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Will Uber Rouse the Trustbusters?

Following its mammoth deal in China, the company has an even tighter grip on ride-sharing. It may be time for antitrust officials to step in.

August 9, 2016  |  by Kevin Carty
Read on Slate

In the days since Didi Chuxing, China’s dominant ride-hailing company, announced a deal to buy Uber’s operations in the country, analysts have focused on two big themes: the difficulties that American tech companies face while operating in China, as now evidenced by Uber’s abandonment of its loss-sustaining business in the Middle Kingdom, and the merger’s benefits to Uber, which is now free to pursue an initial public offering and concentrate more of its fire on its U.S. rival, Lyft.

But there’s another important story, one that could roil the ascendant American ride-hailing industry: By making this deal with Didi Chuxing, Uber could expose itself—and its domestic peers—to scrutiny by U.S. antitrust authorities. The reason arises from the fact that last year, Didi invested $100 million in Lyft. The new deal, as presently structured, would leave Uber holding a 20 percent stake in Didi, meaning Uber would own part of Lyft. The deal also arranges for Uber CEO Travis Kalanick and Didi co-founder Cheng Wei to sit on each other’s boards.

Such a corporate structure creates both a clear incentive and an easy means to reduce costly competition between Uber and Lyft in the United States—at the expense of American riders and drivers. And that could lead the government to step in.

“When No. 1 and No. 2 merge, in any sector, in any country, that’s a particularly clear case for antitrust scrutiny,” says Ben Edelman, a Harvard Business School professor who studies online markets. “Uber cannot be allowed to own part of Lyft. [There’s] absolutely an opportunity for regulators to step in here.”

The deal also makes for a de facto monopoly in China. Uber and Didi will collectively own some 93 percent of the entire Chinese market in on-demand transportation while the next largest competitor, Yidao, offers a mere 3.3 percent of all rides in the country. But the government in Beijing appears to have decided to treat ride-hailing companies as a form of utility, deserving of clear regulation of prices, cars, drivers, and where data is stored.

The deal also raises anti-monopoly questions in multiple other markets around the world. Didi already owns stakes in India’s Ola and in Grab, which competes with Uber in Southeast Asia. That means that once the deal is final, Uber will also own a stake in many of its Asian rivals. The merging of Uber and Didi in China only further consolidates a highly concentrated industry. “Decisions to exit and enter markets appear to be driven by a few companies determining who competes in what markets,” says Diana Moss, the president of the American Antirust Institute.

Even though the deal was struck in China, antitrust lawyers say there is ample precedent for U.S. enforcers to step in. U.S. regulators routinely review overseas mergers that affect the U.S. market, as do Chinese and European regulators.

For American riders, one of the first effects of such collusion would likely be higher prices. This has already taken place in China, which recently released new regulations that regulate driver qualifications and ban loss-leading, whereby firms offered rides at prices below cost.

In the United States, the federal government’s first antitrust laws in the 1890s were designed precisely to deal with tight corporate and financial entanglements between competing companies. John D. Rockefeller, for instance, used co-ownership among oil companies and shared board seats among executives to turn Standard Oil into an anti-competitive trust. Concern over such “interlocking directorates” also played a role in passage of the Clayton Antitrust Act in 1914, which explicitly prohibits executives of competing companies from serving on the same board.

Sharing board seats and shared investments are not necessarily illegal in all cases. But competition policy experts have for more than a century understood that such structures greatly reduce the incentive for companies to battle one another for new customers or fight to enter new markets.

American regulators have seen the effect of such intimate connections recently. From 2006 to 2009, then–Google CEO Eric Schmidt sat on the board of Apple, even though the two firms were competing in several markets and over several products. During that time, Google, Apple, and several other Silicon Valley tech giants maintained a “no-poaching pledge,” where they promised to not hire each other’s engineers, a policy that artificially depressed wages for thousands of workers.

The Federal Trade Commission ultimately pressured Schmidt to resign from the board, after the agency began investigating the companies for violating sections of the Clayton Act.

If American regulators were to scrutinize the Uber-Didi deal on antitrust grounds, they might simply require Didi to sell off its stake in Lyft, or they could move to shape the ride-hailing market to promote the emergence of additional large competitors. In 2013, for instance, U.S. regulators forced Anheuser-Busch InBev to sell its Mexican beer-importing business to Constellation Brands.

Without such action, the prospect of an Uber dominating the U.S. market for ride-hailing raises other significant regulatory and anti-monopoly concerns, says Maurice Stucke, a professor of law at the University of Tennessee and the co-author of the forthcoming Virtual Competition, a book about algorithms and monopolies. “If Uber becomes, in any particular city, the dominant car-sharing app, then they can effectively dictate what the market price is,” Stucke says. “As its market power grows, to what extent does it no longer respond to market forces but set the market forces?”

Uber’s market share also varies from city to city. In some, like Los Angeles and San Francisco, Lyft comes close to matching its rival—managing 45 and 43 percent of on-demand cars, respectively. But, in many other cities—like Birmingham, Alabama; Peoria, Illinois; and Asheville, North Carolina—Lyft has no presence whatsoever.

Uber’s exact share of the taxi business in the United States as a whole is also unclear. But one recent study compiled by Certify revealed that Uber accounted for 43 percent of all ground transportation expenses filed by business travelers in the first quarter of 2016.

Given the fact that Uber’s network has become such a significant part of the transportation infrastructure in some cities, some experts believe U.S. regulators should follow China’s lead and treat ride-hailing as a form of utility. K. Sabeel Rahman, a professor of administrative and constitutional law at Brooklyn Law School, has advocated such an approach.

Stucke agrees that viewing the ride-hailing technologies controlled by Uber as a utility may make the most sense. Doing so, would, in essence, mean treating Uber like a traditional taxi company—requiring background checks from drivers, car maintenance checkups, and regulating rates and fees. “If Uber can become dominant and set the market-clearing price,” Stucke says, “then why can’t the government do the same?”

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