AB 325: Does it hurt or help consumers?

Rent, grocery prices, ride-sharing apps, electronics and more – what do these all share? These are just a few of the consumer goods that can be affected by a common pricing algorithm.

Many common pricing algorithms, some using artificial intelligence, allow businesses – even those in competition with one another – to adjust the prices of their products based on market trends, cost of production and other economic factors.

For some, a common pricing algorithm is merely a good use of technology that allows a company to simplify its pricing structure. To others, it is a surreptitious way for businesses to get around federal and state antitrust laws that bar them from participating in price fixing schemes.

The possibility of the use of algorithms in the latter inspired Assembly Majority Leader Cecilia Aguiar-Curry (D-Winters) to introduce Assembly Bill 325 last January.

The federal Sherman Antitrust Act, adopted in 1990, bars monopolies and other practices that prevent or discourage free-market competition, including price fixing. California followed suit in 1907, adopting its own protection against price fixing and anticompetitive practices, the Cartwright Act, in 1907. The Cartwright Act, among several things, explicitly forbids price fixing.

AB 325 would amend the Cartwright Act to do two main things.

“First, this bill provides that it is unlawful for a person to use or distribute a common pricing algorithm as part of a contract, combination in the form of a trust, or conspiracy to restrain trade or commerce in violation of the Cartwright Act,” according to the Senate Floor Analysis.

Essentially this means that two businesses can’t use the same algorithm software to set their prices as a means of preventing them from colluding on those prices.

Lee Hepner, Senior Legal Counsel for the American Economic Liberties Project and a witness in support of AB 325, says that while the use of common pricing algorithms might be a boon to businesses, it ultimately costs consumers.

“It just deprives businesses of their own pricing strategy [and] that independent pricing strategy is the competition that drives lower prices,” Hepner says.

Second, the bill makes it illegal for someone to coerce another person to “adopt pricing recommended by that algorithm for the same or similar products.”

The proposal would also lower the burden of proof for a violation of the Cartwright Act. Currently, the law requires evidence that businesses intentionally conspired to fix prices. If AB 325 passes, a Cartwright Act violation complaint could move forward if it’s plausible that collusion happened, even if businesses acted independently.

That aspect of the measure has drawn the most opposition.

“It seems to me that the assumption of it [AB 325] is that a business is always going to use that [common pricing algorithm] to find the maximum price,” said Senator Roger Niello (R-Fair Oaks). “And I, just as a business person, I say that is very definitely not necessarily the case.”

Niello, who sits on the Business, Professions, and Economic Development Committee and is the vice chair of the Judiciary Committee, said AB 325 as it is written now would “discourage businesses from using algorithms at all” out of fear of being sued.

According to Niello, AB 325 “particularly disadvantages small businesses because they don’t have the resources to gather data in the marketplace that a larger business would, and it would discourage them from using a tool that might help them to be more competitive and therefore more successful.”

AB 325 has drawn support from Attorney General Rob Bonta, the only such bill this session he has publicly endorsed.

The  bill has been opposed by a number of the major business advocacy groups, including the California Business Roundtable and the California Chamber of Commerce, the state’s largest business advocacy group. An opposition letter the Chamber and several other organizations issued to the Senate Judiciary Committee in July said it believed language in the measure “would create legal uncertainty around the use of public information and would undermine legitimate business practices.” As such, it included AB325 in its list of “cost driver” measures. That designation has since been removed.

Artificial intelligence-based pricing algorithms, such as those specified in the bill, are just one of the pricing algorithms that fall within the umbrella term of common pricing algorithms. In contrast, a rule-based pricing algorithm such as rounding the cost of a good to the nearest $0.99 is considered a standard business practice and is thus not targeted within the scope of AB 325.

AB 325 is currently in its third reading on the Senate Floor with a decision needing to be made by this Friday when the legislative session ends.

Acsah Lemma is an intern with Capitol Weekly’s Public Policy Journalism Internship program.