|View Clarissa A. Yeap’s Profile||EI Senior Economist Clarissa A. Yeap specializes in empirical microeconomic analysis in the assessment of liability and damages in antitrust, intellectual property and class action matters.|
U.S. District Judge Jed Rakoff of Manhattan recently denied a motion to dismiss the class action lawsuit brought by a customer against Uber Technologies Inc. (Uber) CEO Travis Kalanick. The lawsuit alleges that Mr. Kalanick and other Uber drivers conspired to fix prices by agreeing to charge customers for rides according to Uber’s pricing algorithm, which includes automatic price increases during periods of peak demand. Judge Rakoff later dealt a further setback to Uber when he denied Uber’s attempt to force the case to arbitration. The trial is set to begin on November 1, with the key decisions hinging on what role Uber plays in the ride-sharing market and how surge pricing affects consumer welfare.
According to Uber, it is a technology company whose main product is a ride-sharing app that connects drivers with customers. Uber drivers are independent contractors, not employees of the company. In addition to matching drivers to riders, the Uber app calculates the fare for each ride using a proprietary algorithm and manages the payment transaction. Uber retains a percentage of each fare as payment for licensing its software. Uber’s pricing algorithm includes price “surges” or increases in periods of high demand, such as during inclement weather, or on peak travel days, such as New Year’s Eve.
The lawsuit alleges that Uber’s and its drivers’ use of the pricing algorithm amounts to price fixing since they have bound themselves to charging a standard fare and uniform surge pricing when demand is high. The lawsuit alleges both horizontal and vertical price fixing claims. Mr. Kalanick is alleged to be the organizer of the conspiracy in his role as Uber’s CEO and also a co-conspirator in his role as occasional Uber driver. Uber argued that the horizontal price-fixing claims should be dismissed because Uber plays no role in the transportation industry but rather supplies ride-matching and payment-processing services to the industry through its software. It claims that drivers independently choose to use Uber’s app to benefit from these services. Judge Rakoff did not find this argument to be sufficient reason to dismiss the horizontal claims, pointing to the recent United States v. Apple, Inc. (ebooks) ruling as a case where a party to a vertical relationship was found to have orchestrated a horizontal agreement in restraint of trade. In so doing, Judge Rakoff drew a direct comparison between the role of Uber in facilitating ride-sharing and the role of Apple’s iBooks platform in facilitating ebook sales.
In both cases, economists would say that Uber and Apple performed the function of a two-sided platform, bringing together buyers and sellers of shared rides and ebooks, respectively. Whether or not the court ultimately views Uber as a two-sided platform will affect the findings concerning horizontal or vertical price-fixing. Horizontal price fixing is per se illegal. If Uber is viewed as a two-sided platform, however, its business model includes vertical coordination with drivers, and vertical conduct is assessed by the courts under the rule of reason standard. Competitive effects of Uber’s pricing algorithm and surge pricing would be evaluated for their overall effect on consumer welfare.
Uber argues that surge pricing helps to ensure shorter waiting times for customers who are willing to pay the higher prices by moderating demand and creating incentives for more drivers to participate. Economic theory contends that when demand outstrips supply, prices in a free market will adjust until a new equilibrium is reached where demand meets supply. A mechanism such as Uber’s surge pricing could mimic the actions of a free market and drive the ride-sharing market towards greater efficiency. In particular, Uber’s pricing algorithm could play a crucial role in generating better matches between riders and drivers in Uber’s function as a two-sided platform. On the riders’ side of the market, higher fares may cause customers who do not value rides as highly to wait for surge pricing to end, lowering the amount demanded. On the drivers’ side of the market, higher fares may lead more drivers to offer their services, increasing the amount supplied. The key question for assessing the anticompetitive harm is whether overall consumer welfare actually increases due to surge pricing. The answer depends on how responsive drivers are when fares rise during surge pricing periods. If the supply of rides does not respond and riders face both limited supply and increased prices for extended periods of surge pricing, consumer welfare may be harmed by Uber’s pricing algorithm. If, instead, surge prices increase supply enough that the non-price benefit of short wait times offsets the price increases and prices fall back quickly, then Uber’s pricing algorithm increases consumer welfare. Currently there is little public information to assess this question.
How Uber’s business model is viewed relative to the ride-sharing market in this case has wider implications for other technology firms. Many large technology companies like Apple, Amazon, and Airbnb play the role of two-sided platforms, bringing together suppliers and buyers of goods or services. They often position themselves as suppliers of innovative technology for facilitating better matches, such as Uber’s surge pricing mechanism, and keep at arm’s length from the industries they serve, as Uber does by designating drivers as independent contractors rather than employees. In some cases, this strategy allows the firms to avoid regulatory oversight or employment laws. Companies like Uber may face increased regulation if the courts begin to view them as key participants in the industries that use their services, regardless of their arm’s length relationships with market participants. For example, for Uber, the antitrust case could also affect lawsuits brought by drivers who were seeking to be classified as employees and regulators who are interested in examining Uber’s labor practices.
In the opinion denying the defendant’s motion to dismiss, the judge noted that “[t]he advancement of technological means for the orchestration of large-scale price-fixing conspiracies need not leave antitrust law behind.” This statement touches on a key tension in how “new economy” firms like Uber should be viewed, whether as disruptors of traditional business models that raise efficiency for society as a whole, or as the latest players with new tools to achieve the age-old nefarious goal of conspiring to reduce competition.