To those paying attention, there is a growing list of states (and even the US Senate) who appear to be attempting to outlaw algorithmic pricing in rental housing thus rendering the software used by virtually all of the NMHC Top 50 and hundreds of other operators illegal.
As the industry contemplates being forced to go back to the manual pricing processes of the 1990s, there’s a lot of understandable teeth-gnashing…not to mention an immediate reaction to how unfair that would be compared to other industries that use algorithmic pricing--particularly in the travel and hospitality world but also in most online shopping models and many other demand-driven industries.
And on first blush, there’s a lot to worry about. Consider New York State’s Assembly Bill A9473 which is virtually identical to Colorado HB24-1057 and similar to American Economic Liberty Project’s model state and municipal legislation.
The title alone scares anyone involved with pricing and revenue management:
AN ACT to amend the real property law, in relation to prohibiting the use of an algorithmic device by a landlord for the purpose of determining the amount of rent to charge a residential tenant
The summary brings no solace or comfort:
Prohibits the use of an algorithmic device by a landlord for the purpose of determining the amount of rent to charge a residential tenant; declares that such use is an unfair or deceptive trade practice.
And Section 1 (essentially the preamble) just piles it on:
Section 1. Legislative declaration. The legislature finds that the use of algorithmic devices has been the subject of lawsuits that allege such products pose a heightened risk of anticompetitive conduct, price fixing, and collusion, all of which allegedly result in higher rents for residential tenants, and allegedly poses the risk that landlords will outsource pricing decisions, which the legislature determines should always be made by the landlord.
Therefore, the legislature declares that, with certain exceptions, the use of an algorithmic device by a landlord to set the amount of a residential tenant's rent is prohibited.
At this point, with my 25 years of work in pricing and revenue management in rental housing designing, building and supporting algorithmic pricing products, my blood pressure is rising and I fear I may begin to hyperventilate.
So, I take a deep breath and wade past the “headline grabbers” in these first few lines to read the rest of the bill. And there, in the second section is the salvation (bold italics added to highlight the key point):
§ 2. The real property law is amended by adding a new section 222-a to read as follows: § 222-A. DETERMINATION OF RENT AMOUNT; USE OF AN ALGORITHMIC DEVICE IN SETTING RENT AMOUNT PROHIBITED. 1. IN SETTING THE AMOUNT OF RENT TO BE CHARGED TO A TENANT FOR THE OCCUPANCY OF A RESIDENTIAL PREMISES, INCLUDING DETERMINING ANY CHANGE IN THE AMOUNT OF RENT TO BE CHARGED FOR THE RENEWED OCCUPANCY OF A RESIDENTIAL PREMISES, A LANDLORD SHALL NOT EMPLOY, USE, OR RELY UPON, OR CAUSE ANOTHER PERSON TO EMPLOY, USE, OR RELY UPON, AN ALGORITHMIC DEVICE THAT USES, INCORPORATES, OR WAS TRAINED WITH NONPUBLIC COMPETITOR DATA.
Pulse declining, breathing and blood pressure back under control. If this bill passes in NY or other states (and those are big ifs), they are simply outlawing a specific component of some revenue management systems—the use of shared, non-public competitor data.
Contrary to the headline, this does NOT prohibit the use of ALL algorithmic devices for pricing. It just prohibits “an algorithmic device,” i.e. a specific kind of device that uses non-public competitor data. Fortunately for the industry, and for my company and me, there are algorithmic pricing devices that operators can turn to that do not fall prey to this potential prohibition.
As an aside, the US Senate bill introduced by Senator Wyden uses very different language but boils down to the same result as it defines as a violation of law anyone who “coordinates” the dissemination of non-public competitor data for the purposes of pricing.
That doesn’t mean that we don’t have to stay ever vigilant as there is always a risk of these bills metastasizing beyond this limited prohibition. But at least as currently written, even if passed, these bills will not materially change industry practices and the efficacy of well-designed pricing algorithms.
Like clickbait online, bill headlines and preambles are often written to grab attention rather than convey the details underneath this surface. And that’s why my new mantra is, “Keep calm…and read the second section”!
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