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APRIL 26, 2020 PRINT EDITION

The Competition Commission of Pakistan (“the Commission”) was established, in October 2007, with the objective to “maintain and enhance competition.” This simple and clear mandate is enshrined in the preamble of the Competition Act, 2010 (“the Act”). Every action of Commission must therefore be geared to achieve its sole objective of maintaining and enhancing competition.  In January 2020, the Commission approved the acquisition of Careem by Uber, transforming the duopolistic market of application-based ridesharing services into a monopolistic market, which would result in lack of choices for drivers and riders alike, monopoly prices for riders, and higher service fees for drivers, poor customer complaint-handling, among other vices related with monopolistic markets.

Section 11 of the Act authorizes the Commission to review mergers and acquisitions. This section seeks to prohibit any merger which “substantially lessens competition by creating or strengthening a dominant position in the relevant market” (“SLC by CSDPRM”) and provides a step by step procedure for merger analysis to be followed by the Commission. The first step is to determine whether the merger would result in the creation or strengthening of a dominant position (§ 11(5)), and if so, as second step, the Commission is required to initiate a second phase review (§ 11(6)) to assess whether or not the merger would SLC by CSDPRM (§ 11(8)). If, in fact, the Commission determines that the merger SLC by CSDPRM, it shall then assess, as a third step, merger-specific efficiencies if there are any (§ 11(10)). Effectively, this is grounded in the following three-pronged “efficiencies test”:

  1. that the merger substantially contributes to the efficiency of the production or distribution of goods or to the provision of services;
  2. such efficiency could not reasonably have been achieved by a less restrictive means of competition; and
  3. the benefits clearly outweigh the adverse effect of the absence or lessening of competition.

If after the third step, the Commission is not convinced that the efficiencies, which may arise from the merger, meet the test laid down in (§11(10)), it shall as a fourth and final step either prohibit the merger or allow the merger “subject to the conditions laid by the Commission.” (§11(11).

The Commission followed the above-outlined four steps in analyzing the acquisition of Careem by Uber. Clearly, §11 has very little tolerance for the creation or strengthening of a dominant position in the “relevant market”. Relevant market is a term of art, which means a specific market comprising substitutable goods/services in a specific geographic area. A firm is presumed to be dominant if it has 40 per cent or more of the market share. In a duopoly, two firms subsist with  more than 40 per cent each of market share as was the case in the of application-based ridesharing services in Pakistan where both  Uber and Careem had more than 40 per cent of the market share. Once determined that the merging parties meet the dominance threshold, the Commission proceeded to the second step to assess whether the merger would SLC by CSDPRM. Part of the analysis included measuring market concentration pre and post acquisition. Market concentration is measured by an index known as Herfindahl-Hirchman Index (HHI), which ranges from 0 to 10,000 representing a spectrum from a large number of small firms to a single monopolistic seller in the market. A market with an HHI of 2000 or above is considered as a highly concentrated market. In the case of Uber/Careem, pre-acquisition HHI was 4790, more than double the threshold for a market being considered highly concentrated and the post-acquisition HHI was calculated to be 9387, which reflects a monopolistic market.

As a third step, the Commission invited the merging parties to show if there were any efficiencies that may meet the criteria laid down in §11(10).  In terms of the Merger Guidelines for the Assessment of Horizontal Mergers of 2008 issued by the Commission, the efficiencies must: (i) benefit consumers, (ii) be merger-specific and (iii) be verifiable.  The merging parties mentioned seven different “efficiencies” to flow from the acquisition (Para 156 of the Order), none of which meet the criteria specified in the Commission’s Merger Guidelines; and Order does not contain any analysis to demonstrate that criteria is met with respect to any of these proclaimed efficiencies. The foremost efficiency mentioned by the parties --- which could possibly have some relevance --- was that “by merging their supply and demand via integration of their applications and cross-dispatching drivers in order to increase network density and lower wait times.”  However, in our view, this is not an efficiency which “could not reasonably have been achieved by a less restrictive means of competition.”  Drivers and riders do multi-homing, i.e., be part of substitutable platforms. The Commission noted that “Uber and Careem users, both riders and drivers, are able to multi-home.” (para 43).  There are applications, like Ridester.com or Mystro, which allows drivers to receive demands from various applications, like Uber and Lyft in the USA, and collate those demands for drivers, without them having to switch between the platforms such as, Uber or Lyft.  Expedia, Tripadvisor and many other apps provide integrated search on the platforms of airlines for domestic and international travelers. The integration of applications touted as a merger-specific efficiency is already being done without the need of the parties to merge. On the contrary, the integration of platforms poses serious threat to present and future competition in the market. As noted in the US, Federal Trade Commission’s Report:

“[T]he two-sided network effects may enable a large platform to become dominant and insulated from competition from smaller platforms with fewer participants. Because they afford buyers and sellers fewer transacting options, smaller platforms may be far less attractive than a larger platform, limiting the extent to which they serve as viable competitive alternatives. Two-sided network effects could also create a barrier to entry, thereby protecting a dominant incumbent from new entry. A new platform would be unappealing to buyers unless it has attracted numerous participating sellers, and unappealing to sellers unless it has attracted numerous participating buyers. In other words, it must solve the chicken-and-egg problem.[1]

[1] https://www.ftc.gov/system/files/documents/reports/sharing-economy-issues-facing-platforms-participants-regulators-federal-trade-commission-staff/p151200_ftc_staff_report_on_the_sharing_economy.pdf

The Commission, however, without adverting to any cogent analysis, noted in the Order that the efficiencies proclaimed by the merging parties “could not be achieved through a less restrictive means of competition. Lastly, we are of the view that the benefits of the purported efficiencies that the transaction is expected to bring about are hardly likely to outweigh the “adverse effects of the absence or lessening of competition.” (Para 159). This aspect has not really been addressed in the Order.  Nonetheless, for reasons best known to it, and however factually faulty the premises thereof, the Commission is convinced that the claimed efficiencies meet the three pronged test of §11(10). This being the case, it is actually estopped from invoking §11(11), and thus 11(11)(b) --- the last resort saving option for a merger transaction. The opening words of §11(11) are: “In case the Commission determines that the transaction under review does not qualify the criteria specified in sub-section (10).” The Commission went against the qualifier of §11(11) and imposed conditions to its approval under §11(11)(b), which allows the Commission to approve a merger even if it SLC by CSDPRM and the efficiencies if any have not met the criteria stipulated in §11(10)  by imposing conditions for the approval. This action of the Commission speaks louder to negate and run counter to its words as recorded in Paragraph 159 of its Order, which unreservedly makes the efficiency case for the merger obviating the requirement to stipulate conditions. According to the Black’s Law Dictionary, a condition is “a qualification, restriction, or limitation modifying or destroying the original act with which it is connected. . . [Conditions] are lawful and unlawful: The former when their character is not in violation of any rule, principle or policy of law; the latter when they are such as the law will not allow to be made.”

While there are no limits on the type of conditions the Commission may impose, the conditions must further the sole objective for the establishment of the Commission, i.e., maintaining or enhancing competition.  Conditions (or sometimes called remedies) are categorized either as structural or behavioral. Structural remedies comprise change in the structure of the acquiring firm, such as divestiture of existing business.  Behavioral conditions, on the other hand, control the post-acquisition behavior of the acquiring firm. Behavioral conditions are less effective and impose monitoring costs.  In a market which is highly concentrated, competition agencies with longstanding experience of approving mergers have concluded that it is the structural conditions that clearly make sense and are often imposed.

However, as opposed to what is reflected above, and notwithstanding the   extremely high market concentration levels, the Commission approved the merger imposing eight behavioral conditions on Uber as noted below:

  1. No Contractual Exclusivity: Uber was shall not enter into an exclusivity agreement with the drivers on its platform.
  2. Service Fee Cap: Service fee or the amount of commission, which Uber charges from drivers per ride varies between 22.5% to 27.5%. The Commission directed Uber not to lower its Service fee if a new entrant enters the market.
  3. Annual Fare Increase: The Commission allowed Uber to increase its fare by “12.5% per year above inflationary Cost Increases for the Applicable Products Pakistan-wide.”
  4. Surge Price Cap: Commission allowed Uber to use upto 2.5 times multiplier as surge price cap.
  5. Innovation and Quality: The Commission directed Uber to dedicate 10 engineers who will primarily work on R&D activities focused on bringing innovations to a wider region, including Pakistan.
  6. Access to Map Data: “Uber shall grant access to a Ridesharing Services Provider upon the latter’s request to Careem’s points of interest map data.” The data shall be granted on a one-time basis against the payment of a license fee. Then there are a number of conditions to be imposed on the licensee, as to the use of data, its exploitation, resale, and prohibition on creating a stand-alone mapping solution on the basis of the data.
  7. User Data: for riders to port their data to alternative ridesharing suppliers, Uber shall continue to grant riders access to their data.”
  8. Personalized Pricing:  The Commission banned Uber from giving any concession to frequent travelers based on the number of rides they took.

In addition to the conditions, the Commission dedicated four pages of its Order on discussing the appointment, duties and obligation of the Monitoring Trustee, who will oversee that the conditions imposed by the Commission are complied with by Uber.

A bare perusal of the so-called conditions shows that they useless, ineffective, unlawful and it is difficult to perceive how these will be able to maintain or enhance competition, rather these conditions are likely to stifle any future competition. Let’s briefly analyze them.

a. No contractual Exclusivity – exclusive vertical agreements by a dominant player, which precludes supply for new entrants, are always condemned as abuse of dominant position under section 3 of the Act. Uber is at present not concluding exclusive agreements, and cannot do so in future in view of the prohibition of section 3. Thus, the condition will achieve nothing, and is, therefore, useless.

b. Service Fee Cap: the Commission prohibited Uber from lowering its service fee cap, in case a new entrant enters the market, which it charges at the rate of 22.5 % to 27.5% from drivers for every ride. The current rate is already too high. The Commission presumptively imposed this condition to prevent future predatory pricing. Predatory pricing occurs when a seller sells his products at a price which is below its marginal cost. In markets based on digital platforms, the marginal cost is close to zero if not zero.  This condition encourages the new entrants to charge service fee closer to that charged by Uber, and will therefore stifle future price competition, and condemns the drivers to ever pay a service fee of at least 22.5%.

c. Annual Fare Increase: The Commission prohibited Uber not to raise its annual fare increase beyond 5% per year above inflationary cost increases. The cost of inflation hovers around 8% in Pakistan. The Commission in essence authorized Uber to raise its fare annually up to 12.5% plus 8%, which amount to 20.5%. Is this a condition or an allowance granted to Uber under the guise of a condition? How is this condition going to maintain or enhance competition? Price regulation is beyond the mandate of the Commission – the condition is ultra vires the power of the Commission.

d. Surge Price Cap: Commission allowed Uber to use up to 2.5 times multiplier as surge price cap. Surge price is employed by Uber’s algorithm when there is high demand and low supply. Surge price of 2.5 times the normal fare would mean that if the normal fare is Rs. 100, Uber can now charge Rs. 250 for the same ride whenever there is high demand. By way of comparison, Egypt’s competition Authority has imposed a surge fee cap of 10 per cent so that the fare can only increase from Rs. 100 to Rs. 110 and not beyond. Again, is this a condition or an allowance granted to Uber?  How is this condition going to maintain or enhance competition? Is the Commission working to safeguard the interest of Pakistani consumers or Uber?

e. Innovation and Quality: The Commission directed Uber to dedicate 10 engineers who will primarily work on R&D activities focused on bringing innovations to wider region, including Pakistan. Again, is this a condition? Uber is engaged in R&D activities anyway. Why is the Commission so worried about the wider region and not just Pakistan? How is this condition going to maintain or enhance competition in Pakistan?

f. Access to Map Data: “Uber shall grant access to a Ridesharing Services Provider upon the latter’s request to Careem’s points of interest map data.” Why did the Commission not require Uber to provide its own points of interest map data, and why just that of Careem? Why the Commission is so much concerned that the data be provided on “one-time basis”, and that too against a license fee and how the licensee will use the data? How will this condition enhance competition in the market?

g. User Data: for riders to port their data to alternative ridesharing suppliers, Uber shall continue to grant riders access to their data. Uber is already providing access to riders of their data. What benefit will a rider get by porting his data to another service provider? And, what would that data be comprised of? The date, time and place the rider hailed the ride and where did he go, and how many times? Why would a rider share his travelling history with a new service provider, and how is this condition going to enhance competition in the relevant market?

h. Personalized Pricing: The Commission banned Uber from giving any concession to frequent travellers based on the number of rides they took.  Loyalty discounts are not anticompetitive, unless those discounts put “other parties at a competitive disadvantage.” (§3(3)(e) of the Act). This is usually not the case when loyalty discounts are given and the logic of this condition is not obvious. And insofar as riders are concerned, what possible disadvantage could occur to other riders by giving discount to one rider? On the other hand, the Commission has no objection to service fee being charged from 22.5% to 27.5% to different drivers/rides. Again, one wonders whether this a condition or an allowance to Uber? And how is this condition going to maintain or enhance competition?

The conditions stipulated by the Commission run against the spirit of the law and in this sense, broadly speaking, can be regarded as unlawful. Some conditions are in fact allowances/licenses granted to Uber, such as the rate of surge price, service charge, and annual fare increase, and it is questionable whether the Commission is acting within its legal mandate by imposing these conditions. Price regulation is not a function of the Commission. It may be mentioned here that Uber in its home State of California is treated as a public utility and is regulated by the California Public Utilities Commission (CPUS), which regulates public utilities within its jurisdiction, including by setting rates for transportation services provided by Uber’s ‘partner drivers.’

The Commission also erred in technical analysis by clubbing all geographic markets as one, and by failing to consider the supply-side of the platform, the drivers, and the impact the acquisition would have on the drivers by elimination of choices.  There were inconsistencies in the order, for example, it was effectively ordained that the efficiencies criteria specified in §11(10) was satisfied, yet it invoked §11(11) ; it is stated that the ridesharing market will “fetch a significant FDI” (paragraph 242) while in paragraph 151 it is noted “that Ridesharing Market is not capital intensive.” As a matter of fact, after the acquisition there will be at least 22% of revenues from the application-based ride-sharing industry that will be repatriated from Pakistan, causing a significant monetary drain in the economy of Pakistan.

The Commission exhibited poor understanding of the concept of “competition.”  It noted in paragraph 32 of its the Order that in the app-based ride-sharing, the rider gets an estimate of the fare before the ride which “saves consumers from the hassle of haggling as with a taxi, as they don’t get any estimates and which can vary with different cabbies offering different rates for the same route.” Indeed, price competition is a hallmark of a competitive market. Yet, the Commission views the variation in price for the same route as something problematic, and a fare estimate given by a monopolist service provider, who says “take it or leave it” as a useful thing! The comprehension of the Commission as to what constitutes a competitive market gives rise to concerns regarding its ability to properly comprehend and apply recognized competition norms as embodied in the law and  protect the interest of Pakistani consumers.

It is also worth noting that the Commission placed the Order on its website for a brief period and then removed it.  The authors were able to get hold of a copy of the Order when it was still on the website. The fact that the Order was removed from its website, despite section 29(b) of the Act which stipulates that all orders be placed on the Commission’s website, suggests the possibility of mala fides. A judicial review of the Order seems warranted to protect competition and to safe guard the interest of Pakistani consumers, who were taken for ride by the Commission before Uber!

[1] Prof. Khalid Mirza served as the Founder Chairman of the Competition Commission of Pakistan, and at present teaches at the Lahore University of Management Sciences.

[1] Dr. Joseph Wilson served as a founder member, and later as Chairman, of the Competition Commission of Pakistan and at present teaches as adjunct Professor at McGill University’s Faculty of Law.