In an editorial, Elon University Assistant Professor of Finance Andrew Schwartz gives his take on why New Jersey politicians shouldn’t fear Artificial Intelligence (AI).
Trenton and Washington, D.C. politicians are defying the will of the courts — and the wishes of people of New Jersey — by attempting to decide which artificial intelligence technology Garden State businesses and consumers can and cannot use.
A federal judge, appointed by President Biden, recently dismissed a lawsuit against some of Atlantic City’s largest hotels.
The plaintiffs argued that the algorithmic software they use should be outlawed because it has allowed the hotels to illegally set prices higher than they otherwise would be.
This argument is nonsensical. The AI software advises the hotels to raise prices when demand goes up and lower — yes, lower — prices when demand goes down.
The goal of this software isn’t price-gouging. It’s to help all the actors in New Jersey’s fast-moving economy keep up with the latest changes. It’s as simple as that.
Unfortunately, New Jersey’s politicians, fearing this new tool, are responding with their usual knee-jerk, heavy-handed reactions by planning to increase regulations in what is already one of America’s most heavily regulated states.
Despite the federal court’s ruling, New Jersey wants to ban the use of similar technology by landlords in the residential rental market.
“I hope we can all agree that collusion by any means is not only wrong, but illegal,” said Assemblywoman Yvonne Lopez, D-Middlesex, a sponsor of the legislation, is quoted in New Jersey Monitor.
“We need to do everything we can to ensure fairness in our rental housing market, and I believe banning these schemes is critical to that goal.”
While it is no secret that housing and rental prices have skyrocketed in New Jersey, this AI technology isn’t responsible for the uptick. Inflation and regulation are.
AI technology is only providing recommendations based on the data. With or without AI, prices are determined by supply and demand. When demand for apartments goes up, prices will rise, and when demand for apartments goes down, prices will fall.
The new programs may help landlords identify trends, but that is it. The software isn’t changing the fundamentals of supply and demand.
The data supports this view. For example, one research study found that, during the 2008 to 2010 Great Recession, when there were less people looking to obtain new apartments, “adopters of the algorithm lowered rents and increased occupancy compared to non-adopters in the same submarket and building class.”
Landlords and rental companies are far from the only businesses using pricing software in New Jersey. Our businesses and consumers have used algorithmic pricing for the better part of two decades.
Their airlines, hotels, and even state highways and transit systems use similar software programs to analyze real-time data, including market demand, competitor prices, and supply availability.
Algorithmic AI helps Garden State companies and government agencies adjust their prices dynamically so that they can respond quickly to changing marketplace conditions.
If Trenton believes algorithmic software can be used to help set toll road prices on our state highways, clearly the state has no problem with the impact such software has on consumers. Right?
This is the 21st century. Why should businesses have to rely solely on guesswork and gut instincts to stay competitive? Why can’t they use technology to analyze the data and help them stay ahead of the curve just like the state government?
Ultimately, landlords and rental companies make their own pricing decision.
AI is becoming a new tool to help in the process, but it isn’t altering the fundamental calculus that a landlord or hotel makes when they sent rent — What price can I charge while ensuring I can still find tenants?
There’s no doubt that housing is expensive in New Jersey, and many tenants struggle to pay rent while trying to make ends meet. But banning the use of algorithmic pricing software will not magically bring down rents.
If New Jersey legislators want to lower housing costs, they should look at the volumes of regulations already on the books. Maybe subtracting some of those rather than adding one more will actually make housing more affordable in the Garden State.
Andrew Schwartz is Assistant Professor of Finance at Elon University. He was previously Assistant Professor of Finance at Seton Hall University.
