Commentary: Grab-Uber merger will lead to monopolistic prices? Flawed thinking


SINGAPORE: There has been much discussion about the Grab and Uber merger and its implications for consumers, taxi operators such as Comfort, and relatively less discussion of the impact on Uber (and possibly Grab) drivers.

At the outset, it should be noted that comment on this makes the critical assumption that the merger will be approved by the Competition Commission.

Should regulators reject the merger, the following arguments will be moot.

INNOVATION AFFECTED?

There has been much talk about how the merger will affect innovation. 

Let’s be clear though – the most impactful innovation in this space was the use of smartphones to offer ride- sharing services. It dramatically increased the transport options available to consumers and, in some instances, offered better prices, both of which led to higher consumer welfare.

Subsequently, the ride sharing companies formed a number of alliances with traditional transport providers (GrabTaxi, UberFLASH) which further improved consumer choices, and also introduced additional services such as food delivery, e-wallet (facilitating payments), and financial services (through alliances).

The drivers and other delivery partners (e.g. restaurants for UberEats) formed another key group of stakeholders that benefitted from the emergence of these services — they could utilise their time or assets (e.g. cars, motorcycles, bicycles or personal mobility devices or PMDs) to earn some extra income.

In other words, the shared ride companies offered business model innovation but other than the first big innovation, the rest were incremental additions to the first important idea.

Grab Jason Thompson

Mr Jason Thompson, managing director of GrabPay Southeast Asia, sharing about the company’s new financial services at Money 20/20 conference. (Photo: Grab)

MASSIVE DISCOUNTES WERE UNSUSTAINABLE

Before we discuss whether the merger will lead to higher or monopolistic prices, it may be useful to remember that the intense competition between Uber and Grab was akin to a land grab.

In their zeal to acquire a larger piece of the business, the companies were probably doing unsustainable levels of discounting and subsidising. 

With or without the merger, the discounting was bound to stop at some point in time, probably as early as next year, because of Uber’s planned IPO. So it is likely that the only effect of the merger might be to advance the discontinuation of an unsustainable level of discounting and subsidising.

Even leaving the discontinuation of deep discounting aside, we should not be unduly alarmed about the loss of consumer welfare because of high prices for the simple reason that there is a cap on how much the “new Grab” can raise prices, especially in Singapore.

Singapore has a good public transport system and a taxi system that doesn’t charge high fares. Consumers will switch to these alternatives well before the “new Grab” starts charging monopolistic prices.

GRAB LIKELY TO CONTINUE TO INNOVATE

Let us now turn to how the merger will affect innovation and welfare for other stakeholders such as drivers and partners, such as restaurants. I believe that the impact will be much less than is commonly believed and am sceptical about the merger’s detrimental impact on “innovation”.

In fact, as noted above, it may be a stretch to call some of these product extensions as innovations and there are a good number of providers offering these “innovative” services.

For instance, e-wallet services are being offered by many players, including SingTel. In services such as food delivery, there are several delivery options, besides the shared ride service providers, making the impact of the merger even less.

Given the low barriers to entry in this business and the low switching costs for consumers, more entrants may enter in the future as well, leveraging on the existing delivery network – a ready supply of cyclists, motorcyclists and PMD owners.

On Wednesday (Mar 28), homegrown carpooling app Ryde announced it would be launching RydeX, its new private-hire car service, as part of its growth expansion strategy. 

Ryde app

What the RYDE app looks like on a mobile phone. (Image: www.rydesharing.com)

Even after the merger, Grab will continue to innovate. Its competition with Uber was only one of the reasons for trying new strategies and offering new services.

Other reasons include enhancing its profit streams by leveraging its consumer base to sell multiple services (e.g. GrabPay to customers or insurance to Grab drivers) and leveraging its skills in technology (e.g. matching riders and drivers). Both these motivations will remain powerful, post-merger.

DRIVERS MAY LOSE OUT

Drivers may be one key group who may lose out because of the merger. The “new Grab” may need fewer drivers. The intense competition between the two providers lowered the prices of their services and increased demand. 

When prices become higher (they could have headed higher even without the merger), the demand might fall.

This is very much a part of the dynamics of competition. Entrants are attracted by the possibility of making profits, leading to excess supply and shakeout before a market discovers its equilibrium.

The Grab-Uber merger should therefore be seen from a dispassionate perspective.

Most analysts and observers overestimate the extent of innovation happening in this space and incorrectly label product extensions as innovations. It is also incorrect to assume that whatever is happening today (e.g. discounting) would continue indefinitely, without the merger.

As a believer in free choice and markets, I have few concerns about the merger. In a free market system, there is no reason why any party (including governments) should stop Uber from selling its Southeast Asian business if it chooses to do so. 

The argument that it would lead to monopolistic prices is flawed.

Nitin Pangarkar is Associate Professor in the Department of Strategy and Policy at the National University of Singapore (NUS) Business School.



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