Prices are information. Plain and simple. That’s why governmental attempts to distort prices, or make them artificially cheap, always result in shortages of the market good or service that governments are meddling with.
Stated simply, in a free market there are no shortages. And there are no shortages simply because prices freely arrived at transmit to producers what the buyers want, and when they want it.
Keep this in mind as Attorney General Merrick Garland shamefully sues software company RealPage for, in the words of the Wall Street Journal, stifling “competition through its algorithm” and maintaining “an illegal monopoly over rent-setting software.” In Garland’s words, “We allege that RealPage’s pricing algorithm enables landlords to share confidential, competitively sensitive information and align their rents.” The attorney general gets it backwards.
To first see why, first consider gas stations. They advertise their prices for drivers passing by, but they’re just as much signaling to the competition what the market will bear. Is this collusion? Garland might think so, but it’s more realistically price competition. By sharing pricing information with each other through signage, gas stations make it impossible for competitors to overcharge without paying for it in the marketplace.
What’s true about gas stations is true about banks, grocery stores, car dealerships and every other profit-motivated business. The advertising of prices exists as competition, but also information for producers about what they can expect to earn if they bring a product or service to market.
All of which speaks to how crucial RealPage’s software is. With housing of any kind, there’s enormous risk involved in bringing the product to market given the substantial capital costs associated with constructing houses and apartments, and putting them on the market.
It all speaks to what an essential service RealPage is providing. If landlords otherwise possessed clarity about the state of the marketplace, they wouldn’t access the software. The software is the provider of pricing information that makes it possible for competition to enter the space. Without this clarity, the risks associated with competing would be too great and this would reflect in reduced supply at higher prices.
To which some will say landlords and builders access the software to find out how much they can overcharge, but such a view presumes the existence of only one landlord in the marketplace, one builder, or both. Except that if there were but one landlord or one builder, there would be no need for RealPage. Get it? Prices in a monopolized market would just be what the single landlord or builder might charge.
With housing and apartments, competition is vast. By amassing crucial pricing information about what the market will bear in a segment of the market largely bereft of signage-style clarity, RealPage provides information about pricing without which there would be no supply. At the same time, this sharing of pricing data also makes it difficult for any landlord to overcharge without paying for it in the marketplace.
What’s extra interesting about the timing of Garland’s lawsuit is that it comes just as President Biden and Vice President Harris call for annual rent increases to be capped at 5% along with a “crackdown” on algorithms meant to convey crucial information about the apartment market. Such actions are billed as noble, but actual they’re quite cruel. And they signal shortages ahead if the proposals have teeth.
Without accurate information in the form of prices, markets can’t function. As evidenced by RealPage’s prominence in the apartment software space, including what some deem “monopoly,” the market long lacked what RealPage is crucially offering. And this likely explains the high rents that have so many up in arms.
Which is why Garland’s attack on RealPage is so puzzling. Absent pricing clarity, there’s no way for apartment supply to ever match demand. Put another way, you can’t love low prices while hating the providers of the supply that enables low prices.
RealPage is presently working to create information without which there will be no supply, and its reward is a lawsuit from the DOJ. Beware of apartment shortages in the future.
Republished from RealClear Markets