Uber: Ex-Ante Regulation, Innovation, and Challenges to Competition Law (Series III)

Legal Compliance for Market Entrance

Uber might mark the day on 8 December 2015 to celebrate their lawful market entry in Indonesia as the ride-sharing company gained the approval from the Governor of DKI Jakarta to operate in the capital of the country.  The approval was given after Uber met certain requirements to legally operate in Indonesia: establishing a legal entity in Indonesia, providing suitable insurance for both passengers anddrivers, complying with tax and safetymeasures regulations.

To safeguard the work of effective competition in the market, competition law plays its role ex-post to assess on case by case basis whether or not certain behaviour of a firm is anti-competitive or might have anticompetitive impacts. Applying this approach will hinder business players from being limited by too rigid rules that in turn might discourage or impede them from doing business. However, there are cases where regulating a market ex-ante is necessary. Such market regulations can be found for instance in food retail industry and other heavily regulated market such as telecommunication and energy.

In transportation industry, ex-ante regulation could intervene in order to safeguard the interest of consumers, such as safety, and public welfare by means of tax regulation. In some cases, ex-ante regulation in transportation industry may also be applied for the interest of small players.

Innovation and Challenges to Competition Law

Uber was banned in August 2014 from operating in Indonesia (read more discussions in my previous posts about Uber: Manakala Kebijakan Persaingan Diuji oleh Inovasi (Seri I) and Uber: Mendefinisikan Pasar Bersangkutan (Relevant Market), Masihkah Relevan? (Seri II)). While the ban was based on a sound ground to protect the interest of consumers, i.e. by providing clarity about whom they are dealing with when using the service, it was at the same time feared that it could create entry barriers for innovators to enter the existing market or create a new market that has not been known before.

Although Uber responds to the need of transportation in the market, it does not necessarily respond to it in the same way as conventional transportation service providers do. It neither rents out cars nor provides taxi services. Rather, it provides platform to bring together car owners and passengers for the purpose of optimizing the use of cars by sharing them under certain conditions with others. The introduction of the new business model combined with new technology, the online platform, makes it problematic to qualify the services provided by Uber under the same category with the existing services known in the market. Thus, Uber does not only challenge regulators in how to deal with a new market, but also test the existing basis for competition law analysis.

Market Response

It is interesting to see how market responds to the entry of Uber in transportation services albeit taking different business scheme. Apart from gaining more confidence from consumers, it also triggers other transportation service providers to keep up with the make use of mobile phone applications, such as Blue Bird. With the application for mobile taxi reservation, users now can order a taxi nearest to the pick-up location without having to make phone calls. Similar service is also offered by Grabtaxi. It seems that market players tend to respond to innovation brought by the new entrant with further use of the innovation.

Looking at another market: online reservation for transportation services with motorbike, GoJek, Grabbike, and alike almost had to face a different fate when the Minister of Transportation banned its operation on 17 December 2015.[1] The reason for the prohibition was that motorbikes are not recognized as vehicles for public transportation. Thus, the operation of such service was considered as a violation of the current transportation regulations.[2] Strangely enough, the prohibition was not applied for conventional transportation service providers with motorbike, widely known in Indonesia as Ojek. This raised critics that the ban was imposed to favour of the conventional Ojek. However, the ban was removed shortly after it was released. Protests from drivers and passengers, as well as objection addressedby the President have resulted in the removal.

Should Cheap Ride Raise Concern for Competition Law?

Consumers should be the ultimate beneficiary of the work of competition law. Competition should result in low prices, good quality of products, sufficient product choices, and encourages innovation. Competition law authority will usually be alarmed, when prices are rocketing. What if the prices are so low that it is extremely hard for competitors to beat? Uber is resembled by its low prices and this is one major concern for competitors, among other things, although it cannot be automatically qualified as extremely hard to beat. A cost analysis is necessary.

First of all, competition law does not prohibit offering products with low prices. However, selling a product with such a low price that is hard to compete and forces competitors to exit the market might qualify as predatory and under certain circumstances is prohibited. The prohibition of predatory pricing in Article 20 of Law No. 5 of 1999 reads: ‘Business actors shall be prohibited from supplying goods and or services by selling at a loss or by setting extremely low prices with the aim of eliminating or ruining the business of their competitors in the relevant market which may result in monopolistic practices and or unfair business competition.’

Article 20 of Law No. 5/1999 specifies two scenarios of predatory pricing: (1) by performing “selling at a loss” and (2) by “setting extremely low price.” The first scenario refers to actual cost as the benchmark to measure the existence of loss, in which the price is set below the actual cost.[3] While the definition of ‘selling at a loss’ relies on the actual cost, the qualification of ‘setting extremely low price’ relies on the average prices demanded in comparable markets. The problem with this second scenario is first of all there is no measurement to define a comparable market. Defining actual comparable markets is even harder. Moreover, extremely low prices can be resulted from high efficiency and very low cost, which still enables the firm to gain justified profit.

In both cases, the provision requires the element of intention to eliminate competitors and the effect of harm, i.e. potential results of monopolistic practices and unfair competition.  It is also important to note down that predatory pricing is typically enabled by the possession of market dominance or at least market control. Article 20 of Law No. 5/1999 addresses only firms with a significant level of market control. Although the provision does not require the element of market control in its wordings, from the heading ‘market control’ of the Chapter IV Part 3 of the Law under which Article 20 is structured, it is to be interpreted that the provision refers only to firms with the ability to influence the market. Only big firms are able to sustain such a loss from selling either at loss or with extremely low prices until they can recoup the loss by increasing the price after eliminating competitors.

According to KPPU Guidelines for the Implementation of Article 20 of Law No. 5/1999,[4] KPPU applies the following measurement to indicate the occurrence of predatory pricing. The first test is to determine if the price set by a firm is unreasonably low using indicators of market share of 35% and average variable cost (AVC).  Although the market share indicator was not required in Law No. 5/1999, this indicator is used to limit the test only to powerful undertakings (although there is no explanation about the reasoning of adopting the benchmark of 35%). Only if an unreasonably low price exists, a second test is applied to determine whether there is a recoupment after the selling below the AVC by an increase of price. The downside of using the recoupment test is that it is not clear, whether the increase of price per se is sufficient for the test or there should have been a recoupment of the loss. If the second alternative is used, competition law enforcement will be too late to prevent the negative impact of the predatory pricing. This means that there is no legal protection to hinder the anticompetitive conduct in an early stage and the loss resulted by the conduct. To avoid this, another measurement to prove the recoupment intention can be used without relying on a factual recoupment, for instance by assessing whether the selling under AVC is systematically carried out, e.g. on a regular basis.[5]

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[1] Surat Pemberitahuan Nomor UM.3012/1/21/Phb/201.

[2] Law No. 22 of 1999 on Traffic and Transportation; Decision of the Minister of Transportation No. KM. 35 Tahun 2003 on Provision of Human Tranportation with Public Vehicle; Decision of the Minister of Transportation No. KM. 69 Tahun 1993 on Provision of Transportation of Goods.

[3] Heermann, in: Undang-undang Larangan Praktek Monopoli dan Persaingan Usaha Tidak Sehat (Law Concerning Prohibition of Monopolistic Practices and Unfair Business Competition), Hansen, Knud/Heermann, Peter W./Karrte, Wolfgang/Micklitz, Hans-W/Pfletschiner, Wolfgang/Säcker, Franz Jürgen/Sauter,Herbert, Jakarta 2002, Article 20-21, Margin No. 9.

[4] KPPU Regulation No. 6 of 2011 on Guidelines for the Implementation of Article 20 of Law No. 5 of 1999 concerning Selling at A Loss.

[5] Wahyuningtyas, S.Y.; Unilateral Restraints in the Retail Business: A Comparative Study on Competition Law in Germany and Indonesia, Stämpfli, Bern, 2011, p. 125-126.