Does price fixing, by app based on-demand taxi services pose a competition law concern in India?

by Chanakya Basa

To a large extent, both Ola and Uber function in a similar manner. But in the present article we restrict our study to only one player i.e. Uber for easier understanding. As Uber closely resembles Ola in it’s functioning, it can be said that Ola poses similar concerns too.

In a traditional firm the owners provide capital, the managers take decisions and the employees implement these decisions but in a sharing economy, most of the wealth is contributed by the workers. For example, Uber owns no cars, the drivers own the cars. A similar example would be Airbnb which doesn’t own the properties and is a peer to peer based service connecting buyers and sellers over a platform. The platforms here set the terms and conditions for the suppliers and buyers. The control exercised by these platforms is varying. Usually they display the product details, a payment option and a service rating option for the customer. For example, let’s consider we are booking a property on Airbnb.  We see different properties listed by the homeowners competing over prices, specifications and feedback in the form of customer rating/reviews and a payment option. Now let’s consider we are booking a cab on Uber between location X and Y. We see few drivers here, but by default Uber assigns a driver for a price Z. Unlike Airbnb, Uber doesn’t let the suppliers (drivers) compete for the price. By agreeing to Uber’s terms of service, the drivers are indulging in price fixing. If Uber was transportation company and the drivers its employees, then they would be exempted from antitrust scrutiny as cooperation among firm members falls into unilateral conduct. Also, collusion among joint ventures and single economic entities don’t attract antitrust scrutiny.

The important question here is, “Can Uber and its drivers claim defence under the single economic entity doctrine?” In its terms of service, Uber clearly mentions, that it is simply a technology platform that connects users with independent third party service providers. It also explicitly mentions that, ‘‘Uber doesn’t provide transportation or logistics services or function as a transportation carrier and that all such transportation or logistic services are provided by independent third party contractors who are not employed by Uber or any of its affiliates.’’[1] Although it’s a smart way to dodge worker rights and liability issues arising out of drivers’ conduct, but it does open doors for antitrust scrutiny. In American Needle Inc v National Football League, it was alleged, that when NFL licensing wing exclusively granted the trademarks to Reebok thirty two teams of National Football league agreed amongst themselves to use it on caps. The U.S Supreme Court held that, “Although NFL teams have common interest such as promoting the NFL brand, they are still separate, profit-maximising entities, and their interests in licensing team trademarks are not necessarily aligned.”[2] In Copperweld Corp. v. Indep. Tube Corp.,[3] the U.S Supreme Court said that, “the officers of a single firm are not separate economic actors pursuing separate economic interests, so agreements among them do not suddenly bring together economic powers that were previously pursuing divergent goals.” Based on above mentioned cases it can be aptly concluded, that the firms operating in sharing economy do not fall under single economic entities because each entity is pursuing their own separate economic interest. For instance Uber and its drivers are separate economic entities. Here some entities might make profits while some suffer losses. Uber neither shares its profits or losses with the driver nor does the driver share his profits or losses with Uber. Uber only charges a percentage fee on each ride from the driver, for providing him with the technology platform and Airbnb operates in a similar manner.

Now that we have established Uber and its drivers are two separate entities, we have to prove whether their collusion is anti-competitive. The collusion among Uber and its drivers is a classic example of hub and spoke arrangement. In competition law, hub and spoke arrangement is a form of cartel in which, the firm (hub) forms various vertical restraints with upstream or downstream firms (the spokes). Here the firm (hub) organises collusion (the rim) among the upstream or downstream firms (the spokes). The collusion between the spokes results in a horizontal agreement and is usually per-se illegal. The courts often use the vertical restraint between the hub and spoke to establish the rim i.e. the tacit understanding between the spokes. The classic case to understand the hub and spoke arrangement is to look at the US Supreme Court’s ruling in Interstate Circuit, Inc v. United States.[4] In the city of Texas, there were first-run and second-run theatres. First-run theatres were premium theatres. In five cities, the interstate circuit had a monopoly of first run theatres. All new movies were initially released in first-run theatres and after adequate sales and publicity they were released in the second-run theatres at a lower price. After a point, many people stopped going to the first-run theatres and waited for the movie to release in the second-run theatre to watch it at cheaper price. This practice was affecting Interstate’s business. So it was demanded that all the distributors raise the prices for second-run theatres in order to continue showing their films in first-run theatres. The distributors agreed but there was no direct evidence to show collusion among distributors. This conduct raised two important questions- a) Did the distributors mutually agree to this among themselves? b) Did each distributor knew what the other distributor would do? The court held that it was fair to draw a parallel inference looking at the nature of proposal and unanimity in the conduct of the distributors. It could also be inferred that each distributor knew that the other distributor was considering the proposal, as unanimity would lead to substantial profits and lack of unanimity would result in substantial losses.

In the present case, Uber is the hub entering into a vertical restraint with the spokes i.e. drivers, by agreeing to fix prices. Extending Interstate’s logic to Uber, one can draw a parallel inference in the drivers conduct. Here the drivers are entering into a wilful agreement with Uber, knowing the fact that all fellow drivers would be entering into an identical arrangement with Uber. Here an individual driver has no choice but to accede to Uber’s terms i.e. price fixing, else he would be prevented from coming on board. If the driver chooses to not join any platform and go solo, he would be directly competing with a cartel in a shared economy, incurring substantial losses. The conduct of Uber drivers is per se illegal as it is a horizontal agreement under Sec-3(3) (a) of the Competition Act, 2002 resulting in appreciable adverse effect on competition. Sec-3(3) (a) prohibits any agreement between individuals or associations to directly or indirectly determine purchase or sale price. The conduct of drivers to enter into an agreement to determine the sale price with Uber, knowing the fact that other drivers have entered into a similar arrangement contributes to indirectly determining the sale price. This collusion is presumed to have an appreciable adverse effect on competition under Sec-3(3) of the Competition Act.

The question, “Do drivers really have a choice to do business if they don’t consent to price fixing by the platforms?” raises serious antitrust concerns. Online platforms or the new economy is largely driven by network effects. In network effect, the utility derived from the product or service increases with the increase in users joining the platform. An individual user benefits more with the increasing size of the network. For example, in order to reap the maximum benefits of Whatsapp you need most of your contacts on Whatsapp, else you use SMS (paying more for limited options). Similarly in two sided markets, there are indirect benefits of network effects. On platforms like Uber, with the increase in customers, more drivers come on board to serve them. Today if a user wants to book a cab from his office to home, he opens Uber or Ola on his phone and books a cab. Usually within ten minutes the cab is at his doorstep waiting for him. According to a research by KalaGato Pte show, the market share in June 2017 was-Uber at 50%, Ola at 44.2%, Ixigo cabs at 4.5% and Meru at 1.3%. The market share of Uber and Ola combined is nearly above 90%. The network has become so big that neither the customers nor the drivers really have a choice but to accede to absurd conditions like price fixing set by Uber and Ola. The phrase “Winner takes all” is commonly used in businesses driven by network effects. Hence the investors constantly flush money, in spite of operating on losses, solely to increase the size of the network by luring customers with discounts. It is imperative for the regulators to ensure that the tipping point is solely on innovation and not on predation. Today if an individual driver or a small group of drivers chooses to operate on their own and not indulge in price fixing, they cannot. The very nature of network effect will not allow them to do so. The conduct of Uber and Ola here clearly satisfies the condition under Section-19(3) (c) of the Competition Act i.e. foreclosure of competition by hindering entry into the market. On conclusion, if certain conduct has an appreciable adverse effect on competition, the factors mentioned in Section-19(3) are taken into account. Here, under Sec-19(3) the factors listed under (a), (b), (c) are aggravating factors and the factors listed under (d), (e), (f) are ameliorating factors. The only entity benefitting out of price fixing is Uber, not the consumer. So the conduct of price fixing is a clear violation under Section- 19(3) (d) of the Competition Act, i.e. accrual of benefits to consumers. It also violates the conditions mentioned in 19(3) (e) & (f) as price fixing is badly affecting the efficacy of the service too. Therefore, Uber’s conduct is not ameliorating as it doesn’t satisfy the conditions in 19(3) (d),(e), (f) and at the same time it is aggravating as mentioned under Sec-19(3)(c).

A similar suit, alleging horizontal agreement of price fixing by Uber drivers was filed in a United States district court in 2015. In Meyer vs Kalanick,[5] Spencer Meyer, a Connecticut customer alleged that the price fixing algorithm violated the antitrust principles. The U.S. District Court, Southern District of New York, found that the pleadings were sufficient to include a hub and spoke arrangement between the drivers and Mr.Kalanick, as there was a vertical agreement between the drivers and Mr. Kalanick to fix prices. Hence an early motion to dismiss the petition was rejected. However, there is no clarity as to whether the dispute will go to trial or arbitration. In August 2017, the Second Circuit has sent the case back to district court to decide if Uber waived its right to arbitrate by actively litigating.[6]

The European Union took a completely different approach with respect to Uber’s functioning. A complaint was filed by Professional Taxi drivers association in Barcelona, alleging that Uber was indulging in unfair competition and misleading trade practices by the use of non-professional drivers in its service called UberPOP. In December 2017, the highest court of Europe, European Court of Justice (ECJ) ruled that Uber was a transport service and should be regulated as other taxi operators. Uber argued that it was simply an online service and a digital app acting as an intermediary between the drivers and the customers. Under the EU law, online services are protected from undue restrictions by the national governments. The national governments are supposed to notify the European Commission so there isn’t any discriminatory or disproportionate exercise of control. However, transport services are excluded from this exemption and member states are within their right to regulate services under transport. In its ruling, the ECJ said, “intermediation service, the purpose of which is to connect, by means of a smartphone application and for remuneration, non-professional drivers using their own vehicle with persons who wish to make urban journeys, must be regarded as being inherently linked to a transport service and, accordingly, must be classified as ‘a service in the field of transport’ within the meaning of EU law. Consequently, such a service must be excluded from the scope of the freedom to provide services in general as well as the directive on services in the internal market and the directive on electronic commerce. As EU law currently stands, it is for the member states to regulate the conditions under which such services are to be provided in conformity with the general rules of the treaty on the functioning of the EU.”[7] Uber’s decisive control to set prices and other conditions on drivers makes it more than a mere platform connecting drivers to customers as Uber is largely responsible for ultimate consumer experience. The driver unions are celebrating the ECJ’s decision. Uber has been dodging employment disputes with the defence that it is simply a tech platform connecting drivers and passengers and there is no employer here. Frances O’Grady, the General Secretary of the British Trade Unions Council (TUC), said, “Uber must get its house in order and play by the same rules as everybody else. Their drivers are not commodities. They deserve at the very least the minimum wage and holiday pay. Advances in technology should be used to make work better, not to return to the type of working practices we thought we’d seen the back of decades ago.” It is interesting to notice that trade unions and driver unions, by asking for minimum wages and holiday pay are attributing the role of employer to Uber. By this definition they are allowed to fix prices, as now they belong to a single economic entity.

We have two distinct approaches here- the regressive approach taken by EU and the hub and spoke conspiracy pending in the US courts. Assuming if the dispute goes to CCI in the near future, it would be interesting and important to watch which route CCI would take. If we look at the past conduct of CCI with respect to the new economy, we observe that it has been cautious to not exercise disproportionate control. In the past with respect to on demand taxi sharing services, the CCI in its order ruled that in M/s. Mega Cabs Pvt. Ltd. v. M/s ANI Technologies Pvt. Ltd. (Ola)[8] and Meru Travel Solutions Private Limited v. Uber India Systems Private Limited (Uber)[9], the opposite parties (Uber & Ola) were not in a dominant position in the relevant market of New Delhi and consequently, the practices followed by Opposite Parties were not in violation of Sections 3 and 4 of the Competition Act. In both the cases the informants alleged the abuse of dominant position by the opposite parties by indulging in predatory practises such as offering excessive discounts and incentives. The informants relied on independent reports to prove dominance. Although the commission dismissed both the reports and said that there was a stiff competition between Ola and Uber, it agreed that they were major players in the market. It also said that availability of funds and access to innovative technology didn’t create any entry barriers as these avenues were available for all the existing players and were not limited to Ola or Uber. In a recent case of Re: Fast Track Call Cab Pvt. Ltd, Meru Travel Solutions Pvt. Ltd. v. ANI Technologies Pvt. Ltd.,[10] CCI dismissed abuse of dominance charges against Ola in Bangalore. CCI said that the market is nascent and in a technology driven market the market power may turn out to be transient in the early stages. Further CCI reiterated, “It is difficult to determine with certainty the long-term impact of this pricing strategy as the market is yet to mature. Without going into the legitimacy of OP’s pricing strategy, suffice to say that besides statutory compulsion of non-intervention in the present case, as OP is not dominant in the relevant market, the Commission is hesitant to interfere in a market, which is yet to fully evolve. Any interference at this stage will not only disturb the market dynamics, but also pose a risk of prescribing sub-optimal solution to a nascent market situation.”  Similarly Uber was alleged to be indulging in predatory practises in other international jurisdiction. In 2015, eight taxi companies alleged abuse of dominant position by Uber for indulging in predatory practices by offering discounts and incentives. The Competition Commission of South Africa dismissed the suit as it was prerequisite for the informants to prove dominance before alleging predatory pricing.[11] The Philadelphia Taxi Association Inc. filed a federal lawsuit claiming, that Uber’s entry has resulted a drop in demand for their services thereby affecting their earnings. In March 2016, the US District Court Eastern District of Pennsylvania held that this wasn’t an antitrust concern as the plaintiffs only pleaded a determinant to their welfare but didn’t take into account the welfare of public at large. In India as well as internationally the parties alleging predatory practises against Uber’s conduct didn’t have much success.

The conduct of CCI with respect to online platforms was less intrusive and more pro innovation. In Fast Track Call Cab, it clearly mentions that the market is nascent and its intrusion at this stage may create a negative impact. Hence I feel it is implausible that the CCI would be following in the footsteps of European Union by declaring Uber as a transportation service but the driver unions and cab welfare associations might fight for the EU approach. They have been angry and unhappy over decreasing earnings and incentives. In the past, drivers unions have held multiple protests and strikes in various cities to express their angst. “Our demands should be fulfilled because our earnings have dropped. Their commitment of Rs 75,000 per month in earnings proved to be fake. We are earning Rs 10,000-15,000. I cannot even pay my EMIs. They should immediately stop getting cars,” a driver was quoted by ANI during a protest earlier this year in Hyderabad.[12] In a recent report[13] published in 2017 by the Maharashtra government, it was mentioned that cab drivers should be allowed to join multiple aggregators as it would boost their earnings. Also it was suggested that they shouldn’t have any uniform, as cab drivers operate with multiple service providers and each service provider might have a different uniform. If the cab drivers are operating simultaneously on two platforms i.e. Uber and Ola, then it isn’t possible to call them employees and the tech platforms employers. They are no more a company and the defence of single economic entity to fix prices cannot be used. Limiting them to mere tech platforms acting as intermediaries between drivers and passengers seems like an apt definition at this juncture but at the same time the mere definition of tech platforms isn’t justified if one takes into account the decisive control exercised by these both platforms. Price fixing is a serious antitrust concern and by no means should it be overlooked. By using the principle of hub and spoke one can clearly establish the anti-competitive behaviour in the present issue. The only way to go ahead is to do away with price fixing completely and let the drivers compete on prices.

Now this leads to an interesting question, “Can Uber do away with price fixing and still operate efficiently?” If Airbnb can function without indulging in price fixing Uber can too. Infact, I believe Uber’s efficacy would rise without price fixing. In the present system, once the user requests for a cab, the driver receives a ping and the driver has 15 seconds to respond, else it is assigned to another nearer driver. The drivers are supposed to maintain an 80% plus acceptance rate. Here Uber can incorporate a bidding system, where all the nearest drivers bid for the ride and the user gets to choose based on the ratings and fare. To simplify it further Uber can give an estimated fare for the driver based on the kilometres and estimated time. The drivers can bid higher or lower than the suggested price. The drivers would bid carefully as quoting higher prices would lower their acceptance rate. Also, in the current system the drivers are supposed to maintain an average rating of 4.8 plus on the app. An average rating of below 4.6 puts them at the risk of deactivation. Uber sends weekly newsletters to the drivers with information on trips, hours online, fares and acceptance rate. Thus the rating mechanism and track on acceptance percentage would prevent the drivers from quoting unreasonable fares.

[1] https://www.uber.com/en-IN/legal/terms/in/

[2] American Needle, Inc. v. National Football League, 560 U.S. 183, 198 (2010)

[3] Copperweld Corp. v. Indep. Tube Corp., 467 U.S. 752 (1984)

[4] Interstate Circuit, Inc. v. United States, 306 U.S. 208 (1939)

[5] Meyer v. Kalanick, No. 1:2015cv09796

[6] Meyer v. Uber Techs., Inc., 866 F.3d 66, 94

[7] ECLI:EU:C:2017:981

[8] Case No. 82 of 2015, Order dated February 9, 2016

[9] Case No. 96 of 2015, Order dated February 10, 2016

[10] Case No. 6 & 74 of 2015, Order dated July 19, 2017

[11] http://www.sabreakingnews.co.za/2016/10/21/uber-beats-anti-competitive-claims/

[12] https://www.vccircle.com/mumbai-uber-ola-drivers-call-for-strike-over-falling-income-rise-in-suicides/

[13] ‘Report of the Committee For Determination of Fare Structure of Taxis and Auto Rickshaws in the State of Maharashtra State’ by B.C.Khatua.