Uber: Competition between platforms, innovation and economic policy in Colombia

By Victor Ayalde Lemos*

The relationship between law and the digital economy has been widely discussed. Low barriers to entry and costs, an important characteristic of the digital economy, enable market participants to offer free or very cheap products. The latter means that competitive differentiation is no longer patent through price differences, but through innovation and other added values that can be offered.

The aforementioned is just a manifestation of the undeniable premise that the digital economy evolves faster than the interpretation and application of the law. This situation generates an incentive for legislators and regulatory authorities to issue new regulations or amend the existing ones in order to include the new business models. Such is the case of one of the most obvious platforms: the Internet.[1]

I consider that the intervention in the economy by legislative and regulatory bodies should be minimal. Indeed, there is evidence that regulation on digital affairs tends to be ineffective (SOPA, PIPA, Ley Lleras, Hadopi, Sinde, among others) given the fact that problems are due to mainly the lack of adaptability of incumbent market suppliers. The answer to these problems has been a mix of enforcement (to a limited extend), but mostly from the acknowledgment of firms that they must adapt to the current trends and compete through innovative competition (Itunes, Netflix, HBOgo and other on demand content services).

In regulated markets, some incumbents use, the old argument, that new businesses infringe upon the current legal framework and thus they should be banned from any economic activity. Some countries have been, willingly or unwillingly, accomplices of this undesirable behavior, which of course can represent the breach of international treaties and principles such as national treatment and most favored nation.

From an economic policy view, it could have harmful effects: discouraging investment and undermine the exercise of consumers’ fundamental right of free choices of quality products. In this context, the Uber case becomes relevant, as it will send a message regarding the path that Colombia has chosen as a business forum in a globalized and digital economy.

Professors Fox and First, from NYU law school, have considered Uber as a technology platform-app, which can have an important impact on this market globally[2]. And is under this premise that I believe that the anticompetitive effects of Uber should be assed. Otherwise, it would mean that Tappsi and Easytaxi are ground transportation companies, and that apps such as Domicilios Bogotá[3] are restaurants, and Metrocuadrado[4] is a real estate company. Consequently, it is clear that, on one side, we have the market of technology platforms and, on the other side, there are transportation services associated with these platforms. The latter is just one end of the platform that uses it as means to provide its services to the clientele that also is deciding on which platform to use to acquire the services.

Bearing the latter in mind, we now shall analyze the antitrust and unfair competition accusation against Uber, summarized as follows: (i) an alleged price fixing arrangement; (ii) excessive pricing; and (iii) unfair competition for violating the general prohibition in which all participants in the market must always respect the principle of good faith in commerce and other regulations. In order to make the right approximation to the matter, I would invite readers to approach inter and intraplatform competition in the same manner as inter and intrabrand competition.

First, lets address the price fixing allegations. In my view, this is an intra-platform problem. Uber price is calculated based on the number of users demanding the service and the suppliers at a given time. The platform price is devised so as to increase and decrease under the free play of supply and demand. Therefore, price surges offer an incentive for drivers to join the platform. All this, of course, adjusted to the traveled distance and time as it occurs in the case of taxis where there is also a fixed factor that is multiplied by the number of traveled meters. In this sense, price is set according to an algorithm vertically determined by Uber which responds to supply and demand criteria, and has the necessary elements that serve to promote competition between platforms.

Besides all of the above, it is important to understand that antitrust law embraces the idea that any vertical restriction is relevant only if it represents an abuse of dominant position. In this case, there is no such position because Uber drivers are free to associate to any platform and offer their services directly by using the commercialization channels described before. Users can freely choose between Uber, Tappsi, Easytaxi or any other transportation mode they deem convenient. Thus, both suppliers and consumers are price-takers and in this way, neither can determine price.

This takes us to the second restriction: excessive pricing. This problem is being generated by the wrong interpretation of the current legislation, blocking Uber´s access to the national market. Determining that Uber is a transportation undertaking and thus unable to render its services without a license, generates a shortage in the market, which affects all the vehicles that want to associate to multiple platforms and the users that have to choose between them.

Additionally, it is important to consider that regulated taxi fares are not protecting users. Instead, they are generating a shortage in the provision of the service and a prejudice to consumers welfare because they can´t simply get around them – this cost is much higher as users who cannot transport themselves have to sacrifice satisfaction of other necessities as well. If we allow various platforms to operate, and taxis develop their own platforms and associate to them, competition between those markets can increase in an exponential way, contently leading to a competitive market price.

Finally, in relation to unfair competition allegations, it is important to understand that these supposed restrictions are the result of the wrong interpretation of the transportation law that rules in Colombia. First they are applying transportation regulation to an app, which is a platform that acts as a meeting point between supply and demand. And also, in regard to Colombian Regulations there is no such violation as Uber associated vehicles are licensed under special transportation services pursuant to Decree 147 of 2001.

It is then clear that the Uber case is a transcendental one. The way this case is handled will set the path that will label Colombia into one of two categories. The first one, as a country ready to be included in the global economy, where the fundamental principles of an economic model are respected without discrimination or undue restrictions on market agents – such us unlawful application of regulations -, which seeks to attract new and innovative business models in support of its economic development policy. Or, a country that is hostile to the above, in which old monopolist business models are allowed to maintain their rights under the abuse of law, generating interpretations that will aim to maintain a status-quo that in my opinion, is absolutely detrimental for both suppliers and consumers.

This is an invitation for legislators and regulatory authorities. We can´t keep regulating industries without necessity, and if we do it, we must follow the proportionality and rationality principles, without forgetting the legal and economic nature of those industries. Likewise it is an invitation to the incumbent economic agents who are confronting competition, to face it with new market strategies – innovation and added value – and not by legal actions, and for consumers, to maintain and raise their voice in order to require their constitutional rights to the freedom of choice and freedom of circulation.

[1] The Federal Communications Commission has long debated weather to include the Internet as a telecommunication service or information service. One or another would enable regulatory agencies to intervene to a greater or lesser extend on this platform.

[2]http://www.slate.com/blogs/moneybox/2015/01/13/uber_competition_can_a_global_taxi_alliance_put_other_ride_apps_on_the_map.html

[3] Online Delivery Directory.

[4] Listing Service similar to Craigslist.

*Associate, Esguerra Barrera Arriaga
LLM in Global Business Law (NYU-NUS)

Note from the editors: a spanish version of this post was originally published in Lalibrecompetencia.com. This blog entry comes as part of our collaboration agreement with Lalibrecompetencia. You can also check out the presentation of this post on the February Monthly Meeting of the Center for Competition Law Studies

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