McDonald’s Faces Lawsuit Over AI Pricing System

OpenAI’s AI may be determining U.S. restaurant prices. McDonald’s is being sued in a pending nationwide class-action lawsuit over an artificial intelligence software that suggests what prices to set for menu items on its customers’ menus in the U.S. The case presents larger questions related to the use of AI co-ordinated price-setting.

The complaint was brought in a federal court in Chicago by Illinois consumer Michael Thomas. It claims that McDonald’s, which has more than 14,000 restaurants around the world, broke US antitrust law by relying on inside information from its thousands of restaurants through a pricing system to make recommendations that can impact prices at other franchise locations.

The heart of the fight is McDonald’s pricing tech. McDonald’s has been employing algorithms for years, building a system that digs into a range of factors including sales at the restaurant, prices of nearby competitors and restaurant location to make decisions on dish prices. Reuters has reported that McDonald’s’ price engine employs machine learning to crunch millions of transactions every day across close to 14,000 U.S. locations.

The complaint says that the system also helps a potential competitor problem, because franchisees that might otherwise be more autonomous could get recommendations based on information collected throughout the larger McDonald’s system. Sharing such information can make it easier for also situated market competitors to coordinate their prices, the complaint said.

McDonald’s vehemently disagrees with this interpretation. The company claims that its artificial intelligence system does not set a Big Mac or menu prices directly. Rather, it describes the tool as a recommendation system that offers franchise owners with information that they may use as they see fit in establishing their pricing strategies, which it said it plans to oppose “vigorously”.

This distinction is significant as it is mostly franchisees operating McDonald’s establishments in America. The corporation states that 95 percent of its nearly 14,000 restaurants in the United States are operated and owned by franchisees. The corporation claims that franchisees “control the prices in their [own] restaurants”.

This lawsuit follows increased scrutiny on the part of McDonald’s of its use of technology to determine pricing. Meals at different restaurants are allowed to be charged at different prices according to local operating costs, levels of competition, customer demand, and other variables. While the variation in pricing alone does not indicate market abuse, the lawsuit claims the use of the centralized calculation algorithm warrants closer examination.

A frequently cited example is the $18 Big Mac meal proposal, which had generated consumer opposition. Accounts of the pricing technology have also included stories from individual franchise owners who claimed to have felt pressure to follow the recommendations, though McDonald’s has denied that its pricing tools compel restaurants to set certain prices.

To keep up with competitors in their own industry, firms in dozens of sectors are deploying machine-learning systems to evaluate vast quantities of market data and recommend prices. They claim that algorithms will allow firms to adapt to local conditions better, but critics say they may inadvertently help collusive pricing.