[Kaustub N. S. Bhati and Prankul Boobana are 3rd Year B.A. LL.B. (Hons) students at NALSAR University of Law, Hyderabad]
The Competition Commission of India (CCI) passed an order on 6 November 2018 dismissing the allegation that Ola and Uber (Cab Aggregators), through their algorithmic pricing mechanisms, are indulging in price fixation in accordance with section 3(3)(a) of the Competition Act, 2002 (the Act).
The order deals with three grounds alleged by the Informant against Cab Aggregators which are: firstly, that they engage in price fixation by the use of centralised pricing algorithm mechanisms and thus not allowing the individual drivers to compete on prices; secondly, that such an act leads to minimum resale price maintenance agreement between the Cab Aggregators and their drivers; and thirdly, the Cab Aggregators price-discriminate to the disadvantage of riders because of information asymmetry. This post analyses the CCI’s order to point out the flaw in holding that there existed no price fixation agreement.
The CCI rejected the allegations on the basis that there existed no agreement or coordination amongst the drivers or between the Cab Aggregators and the drivers to fix the price. The CCI stated that the price was being fixed by a centralised pricing algorithm which computes the fare based on various dynamic factors and this centralised control is integral to the functioning of an aggregation-based model.
The CCI in its order states:
“In the present case, the drivers may have acceded to the algorithmically determined prices by the platform (Ola/Uber), this cannot be said to be amounting to collusion between the drivers. In the case of ride-sourcing and ride-sharing services, a hub-and-spoke cartel would require an agreement between all drivers to set prices through the platform, or an agreement for the platform to coordinate prices between them.”
It is crucial to first understand the relationship between the Cab Aggregators and the drivers. The Cab Aggregators operate in what is popularly known as a ‘gig economy’ in which they exercise a significant amount of control over the drivers in the form of discretion in appointment and termination of services, complete control over the prices and discounts offered and conditions which the drivers are subject to. But simultaneously, they do not give any fixed salary, minimum wage or any kind of employment benefits such as health insurance, holiday pay, or the like.
The working mechanism of the Cab Aggregators is such that, for instance, when a rider requests a ride, Uber assigns this ride to a driver on a particular price which he has to accept within a stipulated period of time; otherwise, the ride is assigned to someone else. Here, the driver assigned would accept the offer because, firstly, the Uber driver agreement is based on the contingency that the drivers would accept the price calculated by Uber and, secondly, he does not have a real choice as another driver would accept the same offer if he does not. Further, in such an arrangement, the ability of the drivers to compete on prices also vanishes. If the Cab Aggregators were not following a centralised pricing mechanism, then normal market forces of demand and supply would have prevailed to determine the price.
Further, the Cab Aggregators function in a manner that is akin to providing a platform for connecting riders and the drivers. There is no joint supply of services where the profits are jointly shared. Rather the drivers here are agreeing to provide the cab service to riders through this platform. It is also possible that some of the drivers might earn profits or even incur losses after the deduction of the platform’s commission. The drivers are accepting the conditions and prices given by the aggregator in return for using their platform.
This is similar to a hub and spoke agreement in which the hub imposes various vertical restraints on the spokes. Here the Cab Aggregators (Hub) impose vertical restraints (price) on the drivers (Spokes) which results in collusion among the Spokes by virtue of their individual agreements with the Hub and is treated as anti-competitive.
This shows that while there exists an agreement between the Cab Aggregators and the drivers, there also exists a parallel implicit agreement among the drivers. In Interstate Circuit, Inc. v. United States [306 U.S. 208 (1939)], the US Supreme Court ruled on the possibility of drawing inferences of an agreement from the nature of proposals made and the unanimous action of the parties. The parties, in this case, knew of the substantial profits that could be made through a unanimous action while being conscious of the risk of incurring huge losses that might occur without a unanimous action. Similarly, in the present case, the drivers are influenced by the effects of more drivers accepting this mechanism and the resultant earnings. When the drivers agree to the pricing structure of the Cab Aggregators, knowing the network effects of such a structure, then they are participating in a tacit agreement among themselves to fix the prices.
However, the agreements which directly or indirectly determine sale prices are prohibited under the Act. According to section 3(3)(a) of the Act:
“(3) Any agreement entered into between enterprises or associations of enterprises or persons or associations of persons or between any person and enterprise or practice carried on, or decision taken by, any association of enterprises or association of persons, including cartels, engaged in identical or similar trade of goods or provision of services, which—
(a) directly or indirectly determines purchase or sale prices;
—-
shall be presumed to have an appreciable adverse effect on competition.”
Courts and the CCI have time and again held that the understanding of “agreement” for the purpose of this section is inclusive and not exhaustive. It is not restricted to the formal contractual understanding but also covers transactions, practices and cooperation occurring without a formal agreement. The CCI in Director General (Supplies & Disposals) v. M/s Puja Enterprises Basti and Ors. [(2013) CompLR 714 (CCI)] held: “In most cases, the existence of an anti-competitive practice or agreement must be inferred from a number of coincidences and indicia which, taken together, may, in the absence of another plausible explanation, constitute evidence of the existence of an agreement.”
Further, agreements to fix prices do not occur conspicuously and the conduct of the parties in such cases helps in deriving the existence of any agreement. Similar observations were made in British Basic Slag Limited v. Registrar of Restrictive Trading Agreements [1966] LR 6 RP 101]:
“What the member companies are suggesting here is, in effect, that the parties can give to the court an undertaking not to make an arrangement, and can themselves prevent what would otherwise be an arrangement from being such by the simple device of taking care not to tell one another what they are going to do before they start to do it; even though over a period of years thereafter they carry out a course of conduct involving the acceptance of mutual obligations, which are implicit if their conduct is to achieve its only point and purpose; and they carry it out in the knowledge; and because of the knowledge, that the others are all doing likewise and can be expected to continue so to do. In such circumstances, there is an arrangement, just as much as if they had each said to the other in advance: We shall do this, if you also do this.”
[Emphasis Supplied]
Therefore, a tacit agreement between the drivers as shown above would fall under the ambit of this section as it indirectly determines sale prices of the transport service offered. Such agreements are presumed to have an appreciable adverse effect under the Act and thus are anti-competitive in nature.
The CCI erred in giving paramount importance to a precondition of ‘meeting of minds’ for there to exist a collusion to fix the prices. This is an old position that needs to change since all agreements to collude are not explicit. In tacit collusions, such as the one involved here, there would exist no communication or correspondence between the drivers or evidence of the same and, hence, would be near impossible to prove. An alternative approach for the Cab Aggregators that would not result in such an anti-competitive consequence would be to operate like platforms such as Zomato and Trivago, with the drivers quoting their prices to a ride-request and hence competing with other nearby drivers on prices.
– Kaustub N. S. Bhati & Prankul Boobana