Post–Uber/ Grab merger: Better or worse?

A few days ago, my friend and I decided to head to Sri Hartamas from KL Sentral for a healthy brunch at lunchtime. Prices during lunch hour are often higher because (of course) demand/ supply so we weren’t expecting it to be cheap but neither did we expect it to be so high. For Grab, it was RM20 which made us reconsider if the brunch was worth the trip (it’s the price of an entire meal!) For MyCar (another ride-hailing app), it was only RM11 so we were still able to get our smoothie bowls without a major heart pain. Comparing the price between Grab and MyCar, it was a massive 81% increase! Additionally, Grab used to offer many discounts and rebates in the past through text messages to its users but however, these are now nowhere to be seen.

However, as we were planning to head to Bukit Bintang for tea time after brunch, we could not book a MyCar and were forced to book a Grab which the price was higher compared to the former. This may be due to the fact that the area we were in was relatively secluded and not very convenient so the availability of MyCar was very scarce. However for Grab, being the bigger player in the market, it has more drivers hence higher coverage area so we had to use Grab instead.

I am sure many Grab passengers were disappointed with how Grab is now compared to how it was pre-merger. The price had increased but Grab claims that the prices were due to multiple factors such as surge pricing during peak hours, the algorithm to set the price based on driver availability and the number of bookings from a particular location. Weather is also an important factor taken that it was previously claimed that Malaysians would only take metered taxis during raining days or else it would be too expensive.

So what did the merger do?

In Malaysia, the MyCC has (belatedly) announced an intention to study the merger. Currently, Putrajaya is studying the risk of monopoly within the country’s ride-hailing market, which has been triggered by the merger between Grab and Uber.

A new player called Diffride has an interesting operating strategy which appears to be different from the conventional ride-hailing strategy where the company says it will only charge drivers a fee of RM5 per day to use the platform, and no commission. It will be interesting to see if this model is sustainable for the company considering that they only have 2000 drivers at the moment with an anticipated 4000 to join by the end of the year.

As reported previously, the Competition and Consumer Commission of Singapore (CCCS) and Vietnam Competition Commission had both stalled the merger citing “anti-competitive concerns”. Our counterpart across the border has done much more scrutiny and checks which has led to the CCCS to provisionally determine that ride-hailing firm Grab’s acquisition of American rival Uber’s South-east Asian business is an infringement of competition laws. On 24th September 2018, they have imposed a combined fine of S$13million of their infringement! (It was also revealed that the Uber/ Grab had even provided for a mechanism to apportion eventual antitrust financial penalties so it can be said that they saw this coming).

Honestly, it should have been a shining red light in the face of competition authorities that such a merger would cause competition concerns so I am *very very* glad that the CCCS finds that the merger had substantially lessened competition. Some of the provisional findings by the CCCS were interesting such as:

  • Uber would not have left the Singapore market in the near to medium term in the absence of the Transaction.
  • Uber had entered into an agreement to collaborate with ComfortDelGro with the introduction of UberFlash to compete with Grab, and the collaboration was only withdrawn after the Transaction.
  • Market share of taxi booking service was only at 15%. Grab holds a market share of 80%.
  • Fares have increased between 10-15%.
  • Parties have not been able to show that the Transaction gives rise to efficiencies that would outweigh the harm to competition.

Potential remedies and penalties

Reading the press release, I was particularly intrigued where the CCCS boldly said “CCCS may require the Parties to unwind the Transaction”. Such a move is often threatened but rare in practice but it is within their jurisdiction. Under Singapore’s merger notification regime, the Parties had the option of notifying the Transaction for CCCS’s clearance or seeking CCCS’s confidential advice prior to completing the Transaction. In the EU, parties were required to inform any intention of a merger which had an EU dimension.

Measures were ordered by CCCS to allow lower barriers to entry and improve market contestability which includes:

a. The removal of exclusivity obligations on all drivers who drive on Grab’s platform including rentals

b. The removal of Grab’s exclusivity arrangements with any taxi/CPHC fleet

c. The maintenance of Grab’s pre-Transaction pricing algorithm & commission rates until competition

d. Requiring Uber to sell all or part of Lion City Rentals assets to any potential competitor who makes a reasonable offer and preventing Uber from selling to Grab without CCCS’s prior approval.

Furthermore, CCCS said it may suspend the measures on an interim basis if a rival could garner over 30% of total rides in the ride-hailing services market in a month. It would remove the restrictions if the rival could maintain it for 6 months.

In Vietnam, the deal remains under competition authorities review which has warned that it could be blocked if the firms’ combined market share in Vietnam exceeds 50%.

In the Philippines, where the merger has been approved, the competition authorities will continue to monitor Grab’s compliance with conditions intended to improve the quality of service, with any breaches possibly resulting in fines.

Conclusion:

For now, worse. I find it hard to believe that Grab would charge an outrageous 81% higher than a smaller market player (where are the economies of scale theory here?). This also proves that the larger the firm, the more they likely they will consider consumer welfare. I echoed my previous post about the benefits a merger can bring: better resources, saving failing firms, barriers to exit and more. However, mergers have a much more, almost irreversible, impact on the competition market than say an abuse of dominant position. You can then later penalise an undertaking for an abuse post-merger, but not having a dominant position is always better because “prevention is always better than cure” so preventing the root of the problem is more ideal.

I would like to say that I am very impressed with CCCS’s media release by detailing the theory of harm and specifying the remedies that should be undertaken by Grab. Competition authorities are always trying to balance whether should they on one-hand empower smaller entities to raise competition or encourage growth and innovation by having less scrutiny over larger enterprises. Regardless, I am still of the view that it’s better to be safe than sorry and that the competitive levels are more contestable in the near future.

Can I say no?

A recent decision issued by the Malaysia Competition Commission (MyCC) imposed what I saw one of the heftiest penalty on a single entity for an infringement of Section 10 of the Competition Act 2010 – RM17mil. For some reason, this is much lower than the collective sum of RM33k in the earlier proposed decision on 7 tuition and day care centres for price fixing conduct, you can read my post on it here (which I am still waiting for any updates/ appeal/ decision *cough cough*).

The recent decision concerns the MyCC proposing to fine Dagang Net Sdn Bhd for abuse of its monopolistic decision (full proposed decision can be read here). Dagang Net seems to intend to challenge the Commission’s’ proposed decision and has also indicated to MyCC its intention to make an oral representation before the commission.

  1. The alleged infringement

Dagang Net Technologies Sdn Bhd is a wholly-owned subsidiary company of Dagang NeXchange Berhad (“DNeX”) and has a dominant position for Trade Facilitation under the National Single Window. According to the website, its’ e-services for trade facilitation include as follow:

Dagang Net Technologies is in the business of eService Trade Facilitation in which the exchange of trade documents among businesses and approving authorities and agencies is done electronically. An initiative by the Government in 2009 was to launch the National Single Window in order to simplify clearance procedures, facilitate the electronic exchange of trade-related data, reduce the cost of doing business and thereby enhancing trade efficiency and national competitiveness. Dagang Net Technologies had a contract and is now extended to 31st August 2019 for the said trade facilitation business.

Under the proposed decision, Dagang Net had provisionally infringed section 10 CA 2010 which subsection 10(1) reads: “ An enterprise is prohibited from engaging, whether independently or collectively, in any conduct which amounts to an abuse of a dominant position in any market for goods or services.” The proposed decision assumes a “monopoly” position by Dagang Net with restrictive conducts such as refusing to supply and imposing barriers to entry.

2. Refusing to supply

Normally the first step is to identify the relevant market to determine its’ market position to determine if it really is in a monopoly position as claimed. However, based on this phrase taken from their website: “In Malaysia, the NSW for Trade Facilitation system is developed, operated and managed by Dagang Net Technologies Sdn Bhd (Dagang Net).” I think I am safe to say that it is in a monopoly position for most of the process.

(Disclaimer: I don’t have hard evidence to prove or determine if they are indeed abusing their dominant position but merely analysing if they are based on the proposed decision and stating out the relevant law to it. Ps, I am waiting for MyCC cases judgment to be substantial enough to be quoted in each other’s cases…)

On Refusing to Supply, the Commission claims: The investigation has provisionally found that “Dagang Net … (refused) to supply new and/or additional electronic mailboxes to end users who utilized front-end software from software solutions providers which were not considered to be Dagang Net’s authorised business partners.” It was established in Commercial Solvents v Commission that a refusal to supply could amount to an abuse of dominant position as the reasons given for the refusal is often anti-competitive such as affecting competition on another market, dealings with a rival firm etc.

However, Refusal to supply is also difficult hard to be claimed as anti-competitive because there are equally good reasons as well. In Bronner, Advocate General Jacobs pointed out that the right to choose one’s trading partners and freely to dispose of one’s property are generally recognised principles in the laws of the Member States and incursions on those rights require careful justification. Hence the laissez-faire economic system dictates that parties are free to contract with whomever they choose and the terms to contract on.

→ Dagang Net currently holds a monopoly position and parties, therefore, have no other party to obtain the required services.

Secondly, sometimes duplication of facilities of a network is not feasible and may result in a loss-making situation for both parties. This is why most of the more regulated industries in the country such as water in Selangor is provided only by Air Selangor, electricity is only by Tenaga Malaysia and others.

→ This is unclear as the NSW for Trade Facilitation is still relatively new and it is not an essential facility per say since corporations may still use the longer and more tedious manual process.

Thirdly and most importantly, stated also in Bronner, it decentivises corporations to innovate and improve if it means that they would need to share it to ‘free riders’. In the Guidance, an obligation to supply and provide information or service may undermine an undertakings’ incentive to invest and innovate, even for a fair remuneration.

→ As provided in Dagang’s website, “the NSW for Trade Facilitation system is developed…. by (Dagang Net)” hence by forcing it to supply more may be detrimental to Dagang Net who perhaps invested a lot into developing the system and platform in which the NSW now runs on.

3. Deeper analysis

Now, onto the facts of the case. The basis that the Commission had identified as the reason for refusal to supply is because the “end users who utilized front-end software from software solutions providers which were not considered to be Dagang Net’s authorised business partners”. On a plain reading with no other facts given, this is prima facie an abuse of dominant position because

(1) It restricts what end users can choose as being their front-end software,

(2) It wants to affect the competition in another market by using its’ monopoly position in the trade facilitation market and

(3) it may or may not be a situation of tying/ bundling where only if the end users used software solution providers which were Dagang Net’s authorised business partners would Dagang Net provide new or additional mailboxes.

In Commercial Solvent, the factors leading to the finding of abuse were (amongst others):

  1. Using its dominant position on the raw material market to affect competition in the derivatives market
  2. Refusing to supply to an existing customer because it wanted to compete it downstream and the refusal risked eliminating the customer from the downstream market.

This seems to be quite apt to the current situation where Dagang Net where it seems to refuse to supply to again, affect competition in the front-end software by only providing services where the entities use their business partners services and it risked eliminating competition downstream. The distinguishing factor, however, is that in Commercial Solvent, it had a subsidiary who was also competing in the downstream market as the complainant and it refused to supply so that the complainant could not continue to produce a drug-related to the treatment of tuberculosis but its’ subsidiary could. In Dagang Net, the downstream was by its business partners hence not the same entity. Regardless, it seems pretty convincing to me that Dagang Net wanted to restrict competition perhaps because it was obtaining monetary benefits.

3.1 Essential facility doctrine

Also, “With great power comes great responsibility” (yes, I just quoted Uncle Ben from Spiderman) A quote apt to describe what monopoly players should note about the market obligations and responsibilities their position puts them in. Entities in a dominant position generally have an unspoken special obligation to maintain, protect or improve competition.

Currently, Dagang Net holds an “essential facility”. In Sealink, ‘essential facilities’ were defined as ‘a facility or infrastructure without access to which competitors cannot provide services to their customers’. This definition provides only a starting point. The challenge is to uphold the right of the undertakings under contracts and ensuring competition levels is maintained. In determining whether a refusal to supply amounts to abuse, a few issues must be addressed:

  • Is there a refusal to supply?
  • Does the accused undertaking have a dominant position in an upstream market?
  • Is the product to which access is sought indispensable to someone wishing to compete in the downstream market?
  • Would a refusal to grant access lead to the elimination of effective competition in the downstream market?
  • Is there an objective justification for the refusal to supply

And more.

Most often, this doctrine comes into play in the realm of patent and infrastructure. Dagang Net’s refusal to supply is very much like Bronner where it wanted to have access to the highly developed home-delivery distribution system of its much larger competitor, Mediaprint. The court preferred to use the term “indispensability” instead of “essential facility”. It stressed that the refusal must be likely to eliminate all competition from the undertaking requesting access, not merely making it harder to compete. Access must also be indispensable, not desirable or convenient and there must be no actual or potential substitute for the requested facility (Jones & Sufrin). It might be arguable that Dagang Net’s services were not “indispensable” because it was merely a simplification of the process from application to approval under the NSW system. Corporations and enterprises may still use the preceding method to obtain approval.

3.2 The balance between promoting competition and upholding contractual rights

On the contrary, other situations to consider are whether it is justifiable to force Dagang Net to provide new/ additional mailboxes for end-users who utilized front-end software who are not their business partners? There may be reasons such as to provide a more holistic and integrated to improve user experience because they are more familiar with business partners services and maybe some functions are catered to the needs of their business partners.

A prime example of streaming end-to-end processes is that you will never find an iPhone which runs on an Android system or an Android phone running on the iOS system. This is because Android phones are catered to maximise the user experience by only using the Android system whilst Apple users who prefer the iOS system will opt for the iPhone instead. One complements the other hence it makes sense to not deviate from the current business strategy.

Secondly, MyCC should not be concerned is because what Dagang Net holds is a contractual right given by the government for its’ exclusivity. In return for this exclusivity, Dagang Net may have invested a lot of money, manpower and time to develop the Trade Facilitation system in which forcing it to share with others might frustrate its’ incentives for further innovation.

However, it is not so straightforward and these arguments can fail. There is clear logic why the intervention of competition law to mandate shared access to a property is controversial. For example in Magill, only a hypothetical secondary market was affected but despite this, the courts ruled against its’ intellectual property rights and granted access. Magill is like the Genesis of Refusal to Supply under Competition law. Really, it all comes to where a balance can be obtained.

So… Can I say no?

Maybe (The most truthful answer you’ll get from every lawyer). In law, there is no hard and fast answer. This is even more where there are other elements such as economics and intellectual property rights into play. Competition law being the watchdog over the conduct of all industries will have to balance various stakeholders’ concerns and determine is a fair and just manner whether there was an infringement.

Monopoly or not, most corporations are profit-seeking but not all profits are obtained with an infringement of competition law. Here, I think there was an infringement if the Commission could prove that the infringement was due to the non-usage of business partners product. Additionally seeing as the monopoly position was ‘granted’ by the government, Dagang Net should not that it is not completely shielded by contract and impose restrictions to its’ whims and fancies.

I anticipate seeing more development in the case in the coming months/ years and also for the outcome of My E.G. Services Bhd & My E.G. Commerce Sdn Bhd’s infringement of Section 10 CA 2010.

Too much of a google thing is a bad thing?

People use Google for one of two things: to search something online or to check if their internet connection is working. If you’re the first, you may or may not have seen products being displayed on the top bar when you search for an object, for example:

Google generates about 0.3 billion USD daily and most of that revenue comes from advertising as you may see. Google shopping is no stranger to the world of shopping (indicated by the symbol sponsored) but in June 2017, Google was asked to change its ways on google shopping by the EU Competition Commission and was slapped with the largest fine imposed on a single entity in EU Competition history– €2.4bn fine. There are several reasons as to why this is justified but others argue that it is disproportionate and harms product innovation. Google search engine is used by 90% of worldwide internet users and to prevent exploitation of customers and preserving competition, someone needs to start sending a wakeup call to dominant players that doing as they please will be heavily penalised.

Facts:

In 2010, the EU Competition Commission decided to open an investigation as to whether Google Shopping was a violation of competition rules. Google shopping allows consumers to compare products and prices online and find deals from online retailers of all types, including online shops of manufacturers, platforms (such as Amazon and eBay), and other re-sellers.

The opening of formal proceedings follows complaints by search service providers about the unfavourable treatment of their services in Google’s unpaid and sponsored search results coupled with an alleged preferential placement of Google’s own services. Google’s internet search engine provides for two types of results. These are unpaid search results, which are sometimes also referred to as “natural”, “organic” or “algorithmic” search results, and third party advertisements shown at the top and at the right-hand side of Google’s search results page.

In its media statement, the Commission mentioned that it will investigate whether Google has abused a dominant market position in online search by allegedly lowering the ranking of unpaid search results of competing services which are specialised in providing users with specific online content such as price comparisons and by according preferential placement to the results of its own vertical search services in order to shut out competing services.

After 7 years, the case has come with a €2.4bn fine.

The theory of harm

So what the Courts have told Google is that Google Shopping cannot favour its own product ads (where Google gets its revenue from) over those of other competitors. To illustrate what this means, a useful analogy may be to think what the Commission is doing is the equivalent of asking a newspaper company to carry/publish the advertising service of competing newspapers and in equal conditions whatever that means and without getting the revenue.

This might be shocking to some who don’t understand Competition Law but it is founded on the very rationale that its existence is to prevent “market exploitation”. Companies in a dominant position (such as Google with a whopping 90% market share in internet search engines in the EU) owe a “special obligation” to not distort and obtain an extra advantage from another market compared to other entities already existing in the secondary market.

Example: Windows was fined in the year the 2000s for having pre-installed the Windows Media Player into computers running the Windows system. Other media player companies lodged a complaint that this was an abuse of dominant position by using a pre-existing dominant position in one market (computer software market) to impute and create a dominant position in another market (the media player market). The Court agreed.

Some might argue that this is illogical because as consumers, we want convenience and reasonable price so by forcing Windows to remove the Windows Media Player (which it gave for free!!) isn’t it creating more trouble for consumers to have to search and download another media player? Also, what’s wrong with using what you’ve successfully created (through blood, sweat, tears and a lot of money) to promote something else you’re working on?

It is a little counterintuitive, but the argument on the flip side of the coin is that well, would you like it if one company dominated your whole life? It was to prevent a company from creating too many dominant positions that consumers are compelled if that dominant position became a monopoly position. Also, there are many considerations such as maintaining the level of competition, “too big to fail” and promoting consumer choices.

Back to Google, the EU Competition Commissioner, Margrethe Vestager, describes Google as obtaining an “illegal advantage by abusing its dominance in general Internet search” by promoting its own comparison shopping service in organic search results and demote rival comparison shopping services. The basis of the Commission’s decision is not spelt out on any relevant established anti-competitive practices such as constructive refusal to supply, price discrimination or tying but it was based on an overarching jurisprudence of competition law that dominant firms owe a “special obligation” as I’ve mentioned earlier.

Evidence of the foreclosure involved an in-depth analysis of Google Shopping’s effects on the market. It was found that as a result of Google’s illegal practices, traffic to Google’s comparison shopping service increased significantly, whilst rivals have suffered very substantial losses of traffic on a lasting basis.

  • Google’s comparison shopping service has increased its traffic 45-fold in the United Kingdom, 35-fold in Germany, 19-fold in France, 29-fold in the Netherlands, 17-fold in Spain and 14-fold in Italy.
  • The Commission found specific evidence of sudden drops of traffic to certain rival websites of 85% in the United Kingdom, up to 92% in Germany and 80% in France. These sudden drops could also not be explained by other factors. Some competitors have adapted and managed to recover some traffic but never in full.

Therefore, the theory of harm lies in that it was using its dominant platform (Google Search) to help establish another dominant position (Google Shopping) and this is supported with the exponential increase of traffic to Google Shopping and a fall in competitors. Also, it distorts reduces the level of relevancy in search results by displaying certain products over others.

Commentary:

I must admit first-hand that I am not a big fan of market liberalisation because it creates lesser competition and lowers competitive pressure. I am especially an opponent to the thought that “less is more” in the context of competition. For example, a self-sufficient country like China which holds one of the largest economies in the world has only a few companies running the bank by the billions/trillions: Tencent, Alibaba and Baidu to name a few. Competition is pretty dire there with only a handful of *very strong* players.

However, this decision is one where I am unconvinced of but understand the underlying rationale (and desperateness) of the decision. It’s a good decision but the explanation part leaves more to be desired.

Firstly, it stifles product innovation and improvement. The whole reason for the integration of the price comparison function into Google shopping is so that consumers like you and me need not individually check Amazon, Zalando, Asos, Missguided, Ebay to find the cheapest place to buy a shirt. A function which disadvantages rivals is not automatically anticompetitive practices but a balancing process needs to be taken place before it can be called an infringement of competition laws. Through improving and updating its price comparison function, Google was able to obtain a solid market standing which is not a “Google privilege” but maybe it offered something other price comparing websites don’t– the added convenience. But as seen in Windows/ Windows Media Player, added convenience isn’t always looked upon favourably.

Secondly, it’s quite unclear what kind of infringement this is. This is important because different tests are used for different infringements. At its closest, this appears to be a tying case such as Windows/ Windows Media Player but it wasn’t like consumers were prevented from using an alternate price comparison website and consumers didn’t need to buy Google Search to get Google shopping for free (welcome to the 21st century!). It is possible that this is a constructive refusal to supply case where if it can be proven ‘indispensability’ lead to a ‘margin squeeze’ and ‘a secondary market to be affected’. Bronner, Commercial Solvents, Magill and IMS Health all demonstrate this point (to a certain extent). The Commission notes in its Guidance that the existence of an obligation to supply – even for a fair remuneration – may undermine undertakings’ incentive to invest and innovate, which could be detrimental to consumers; and that, where a competitor can take a ‘free ride’ on the investment of the dominant firm, it is unlikely itself to invest and innovate, again to the detriment of consumers. So… What does it want Google to do exactly?

The part which baffled me the most is, as per the usual EU Competition Commission style, it did not tell Google how to remedy the problem but wants Google to figure out by itself on how it can be remedied and what commitments it plans to give. This is after 7 years of negotiation and various compromises being discussed hence it should be reasonable for the EUCC to at least give an idea of how to give a remedy the issue.

In other related thought, maybe EUCC has been overzealous with Google? It does have 2 cases pending with Google on it’s Adsense and Android workings…

The Gruber Deal

(I know I said in my previous post that Google Shopping would be the next post but since this is more recent… some urgent comments about it)

For people who can’t drive, people who do not want the trouble of finding a car park, people want to go out for lunch and people who would miss the last train (thanks to OT), Grab and Uber would be a staple app in the phone. According to The Edge Markets, Grab itself offers 3.5million rides a day which shows how reliant people have become on ride-hailing services compared to the traditional taxis.

I won’t talk about why the merger happened (you can read more here and here) but rather I want to focus on the market implications of the merger. Indeed it as raised red flags amongst Competition Commissions in Singapore, Vietnam and Philippines about what the implication of the merger will bring as it will be a monopoly in the region. Unfortunately, Malaysia has yet to have merger controls in place as the recent Competition Act focuses on dominant players and anti-competitive practices.

How might this concern me?

If all goes well and as expected, Grab would be a monopoly player in the ride-hailing market. For the society as a whole, we would want to prevent the existence of a monopoly if possible. Imagine if you could only go to Tesco for your groceries, wanting to buy a carton of milk and it costs you RM20? Sure you’ll be unhappy and unwilling to buy it but you have no alternatives, hence you plan what you can save throughout the week to afford that bottle of milk. Monopoly players might just do that, jacking up prices for their own profit gains.

Competition authorities are more cautious when approaching the topic of mergers compared to anti-competitive activities for 2 reasons:

  1. A merger would lead to a permanent structural change in the market and may damage the competition of the market. Once it is done, you cannot undo it. It has a much more lasting change than a cartel/ price-fixing agreement.
  2. A merger can actually lead to efficiencies and higher productivity compared to anti-competitive activities. For example, firms may want to combine IP resources to create a better product/ service.

Of the two possible outcomes, Competition authorities can only predict and make assumptions about the post-merger entity possible moves. They would have to look in the long term, such as 7 years from now, what economic benefits the entity would bring and at what cost to the society. It’s all based on speculation. This is a very onerous and risky decision just like how it is hard to speculate whether a 5-minute ride might either cost you an arm or just RM5.

How do Competition authorities come to a decision?

(I’m referencing merger control in place in the EU since Malaysia lacks one currently)

Currently, the test for whether mergers would affect competition negatively in the EU is the SIEC test: Will the concentration Significantly Impede Effective Competition in the common market?

The burden is on the Commission to establish that the merger is either compatible or incompatible with the internal market. In making the determination, the merger must be assessed in the context of the position that would exist were the merge not to be completed (counterfactual). The standard of proof is the balance of probabilities.

In fact, EU authorities have previously prevented several mergers such as O2/3 and Ryanair/ Aer Lingus.

For O2/3, they are both strong players in the telecommunications market which appears to be an oligopoly market. Market regulators focus on promoting competition and ensuring competition remains strenuous by keeping it fragmented. The mobile telecoms sector should be competitive so that consumers can enjoy innovative mobile services at fair prices and high network quality. The principle that efficiency claims can be put forward to outweigh any negative effects is more rhetoric than reality. Competition authorities are more prudent and cautious for merger cases and efficiencies play only a marginal role compared to the perceived negative effects.

In Ryanair/ Aer Lingus, the parties would have very high combined market shares on a large number of routes, but that the merger would eliminate competition between 2 closest competitors on the routes and that barriers to entry into the market were very high. The parties closely monitored the other’s marketing campaigns and price changes and constrained each other’s behaviour in relation to both price and other parameters of competition.

In cases where the parties are found not be close competitors, such as Facebook/Whatsapp, an unconditional clearance decision is likely. In contrast, a merger between firms which produce products with high degree of substitutability is more likely to produce anti-competitive consequence i.e. Ryanair/ Aer Lingus.

The reason for CCSS to delay the merger until May 9th is perhaps to assess either to allow the merger to pass and give commitments to ensure competition structure, prevent it and as such “Gruber” is not allowed.

But what if Uber said that because it keeps making losses hence selling off the SEA entity was to improve its business?

This is also called the “rescue merger” where a firm takes over another to prevent the latter from “failing”. This defence is well established in US antitrust practice where it seeks to give a “second chance” involving a firm which would face an inevitable liquidation. There are various advantages for this such as to protect all stakeholders, creditors, employees, and the economy. This approach is seen to be involved with distributive justice instead of focusing on efficiency gains by forcing a loss-making company to stay alive for the benefit of competition at the expense of others.

However, there are 3 criteria which the authorities will consider:

  1. The failing firm would in the near future be forced out of the market because of financial difficulties
  2. There is no less anti-competitive alternative purchase than a notified merger and in absence of a merger
  3. The assets of the failing firm would inevitably leave the market.

Note that this is a “last resort defence” and should be assessed very strictly to prevent abuse. Companies may record losses but have valuable assets such as Twitter and Instagram.

In Aegan/ Olympic II, the Commission approved it unconditionally accepting that Olympic was a failing firm and would be forced. The ongoing Greek financial crisis meant that domestic air travel would drop drastically. Absent the merger, it would leave the market completely and the merger would have no adverse effects on competition.

In Grab/ Uber’s case, Uber has been recording losses for years especially in SEA whilst Grab has been innovating rapidly with various initiatives. Uber, with various protocols and guidelines, has been said to lose to Grab due to lack of local preference. However, the situation does not seem to be as dire and critical as Aegan/ Olympic II because they are airlines which focuses on Greece region and there is a financial crisis ongoing. In fact, just a few weeks before the merger announcement, Uber said that it would invest more in SEA region to improve its market position.

It is probable that this argument will fail if we follow EU’s merger regulations and it’s (often criticised) strict approach to competition regulation. I personally prefer Uber over Grab for various reasons but I’ll leave this to the Competition authorities.

Okay, but can’t competition authorities stop Grab for anti-competitive practices post-merger?

Competition authorities would normally have 2 options if later they find the merger to be unfavourable: to unwind the merger or to assess the post-merger entity on anti-competitive practices legislation. Authorities are less likely to unwind a merger because of the significant cost involved and the structural changes to the market already caused. In the EU, once a merger is said to satisfy certain features, it must notify the Commission of intention to merge or else if it “gun-jumps”, a hefty fine can be penalised on it.

This brings us to the second option– under the Competition Act. Most Malaysian Uber/ Grab users would every now and then receive a text “free RM60 off your next 10 rides!” or “book now and redeem up to RM5 on your next ride!” but once that competitive pressure is off-loaded, would we still continue to see these rebates? According to Grab Malaysia Country Head Sean Goh, the merger would not make things any different and prices would remain the same. How much confidence or scepticism should Competition Authorities have on this statement?

Analysis of anti-competitive practices often takes much longer than preventing a merger. The previous may require months of overseeing, various economic theories and it is less obvious. For the latter, it’s all about speculation (and common sense), goes to the root of the problem instead of just plucking the weed and the Commission makes a judgment much faster than anti-competitive practices as businesses want finality and a decision fast before either party changes their mind. As mentioned previously, once a merger goes through, the damage is done. Catching them after the merger is definitely possible, but one that is less preferable than stopping it before and takes more time.

Comments

Personally, I don’t look the merger in a favourable light and 120% sceptical about the merger. My reasons are as follows

1.Monopolies are nightmares

When I was in the UK and Uber was the dominant player, Uber rarely ever had any promotion, discounts or rebates like I’ve been receiving in Malaysia where it’s almost every other week that I’ll receive a text about one. As such, I can imagine the same to happen here where it’s a matter of time where Malaysians would bid goodbye to those promotion texts and are forced to pay higher prices. Without Uber to offer those promotions, Grab would similarly find no reason to give offers as well. As such, it’s just a matter of time.

2.The efficiency gains might not be able to compensate for the reduction in competitive pressure

Unfortunately, and strangely, we live in a decade where monopolies are “normal” and hostile takeovers may be an everyday affair. China is an excellent example where the whole country’s technology lies in the hanof on a few who holds a monopoly in every market. Perhaps the citizens are more patriotic and hence support local apps more than foreign ones (Didi vs Uber) but within China itself, a country with a huge economy, there are very few players in each market i.e. Alipay dominates the card-less payment, Wechat reigns over Whatsappp and Weibo is the new Facebook there. It creates a no-choice, no-second option if I dislike any of them.

I’m really not a big fan of the theory “the bigger the more efficient” theory but I advocate for “the bigger the more risky to fail” theory. The bigger the company gets, the more it absolutely cannot fail and the more the need to sustain it. Call me a pessimist but when it comes to competition, no allowance should be made and no risk left unaccounted for. Look at the Financial crisis 2008/ 2012 and it’s obvious why.

About the proposed decision on 7 Tuition and Daycare Centres: Sharing is not caring

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They say sharing brings joy and happiness… but when the Malaysian Competition Commission comes knocking on your door? Not so much joy.

(Below is based on the Proposed Decision under Section 36 of the Competition Act – Infringement of Section 4(2)(a) of the Competition Act by 7 Tuition and Daycare Centre. When the full judgement is released, this post will be updated accordingly. Certain facts may be circumstantial or speculative.)

The facts are as follows. 7 tuition and day care centres were penalised with a financial penalty of RM33K for collectively agreeing to fix and standardise the fees charged for the tuition and day care services in the SS19 Subang Jaya area. The price fixing agreement caught the Commission’s attention and were penalised accordingly. (The Commission is allowed to impose a financial penalty not exceeding 10% of the undertaking’s worldwide revenue given in the Competition Act 2010)

Competitors collude more frequently than consumers might think and it is extremely naive to think that only high profile companies collude. It exists from your neighbourhood bakery sellers ((No. MyCC.0045.2013)) to ice manufacturers ((No. MyCC.700.2.0001.2014)) [Suggestion: the MYCC should come up with a shorter name for each case]. Healthy competition means competitors are striving to better serve customers than their rivals. As a result, competitors are never sure what their competitors will do next in trying to gain a competitive advantage. However, especially in oversaturated and concentrated markets, instead of going head-to-head with their competitors, why not just make a phone call to the CEO and collude? Where competition is stiff and there’s a lack of consumer choices in a concentrated market,  that sure seems like a win-win situation for the undertakings but not for consumers… or themselves when they find themselves within MYCC’s list.

Article 4(1) of the Competition Act 2010 states that “A horizontal or vertical agreement between enterprises is prohibited insofar as the agreement has the object or effect of significantly preventing, restricting or distorting competition in any market for goods or services.” (An improvisation of Article 101 TFEU) agreement cannot be examined in isolation from the earlier context, that is, from the factual or legal circumstances causing it to prevent, restrict or distort competition. Firstly, it is necessary to assess the impact on the relevant market and then weigh them with any possible efficiency gains or positive effects. Price-fixing agreements would predominantly fall under the object category because it’s quite clear that price-fixing would only benefit themselves and have pecuniary effects on the consumers.

It’s no surprise for information exchange to be regarded as a waving red flag to competition authorities for the presence of a cartel. In fact, information exchange is often considered as the no.1 ingredient of a cartel. However, information exchange can be a double edged sword. On one hand, information exchange allows concerted practice amongst undertakings which means this allows collusion amongst the parties. On the other hand, they may also be a source of efficiency gains to remedy some market failures such as information asymmetries. In Asnef‐Equifax case, information sharing can help to reduce the disparity between the information available to credit institutions and that held by potential borrowers.

So where does one cross the line when sharing information is deemed anti-competitive or not? As a general thought, information exchange restricts competition by object if the exchange of information is individualised (as opposed to aggregated) and the exchange concerns firms’ future conduct (removes strategic uncertainty). Features of the relevant market such as concentration, nature of the product or nature of the market plays an important role.

In Bananas (EU Case), the Commission found the bananas importers had engaged in direct bilateral pre-pricing communication had taken part in a concerted practice to coordinate quotation prices for bananas. It was found that the parties communicate frequently and the conversations which took place were about future pricing policies. It would be easy to assume that the undertakings would take the information into account when determining the policy which they intended to pursue on the market. The court laid down an interesting point where in Competition law, the requirement of independence precludes direct or indirect conduct between operators designed to disclose to actual or potential competitors decisions or intentions concerning their own conduct on the market.

There are however several circumstances where information sharing is legal such as between franchisors and franchisees since communication is vital for the success of both parties to profit. Another example is where the following criteria are satisfied: (i) the arrangement must contribute to improving the distribution of the services in question or economic progress as a whole; (ii) consumers must be allowed a fair share of the resulting benefit, (iii) it must not impose any non-essential restrictions on undertakings and (iv) it must not afford the possibility of eliminating competition in respect of a substantial part of the services in question. (Asnef‐Equifax)

Comment:

Price fixing is a straightforward case because it has a ‘pernicious’ effect on competition and to be so unlikely to produce efficiencies. This is why it is a “by object” restriction instead of “by effect” because to prove the latter is harder, takes longer time and more resources.

There are, however, many much more complicated situations. I’ll touch on what was the European Competition Commission’s biggest fine ever of £2.1million on an undertaking we used everyday– Google.

Sources:

  1. Proposed decision on seven tuition and day care centres for price fixing conduct
  2. Competition Act 2010
  3. MYCC Guidelines on Anti-competitive Agreements
  4. https://www.twobirds.com/en/news/articles/2007/ecj-preliminary-ruling-information-exchanges-between-competitors
  5. Jones & Sufrin Competition law