Uber case and some implications with two side business

Uber Case and Some Implications with Two-Side BusinessTruong Trong Hieu University of Economics and Law Vietnam National University – Ho Chi Minh City PhD Candidate, Yokohama National Un

Uber Case and Some Implications with Two-Side Business

Truong Trong Hieu

University of Economics and Law Vietnam National University – Ho Chi Minh City

PhD Candidate, Yokohama National University, Japan

Abstract

In digital economies, especially in an era of 4.0 industry, technology absolutely plays acentral role for establishing business models Two-side business of course consumestechnological applications much However, successfully decisive elements evidently standoutside technology but inside itself business model Take Uber business model for caseanalysis, the paper points out these advanced feature, which are also drawn down in theory oftwo-side markets; big two-group of users’ data, indirect network effects as well as its non-neutrality of the price structures For business operators, especially Uber’s competitors, itreveals that a deep utilization of technology is clearly important but insufficient Forcompetition policy and regulation, competition authorities need to pay more attention onevaluation of market power as well as anti-competitive impacts in questions of two-sidebusiness models EU Court judgement on Uber, given its authority boundary and in an initialstep, provided a good clue for Uber’s field of trade It still leaves an enough consideration onthe fashion of business activities which competition commissions in South-East countries inturn make progress for such evaluation in the current merger case between Uber and Grab.The assessment must respect to both sides, a capacity where Grab is likely to becomemonopolistic in these markets as well as merits and efficiency the two-side platform can bring

to For this achievement, the paper provides a significant explanation on application of someeconomic efficiency theories, particularly the Kaldor-Hicks efficiency, according to OECD(2009) proposal that customer welfare need to be balanced among both sides of market

Keywords: Uber, two-side business, competition, economic efficiency, and customer welfare.

There is an undeniable fact that technology has played a significant role on developmentprocess Indeed, this recognized trend has long history theoretical analyses, whichoccasionally determined technological changes as endogenous growth rather than neutral orexogenous effect, especially after Paul A Samuelson’s review and development in 1965(Samuelson 1972:160) As a result, there has been a deep variation in the conomy formwhich has been transferred into the knowledge based economy in recent years, andcountiously reachs to the digital economy now pertaing to the progress of 4.0 industry

More important, technology is a crucial ground in process of convergence In the macroeconomics, countries own and utilize much advanced technology will develop more, and itmeans that the low-level economies can reach the same growth ratio as, or even higherthan, previous developed ones In the micro economics, firms and companies easily justify themarket with their rich intellectual properties Therefore, it is no exaggeration to say that thedigital economy is time for evolutionary business fashions of “app” In actual, we do not find

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difficulty in telling this story with many leading cases such as Facebook, Google, Airbnb, orUber.

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One of feasible new models of business that attracts more attention is two-side business Torespect with the success of good representatives as Google, Airbnb or Uber, we can recognizethat two-side business can stand still without any innovative technologies The dependentpath achievements of Google, Airbnb or Uber show that they benefit a lot from internet,technological application and especially effective interactions in the

4.0 environment However, there is a remaining fact that many actors engaged into businesswith their useful “apps”, even into such new model of business in certain cases, was leftbehind In Vietnam, for example, many taxi with their “apps” as Mai linh and Vinasun facechallenges in competing with Uber This reality leads to some doubts about benefit oftechnology, and questions what genuine strengthening for the market dominance is Inaddition to technological application, that only one influentially visual factor can be recalled isthe newly effective model of business itself

It means that along with beneficial technology such a model in turn provides muchadvantages and successful players are those who can exploit the leverage of style’scharacters In other words, the market power of dominant two-side business firms need to beexplained by their business fashion Several publications relevant to two-side businesspointed out the features of big two-group of users’ data, indirect network effects as well asits non-neutrality of the price structures Take Uber for case analysis, there are identifiedsimilar factors on its achievement Almost all competition authorities acknowledge theissues, however, they still encounter a challenge of looking up adequate evaluating frames

of two-side business market concentration

For that situation, this paper will call for a consumption of Kaldol-Hick efficiency standard toovercome such an obstacle in final For that goal, this writing will be divided into fivesections The following section will devote a space for literature review on two-side business aswell as its model’s advantages Section three leads to analyze the Uber case, from the factualbusiness activities and its competitive pressure to significant points on the Court of Justice ofthe European Union (herein after as “EUCJ”) decision then some remained challenges in thecurrent merger case between Uber and Grab in Southeast Asian markets Section four willfollow with a circumstance by some proposals in OECD approach The final section would beConclusion where some remark findings should be noted with research limitations which need

to be for further study

2 Two-side business: Its features and decisive elements

Back to history, we can identify the fact that two-side platform is not a new design really.Originally, similar mechanisms existed for long, such as “village matchmaker” or “insuranceexchange” in Ancient Athens It is just one more decade to generate such as business model

as “a diverse set of diverse set of industries” whose two-sided features “have importanteconomic implications” (OECD 2009:23) As a result, the theory on two- side business hasrecently emerged Rochet and Tirol are initiate frontier and become outstandingrepresentatives for this establishment Their research contributions were primitively publishedsince about 2000 (Rochet and Tirole 2002) then officially braced by a seminal article in 2003and in progress followed by subsequent papers in 2006 and 2008 (Rochet and Tirole 2003;Rochet and Tirole 2006; Rochet and Tirole 2008) The study has been further contributed soonafter that by Armstrong (Armstrong 2006; Armstrong and Wright 2007), Caillaud and Jullien(Caillaud and Jullien 2003), Evans (Evans 2003; Evans and Noel 2007; Schmalensee and Evans

2007), Parker and Van Alstyne (Parker and Van Alstyne 2005) and ongoing others (OECD2009:23) The theory of two-side business presents central questions of competition policy.According to Rochet and Tirol, it is easily for two-side platforms seeking the market power due

mainly to their advanced model Under OECD literature review (OECD - Competition

Committee 2009:23–25), some valuable features of two-side business can be drawn down.First, the two-side business makes coordination of “interdependent demands of two distinctgroups of customers” Of course, these customers need to interact with each other Second,the platform can “internalize the indirect network externalities across these two groups”, and

third, resulting in a

price resort in which the customers in the different sides can face to dissimilar price (OECD 2009:24) Among them, the “indirect network externalities” plays a core pillar strengthening platform’s power.

For the first fundamental element, the existence of two distinct groups of customers, therelevant theory identifies that they must be those who needs to communicate to otherscoming from opposite side However, they cannot make contact by themselves That is whythey have demands of a two-side platform where they can rely on to “intermediatetransactions” We can find out this characteristics on the model of exchange platform, theApple Store, or even a free to the air television channel who “uses content to attract viewersthen sells access to those viewers to advertisers” (OECD 2009:29)

For the second fundamental element, the existence of indirect network effects, it meansthat the value a customer in one side can benefit depends on the increasing number ofcustomer in the other side Take a search platform of Google for an interesting instance, wecan recognize that it is more useful to advertisers if Google has a large number of researchers.Similarly, users looking to buy somethings reach more advantages if there are moreadvertisers displaying their products Of course, this kind of effects happens when theplatform matters and take advantage of it

The indirect externalities mechanism anyway reveals the importance of users’ data Inother words, the more users the platform attracts the more value the platform gains In steads

of maintaining an ignorance of interesting indirect network effects, the platform finds all ways

of adding customers and might need to utilize many traditional types of marketing It iscertainly challenging and cost the platform a lot in advance But the platform easily fails withonly the belief that it also holds a strongly similar “app” and no much enough motivation toadventure its business model curiosities

In fact, the third fundamental element is a substantial strategy to seduce users and thengain merit for its platform Under approach of “non-neutrality of the price structure”, the two-side platform steals from this side to offset for lost revenue in the other It means that theprice set up for this group of customers depends on the one for the opposite Of course, theplatform will provide the lower cost for the group that it would like to increase the quantitywhich in turn allures the rest side who might concern a rising number of customers in theopposite in priority Interestingly, the amount of latter group of customers after that becomeattraction to the former group

This effective process does happen frequently And the platform never loses its motivation tomaximize its profit under the applicable best choice One research conducted in 2011 showsthat the platform tends to fully increase the fee on the side of product sellers at expense of afull sellers’ surplus and charges or even subsidizes on a side of buyers That is because

“increasing the buyer-side fee may discourage innovation and that, when all sellers innovate,

a higher seller-side fee may stimulate innovation in equilibrium” Certainly, under effectivetwo-side business fashion, the platform has sufficient conditions to “serve buyers with alllevels of willingness-to-pay even at a positive optimal price” (Lin, Li, and Whinston 2011:22)

It is a worthy note that such price structure can be designed on the basic conditions thatcustomers in two groups are in distinction or “heterogeneous” (Ambrus and Argenziano2009), but in closed beneficial relationship However, they cannot interact and compensatedirectly because of high transactions costs Or even in the case they can make a dealtogether, the platform with its justifications by the ownership of big- data of customers’potential partners can restrict or give a better option on platform In doing so, moreover, thetwo-side platform also finds a room for applying some levels of pricing discrimination

For these outstanding features, two-side business easily brings market power to two-sidebusiness platforms, and result in more concentration on the two-side markets (OECD 2009:43).More extremely, some analysis pointed out that “market power is more harmful in two-sidedmarkets than in standard markets” (Weyl 2009:43) Of course, this circumstance often comes

with a risk that strong players there can abuse their market dominance or even monopolyattacking on competition or social welfare On OECD’s theoretical literature review, there arealso some specific discipline on this specific type of market.

One of them is an act of anti-competitive pricing Under two-side business characterized

by indirect externalities mechanism non-neutrality of the price structure, a platformconsequently proposes two different prices for two group of customers on two-sides It would

be a lower price, or even zero or no payment with some monetary gifts, on one group and ahigher price on the other On the classical background of the lower price can be charged aspredatory pricing and the higher price can be determined as excessive pricing To pertain to

a complicated definition of market in two-side business model, the risky situation can bemore illustrated by substantial chances of typing, exclusive dealing, or some kinds ofcoordination among competitors

Another central concern is to merger regulation The achieved policy question there is

“whether the operation will create or enhance market power or facilitate its exercise” With arespect that “markets where two-sided platforms operate tend to be concentrated”, themergers among platforms there “raise a special interest among competition authorities”(OECD 2009:43) Under an assumption that the post-merger platform will be much stronger, ithas evidence to say that several harmful impacts could be created seriously The questionwhether the economics of scale in mergers maintain interests or the customer welfare tends

to be stolen is extremely the case

However, there is an alongside question whether the general principles in simplecompetition policy can be still adequate to evaluate competitive impacts under two-sidebusiness fashion It is clearly that two-side platforms will be able to disappear or at least notpersistently characterized by indirect externalities mechanism non-neutrality of the pricestructure when competition agencies impose prohibitions on their course of prices The badlysimilar outcomes can be emerged on the merger regulation if competition actors just haveextreme care of stronger post-merger platforms’ expense at market or customers withoutenough consideration on efficient allocation of resources or expansion and deep consumption

of big-data’s gains

The Nobel Prize in Economic Science found Jean Tirole’s analysis of market power andregulation attractive, then awarded him in 2014 One of his important theoretical researchcontributions is to provide a unified theory relevant to competition policy and regulation onsome newly specific markets such as platform markets His achievement reveals a significantbalance approach on a situation of dominant firms in which there are something good such asreducing costs or encouraging innovation, but something bad sometimes such as permittingdominant firms’ excessive profits or distorting competition Tirole, according to industry’sspecific conditions, therefore mentions much about production chains as well as transactions’efficiency as a case of mergers By his analysis, “it is doubtful whether undercuttingshould be banned” because the conclusion that “setting prices below production costs isone way of getting rid of competitors” is not “necessarily true of all markets” (Nobel Media2014a; Nobel Media 2014b)

Jean Tirole’s researches as well as other further studies, which are mainly covered in OECDreview, offer the new perspective for competition regulation on two-side business model Morespecifically, Attila Ambrus and Rossella Argenziano in 2003, with more subsequent added in

2008, much concentrate on the network externalities and customers choices with respect tohow much customers “care about the externality” In order words, they try to point out howmuch customers value if there are a lot of consumers from the other side of the market on thesame platform As a result, the analysis concludes that this business fashion normally “canlead to asymmetric market structures, with multiple differently priced networks coexisting inthe market” Especially, under the “attractiveness” customers in one group generate for theother group and vice versa as well as their transactions’ marginal cost, even in heterogeneity,

“consumers simultaneously choose networks or decide to stay out of the market” (Ambrus andArgenziano 2009:3,30) Interestingly, Bardey, Cremer, and Lozachmeur in their analysis model

of a given price structure proves that customers in both sides (customers and providers)

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“value the same index of quality”, and “the common network externality has a cumulativeeffect on prices” with the relevant recognition that “its effect on one side’s price is, partially orentirely, shifted to the other side of the market” (Bardey, Cremer, and Lozachmeur 2014) Ifthese two-side market’s benefits

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are in ignorance, what will happen instead of backfire That is partially why there are more extreme in interference to two-side markets than to others (Weyl 2009:42).

3.1 The fact

In addition to Google, Youtube, Facebook and many exchange channels, Uber has officiallylaunched in San Francisco (US) in 2009 (Uber website 2018) then in up to 632 cities worldwidenow (Uber website 2018) Its quick development really makes many people surprise with agiven slogan that “taxi company without any car” Logically, this deep traditional firms onmarket Uber seeks into under hardship conditions Many old taxi firms cannot explain aboutUber’s hit as well as why they have been left behind even they had longtime justifying on themarket This also make local policy makers confused in front of the question whether Uberneed to be allowed or prohibited While the theory on two-side business can be used forproving the Uber’s success and dominance, it is also new and even strange to a few one.Many discussions simplified Uber business basing on the general advances of technologies,especially just emerging 4.0 economy They base their consideration on the Uber’s ownership

of Uber app However, this argument hit stones when many old taxi companies hasdecided to consume technology and internet Interestingly, these taxi companies did notwaste much time and cost to build and launch their apps In actual, they introduced their appssuddenly after Uber app jumped It means that it is not so difficult to achieve similartechnology applications; and the utilization of such apps easily becomes a leading trend indigital economies, but the merits players gain is obviously different

As a recognition of Vinasun, a professional driver taxi firm in Vietnam, the trade war among

it and other non-professional drive taxi apps is exactly a race of financial investment.Accordingly, many traditional taxi companies have a weak position in competing to new ones.For that situation, Vina decides to make the new business strategy which deeply consumetechnological application, increase subsidy shared to drivers, provide beneficial policycovering whole social insurance and even count down its target revenue as well As a result,Vinasun has gotten in stuck still (Nguyen Manh 2018) It facts reveal that technology isimportant but still insufficient

In comparative approach, there are many evidences showing that Uber’s differences areits pathway backing to deeply exploit traditional business strategies These are especiallycurrent marketing and business management regimes Of course, it must have an uncommonstyle applied In marketing, Uber seemingly affirms that: To have money to have all Aftercalling for mass investment from venture and capital funds, Uber does not forget to depositinto new markets More important, Uber also brings a new culture to its coordinative driversand customers, which many analysis names as sharing economy In Vietnam, for example,Uber has many marketing campaigns Its PR contents spread beyond itself label, not only focus

on both its firm, brand and its managing team but also provide information for the newlyuseful option for travelling in the world of technology dominance in general

It should continuously concern about Uber business management The most interesting proof

is that Uber provide a system of “star” ranking for drivers as well as customers It is not forUber’s policy on its incentive to users but for users to know their coordinators’ ranking pointthen make their decisions Traditional taxi firms may have some incentive to drivers in theirsalary or revenue distribution model but they in previous provide no room for drivers andcustomers to show their satisfied levels and basing on it to make their own recommendtogether It is eventually that Uber’s respect boosts motive of users in one side in front of the

pressure coming from their coordinators in the other side Aa a result, this design tries tomaximize a marginal of demands and usefulness.

It still questions that whether Uber seek the leading position on the market by solely suchmodernization strategies As mentioned, some arguments base Uber’s achievement on thephilosophy of sharing economy, and thereby just look at its advantages, a selected examples

of Kim, Baek, and Lee (2018) and Geissinger, Laurell, and Sandström (2018) However, itshould concern about the changes in this concept pertaining to long time variation of society,especially economic infrastructures In order words, to regard to the versions of the said modelbrings more meaningful than such as model itself That is because the current version might

be far different from the original that could be ruined as well Uber might be initiate frombut clearly distinguishing with some roots of sharing economy (Truong Trong Hieu 2017) Tophilosophize with something like sharing, the analysis gets in stuck in finding the nature ofUber current practice

One of the distinctions is the economic target of Uber as well as users To apply the effectivestructure of price like discrimination performance sometimes, Uber always want to gain asmuch profits as possible Strangely, there are more and more taxi drivers left their oldcompanies where they can acquire enough labor protection and retire insurance underregulation to coordinate with Uber without guarantee of social welfare Of course, drivers withUber need to have their owned cars In practice, such cars may be not under theirownership, with much leisure time as sharing economy sophisticated They in actual invest,purchasing or hiring or make partnership with third coordinators They are also not driveUber in their free time, for example, after their formal working, but ride cars asprofessionally full-time job (Truong Trong Hieu 2017; Duy Pham 2018) For that way, it is hard

to conclude that they run to Uber regardless of money Therefore, these facts cannot locate onthe origin of sharing economy

More important, in Uber fashion of business, Uber itself has strong power enough tointerdependently make and control drivers’ business and customers’ consumption Uberitself at the outset produces price structures Moreover, customers on both sides cannotindependently decide who he or she would like to deal To look up and stare at “secret spots”

on the app’s monitor, passengers decide whether they make a contact or not If they haveconnected, Uber in its turn send a deal to a driver it selects, then return its option to such apassenger Drivers as well as passengers are able to make their final decision only after thatpoint of time (Truong Trong Hieu 2017) However, Uber and other technology taxi companiesintentionally argued that they just supply the apps or products like services relevant totechnology application Some discussions also point out that Uber is not a transportation firm,

or it does not provide communicate services Its partners in one side, group of drivers,contribute such business activities to the customers in the other side However, this argumentconflicts to the fact that drivers themselves cannot decide prices for their services Uberdesigns it, which drivers must comply EU court outlined this significant point for its judgementalso (EUCJ 2017:para 39)

Along with other preeminent non-professional driver taxi services like Grab, Uber businessactivities bring much competitive pressure to traditional taxi firms In Vietnam, for example,two leading taxi firms, Mailinh and Vinasun, have faces many obstacles In the middle of theyear 2017, there are totally about fourteen thousand drivers of these two companies quit Indetail, Mailinh, the biggest firm with about thirty thousand drivers after twenty-five yearsengaging in market, lose about 20% of personnel; and Viansun, the following fourteen yearsold firm, has nearly a haft of its drivers withdrawn, resulting in many stagnant cars By contrast,there has been an immediate increase in number of cars connected to Uber and Grab, whichexceeds twenty- one thousand and account for nearly 60% of cars in ten technological taxiproviders in Vietnam Moreover, it should be noted that many drivers leave Mailinh andViansun for such technological taxi platforms.(Phuong Dong 2017; Ngoc Lan 2018; Ha My2017) Vinasun at the end decided to bring a legal action against Grab to the Court in thebeginning of 2018 Vinasun made claims for Grab unfair practice (very low price) which causes

about forty-two billion VND.(The Hung 2018; Ai Nhan - Tuyet Mai 2018) Even, the lawsuit wassuspended due to a lack of evidences for causation in Feb 2018, the case labels a remarksignal on such a tighten tension.

FIGURE 1 PERSONNEL QUANTITY OF VINASUN

17047 17160 15990

14214

13407 13488 12052

3.2 EUCJ’s decision

Not only in Vietnam but many countries where Uber launch its business traditional taxicompanies find difficulties in front of technology taxi platforms and then make claims for arespected equally legal treatment among them In Spain, the Association of professional taxidrivers in Barcelona took a legal action against Uber Systems Spain’s “misleading practicesand acts of unfair competition”(EUCJ 2017:para 13) before the Spain’s Commercial Court(Commercial Court No 3, in Barcelona) In order to classify Uber services as “unfairpractices”(EUCJ 2017:para 15), however, the court need to determine “whether the servicesprovided by that company are to be regarded as transport services, information societyservices or a combination of both”(EUCJ 2017:para 15)

For that achievement, Spanish Court brought the case before the Court of Justice of theEuropean Union, for two main reasons First, Uber Systems Spain bases its services on theinternationally common technical system provided by Uber Netherlands who locates inNetherlands That is why such practices shall be regulated by EU law Second, the legalprocess emerged in Spain called for an interpretation of the EU law which is relevant to EU’scourts’ functions As a result, EUCJ admitted the files and then provided a final judgement onDec 20, 2017

Before making the sentence, EUCJ took a deep analysis It first regarded to thesmartphone application provided by Uber with the respect that this application is indispensablefor both the drivers and the persons because “without which (i) those drivers would not be led

to provide transport services and (ii) persons who wish to make an urban journey would notuse the services provided by those drivers”(EUCJ 2017:para 39) Particularly, the courtconcentrated on a fact that Uber acts “for profit”(EUCJ 2017:para 16) and “exercises decisiveinfluence over the conditions under which that service is provided by those drivers”(EUCJ

2017:para 39) The court also makes a statement that such a service is “more than anintermediation service consisting of connecting”(EUCJ 2017:para 37) Otherwise, Uber’sactivity must be considered as “an integral part of an