[co-author: Ted Serra]
Marking a foray into e-commerce, the United States Department of Justice (DOJ) recently announced its first antitrust prosecution for price fixing in online marketplaces. On April 6, 2015, the DOJ announced that it has entered into a plea agreement with a seller on Amazon Marketplace for adopting a pricing algorithm in coordination with others.1 The DOJ's prosecution demonstrates that the pricing techniques used by online sellers are being scrutinized for possible anticompetitive manipulation.
The DOJ's recent prosecution charged a former executive of an online seller of posters and prints in the popular Amazon Marketplace.2 According to the DOJ, this executive agreed with other online sellers to adopt an algorithm that would adhere to an agreed-upon price for certain posters sold in the online marketplace. The DOJ also alleged that these online sellers developed code for the algorithm for the purpose of coordinating price changes for these posters. These "complex pricing algorithms" were allegedly the primary means for coordinating prices. Further, while the pricing algorithm was used for only five months (September 2013 through January 2014), its adoption resulted in a felony price-fixing charge.3
What may be particularly alarming for the e-commerce industry is that these pricing algorithms are "commercially available" and "extremely common" in online marketplaces, according to some reports.4 The reports refer to Professor Michael Eisen's observation in 2011 of two online merchants selling a textbook for over $1 million; Professor Eisen concluded that the online merchants employed a pricing algorithm that automatically adjusted prices in response to one another, creating an "upward pricing spiral" that could get out of control when merchants did not pay attention.5 We suspect the DOJ may be looking for similar price spikes and abnormalities in online marketplaces to detect other conduct that may have crossed the line.
The DOJ's recent prosecution should not suggest that all merchants using pricing algorithms have violated the law. Indeed, the DOJ must have had evidence beyond just adopting the algorithm and writing code for it in order to bring this enforcement action; the DOJ likely uncovered evidence that this former executive knowingly coordinated with competing online sellers to set the prices. Still, this prosecution shows that pricing algorithms available to online sellers can make improper coordination much easier, even for products that may be thought of as unlikely candidates for successful price fixing.
While the underlying facts of the recent prosecution have not been fully disclosed, it is now clear that the antitrust authorities will be taking apart pricing algorithms to determine whether they include improper price-fixing elements. This prosecution may involve a small market and a price-fixing scheme with limited overall impact, but it is nevertheless important because it puts every e-commerce company on notice that improper coordination cannot be concealed through complicated pricing algorithms.
1 Press Release, U.S. Department of Justice, "Former E-Commerce Executive Charged with Price Fixing in the Antitrust Division's First Online Marketplace Prosecution" (Apr. 6, 2015), http://www.justice.gov/atr/public/press_releases/2015/313011.htm.
2 Id.
3 See 15 U.S.C. § 1 (2012). Section 1 carries a maximum sentence of 10 years in prison and a fine of $1 million for individuals. The executive agreed to plea, pay a $20,000 fine, and cooperate with the DOJ's investigation (it has been reported that the DOJ will not seek a jail sentence).
4 Information, United States v. David Topkins, No. 15-CR-201 (N.D. Cal. Apr. 6, 2015); Pallavi Guniganti, "Art.com Ex-employee Pleads Guilty to E-commerce Cartel," Global Competition Review (Apr. 7, 2015), http://globalcompetitionreview.com/usa/article/38345/artcom-ex-employee-pleads-guilty-e-commerce-cartel/.
5 Michael Eisen, "Amazon's $23,698,655.93 Book About Flies, It Is Not Junk" (Apr. 22, 2011), http://www.michaeleisen.org/blog/?p=358.
