominently that made by a corporation called RealPage.

The hotel cases also mirrors the rental housing cases in that plaintiffs allege that prices are increasing increases alongside occupancy rates falling, whereas without an algorithm setting a floor beneath the market, hotels would cut rates on rooms to fill them rather than let them sit empty. As the complaint in the New Jersey case alleges:

The Rainmaker platform has enabled Casino-Hotel Defendants to obtain supra-competitive room rates and revenue during the class period. An analysis of relevant aggregate and individual Casino-Hotel Defendant statistics published by New Jersey gaming regulators confirms this. The numbers reveal substantial increases in room rates and revenue coupled with marked decreases in occupancy rates, while casino gaming revenue from the same period increased at a much lower rate.

This is obviously less of a big deal in hotel rooms than it is in housing rentals — as regular shelter is much, much more important — but it still speaks to how price-setting algorithms warp the usual conception of supply and demand to artificially restrict the former and make the latter less important for price setting than it should be according to an economics textbook. Indeed, to put it simply, hotel owners’ use of Rainmaker “has allowed them to charge more for rooms while knowing that their competitors would not lower their own room rates to take market share  i.e., what would have happened under normal competitive conditions.”

The FTC and DoJ letter pushes back on two claims the hoteliers have made in an attempt to get the case dismissed: First, the hotels claim a price-fixing violation requires direct communication between the price-setters, which isn’t the case here, and second that the price setting needs to be a binding agreement rather than a recommendation, which is what Rainmaker provides, in order to break the law. FTC and DoJ claim that neither of those is true, and that the existence of some sort of agreement — in this case with Rainmaker, and agreeing to accept Rainmaker’s price at least some of the time — is all that’s needed for an antitrust law violation, even if there’s some deviation from the recommended prices. It’s the intent to fix prices, they say, that makes the case, not every individual end price.

Particularly the first point in the letter is important, because the Las Vegas case I mentioned above ended when a judge decided that a direct agreement is necessary for an antitrust violation to occur. If that ruling is replicated across these cases, then it obviously provides a roadmap for price-fixing: Simply ensure all data collating and price-setting functions are outsourced to a third party such as Rainmaker or RealPage and voila, you can collude as much as you want.

It’s also not surprising to me that gambling towns are at the center of this issue. In both Las Vegas and Atlantic City, it makes sense that big hotel chains dominate, as they have the political connections and regulatory savvy to receive one of the limited supply of gaming licenses available, which caps the number of entities that can compete in the market. I’d be curious to see to what extent Rainmaker is having an effect in less consolidated markets — but as hotel chains keep merging, there are fewer and fewer of those, anyway.

Policy aside, the politics of this issue are also interesting: The Biden Administration clearly thinks taking on price-fixing is a winner, since the White House keeps talking about it. The latest missive: “My Administration is standing up to big corporations who break antitrust laws by price-fixing to raise rents. Landlords should be competing to give folks the best deal, not conspiring to charge them more.” Press coverage — an imperfect proxy to be sure — around the various cases I discussed above has generally been positive.

The question is, then: Do judges break with their colleague who ruled on the Las Vegas suit and agree that these cases amount to a violation of price-fixing law? Or will the issue move from the courtroom to various legislatures, where lawmakers seem keen to simply ban algorithmic price-fixing in its various forms? We shall see!

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JUNK FEES EVENT: Come watch a virtual talk on Thursday, April 11, at 12:30 EST that my shop, the American Economic Liberties Project, is hosting entitled “Beyond Antitrust: The State & Local Fight Against Junk Fees.” I’ll be joined by Erin Witte, Director of Consumer Protection for the Consumer Federation of America, as well as my colleague Matt Keliher, to discuss the ongoing campaign to ban junk fees at the state level. RSVP here.

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SECOND ANNUAL ANTI-MONOPOLY SUMMIT: Economic Liberties and some great partners will also be hosting our second annual Anti-Monopoly Summit on May 21 at the Westin Washington, DC Downtown. The Summit will once again bring together tons of folks who are fighting against concentrated corporate power at all levels of government for a day of discussion and strategizing. You can watch highlights from last year’s summit here and get tickets for this year’s edition here.

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— Pat Garofalo