PublicationsNo “Hub And Spoke” Cartelisation By Ola/ Uber

July 14, 2020by Shivam Goel2
PREFACE

A traditional hub and spoke cartel is one wherein there is an exchange of strategic information between horizontal competitors (spokes) by the means of a common contractual partner active at a different level of the distribution chain (the hub), who often also contributes to stabilizing a cartel.[1]

The hub and spoke cartel, also known as A-B-C information exchange[2], consists in the exchange of strategic information between two or more horizontal competitors (A and C; spokes) via common contractual partner active at a different level of the production/ distribution chain (B; the hub)[3], who often also contributes to stabilizing a cartel.[4]

Recently, allegations were made against Ola and Uber for indulging in anti-competitive practises by operating vide the hub and spoke mechanism. It was alleged that Ola/Uber App provides a platform (“hub”) to the transport service providers/ cab drivers (“spokes”) to fix price for cab rides by employing Ola/ Uber price algorithm to the detriment of the riders, as the element of “negotiation” between a cab driver and the riders as regards “ride rentals” is made to evaporate by employing the mechanism of “concerted action” and “price fixation”.

The Ola/ Uber business model was challenged before the Competition Commission of India on the ground of “Hub and Spoke Cartelization”.

COMPETITION COMMISSION OF INDIA DECISION

The Competition Commission of India[5] vide its order dated: 06.11.2018 observed that allegations of Ola/ Uber to be operating vide the hub and spoke mechanism are baseless, and moreover, Ola and Uber are competitors providing services of same/ similar nature. Also, the services of cab booking through mobile application are not only provided by Ola and Uber but there are other players in the market also, hence, there is likely to be no appreciable adverse effect on competition through the employment of business model on which Ola/ Uber function.

In the case of “Cab Aggregators” model, the estimation of fare through App is done by the “algorithm” on the basis of large data sets, popularly referred to as “big data”. Such algorithm seemingly takes into account personalised information of riders along with other factors such as time of the day, traffic situation, special conditions/ events, festival, weekday/ weekend which all determine the demand and supply situation. Resultantly, the algorithmically determined pricing for each rider and each trip tends to be different owing to the interplay of large data sets. Such pricing does not appear to be similar to the “hub and spoke” arrangement as understood in the traditional competition parlance.

That the decision rendered by the Competition Commission of India was challenged before the Hon’ble NCLAT, and the Hon’ble NCLAT vide its decision dated: 29.05.2020 upheld the order passed by the Competition Commission of India.

BEFORE THE NCLAT

In the matter of Samir Agarwal V/s Competition Commission of India & OrsCompetition Appeal (AT) No. 11/ 2019, the question of law that came for adjudication before the Hon’ble NCLAT was:

Whether Ola/ Uber App promotes “Hub and Spoke” Cartel, as the hub (Ola/ Uber) fixes or restricts prices and the spokes (Transportation Service Providers/ Cab Drivers) merely accede to that fixed and restricted pricing?

Answering the aforenoted question of law in the “Negative”, the Hon’ble NCLAT observed that:

THE COMPETITION ACT, 2002

1. The Competition Act, 2002 was enacted to ensure fair competition by prohibiting trade practices which cause an appreciable adverse effect on competition in markets within India.

2. The Competition Act, 2002 provides for the establishment of quasi-judicial body styled as “Competition Commission of India”.

3. The Competition Act, 2002 aims at curbing negative aspects of competition. Chapter II of the Competition Act, 2002 deals with prohibition of agreements qua production, supply, distribution, storage, acquisition or control of goods or provision of services, which causes or is likely to cause an adverse effect on competition within India by any enterprises or person, singularly or in the form of an association. Such agreements are declared void.

4. Section 3 (3) of the Competition Act, 2002 deals with an agreement between enterprises or persons singularly or in the form of an association including cartels engaged in similar trade of goods or provisions of services which inter alia directly or indirectly determines purchase or sale prices; such agreements are presumed to have an appreciable adverse effect on competition.

5. Section 4 of the Competition Act, 2002 prohibits the abuse of dominant position which includes the imposition of an unfair or discriminatory condition in purchase or sale of goods or services or price in purchase or sale of goods or services.

“HUB AND SPOKE” CARTEL

1. In the conventional sense, hub and spoke arrangement refers to the exchange of sensitive information between competitors through a third party that facilitates the cartelistic behaviour of such competitors.

2. A hub and spoke arrangement generally require the spokes to use a third-party platform (hub) for exchange of sensitive information, including information on prices which can facilitate price-fixing. For a cartel to operate as a hub and spoke, there needs to be a conspiracy to fix prices, which requires the existence of collusion in the first place.

ALLEGATIONS

1. Using the App of Ola/ Uber, the rider opts for a ride and the driver accepts the ride, pursuant to which the driver provides end-to-end services from pick-up of a rider to drop at their destination. The fare is calculated by the algorithm based on many factors, including the expected time and distance which is shown to the rider before the rider opts for a ride. The App facilitates payment of the fare by digital mode of credit card/ debit card.

2. Due to algorithmic pricing, riders are not able to negotiate fares with individual drivers for rides matched through App nor drivers are able to offer any discounts. Thus, the algorithm takes away the freedom of the riders and drivers to negotiate the price and both have to accept the price set by the algorithm.

3. The algorithm calculates the fare based on a base amount, ride distance, and time spent in transit, which is multiplied by a “surge” factor during periods of high demand. The drivers who use the Ola/ Uber App, instead of competing on price, accept the fare which is the outcome of Ola/ Uber pricing algorithm.

4. Ola and Uber as “Cab Aggregators” use their respective algorithms vide their respective Apps to facilitate price-fixing between drivers. Ola/ Uber act as “Hub” where “Spokes” (competing drivers) collude on prices.

5. That the algorithmic pricing adopted by Ola/ Uber takes away the liberty of individual drivers to compete with each other and thus, amounts to price-fixing by Ola/ Uber, in contravention of the provisions of the Competition Act, 2002.

6. As per the Driver Terms and Conditions, which are agreed upon between the cab aggregators with their respective drivers, the taxi fare is reflected on the App at the end of the trip which the driver is bound to accept without having any discretion. The drivers receive their share after deduction of commission by Ola/ Uber.

7. Price fixation and cooperation between drivers orchestrated by Ola/ Uber result in “concerted action” under Section 3 (3) (a) read with Section 3 (1) of the Competition Act, 2002.

8. A cartel is a cartel, even if price-fixing is achieved by way of an App and Ola/ Uber cannot claim any immunity from the provisions of the Competition Act, 2002 on the pretext of “App” based pricing.

9. Ola/ Uber impose a minimum price level on the drivers, resulting in contravention of “Resale Price Maintenance” under Section 3 (4) (e) of the Competition Act, 2002. An agreement that has as its direct/ indirect object in the establishment of a fixed or minimum resale price level, may restrict competition.

DEFENCE OF OLA

1. Ola App is a software platform which can be downloaded by riders/ commuters as well as licensed taxi drivers on their respective mobile phones. Ola enables the drivers to connect with each other through the Ola App. There is nothing to suggest that there exists an agreement between Ola and taxi drivers connected to it, or between the taxi drivers themselves, where they agree to fix prices.

2. Ola merely acts as an intermediary which connects two ends of the supply chain, that is, taxi driver and commuter.

3. Ola and taxi drivers connected to Ola are not at the same level of the supply chain.

4. There are numerous variables such as distance, time, availability of cab, weather etc. based on which the Ola App algorithm sets the fare of the trip which makes it impossible for anyone to fix prices.

5. The drivers, though agree to use the pricing algorithm set in the Ola App, can easily “multi-home” which gives them the ability to plough their vehicle to any platform which they wish to. The consumers and drivers can switch between different Radio Taxi Apps without incurring any significant costs.

DEFENCE OF UBER

1. Uber App is a technology service offered by Uber to its driver-partners with riders having the choice to go for alternative modes of transport and driver-partners having the choice to undertake offline private or corporate transport duties.

2. The driver partners are free to negotiate a lower fare than what is recommended. That Uber does not function as an association with its driver-partners, as such it cannot facilitate a cartel between them as alleged.

3. Price structure offered by Uber is comparable to metered taxis as well as auto-rickshaws which follow standard price mechanism at different points of the day. Moreover, the driver-partners are free to charge any amount which is lower than the one recommended by the App. They are also free to pick-up passengers not using the Uber App.

DEFINITION OF “ANY PERSON” IN SECTION 19 (1) (A) OF THE COMPETITION ACT, 2002?

1. Section 19 of the Competition Act, 2002 provides for an inquiry into certain agreements and dominant position of an enterprise.

2. Under Section 19 of the Competition Act, 2002, the Competition Commission of India (hereinafter referred to as the “CCI”) may inquire into any alleged contravention of the provisions contained in Sub-section (1) of Section 3, or Sub-section (1) of Section 4 of the Competition Act, 2002 through either of the following modes:

(i)    On its own motion; or

(ii)  On receipt of any information from any person, consumer or their association or trade association; or

(iii)  A reference made to it by the Central Government or a State Government or a Statutory Authority.

3. Reference to receipt of any information from “any person” in Section 19 (1) (a) of the Competition Act, 2002 has necessarily to be construed as a reference to a person who has suffered an invasion of his legal rights as a consumer or beneficiary of healthy competitive practices.

THE NCLAT DECISION

1. Both Ola and Uber provide radio taxi services on demand. A consumer is required to download the App before he is able to avail the services of the cab aggregators (Ola/ Uber).

2. A cab is booked by a rider using the respective App of the cab aggregators which connects the rider with the driver and provides an estimate of fare using an algorithm.

3. Ola/ Uber does not provide a platform/ hub in form of their respective Apps for collusion inter se the spokes, that is, the cab drivers.

4. Ola/ Uber App does not provide a platform for restricting price competition among drivers to the detriment of the riders.

5. Allegations of collusion inter se the drivers through the platform of Ola and Uber is meritless.

6. In the business model of Ola, there is no exchange of information amongst the drivers and Ola. The taxi drivers connected with Ola platform have no inter se connectivity and lack the possibility of sharing information with regard to the commuters and the earnings they make out of the rides provided. This excludes the probability of collusion inter se the drivers through the platform of Ola.

7. On the other hand, Uber provides a technology service to its driver-partners and riders through the Uber App and assist them in finding a potential ride and also recommends a fare for the same. However, the driver-partners as also the riders are free to accept such ride or choose the App of competing service, including choosing alternative modes of transport. Although Uber App recommends a fare, the driver-partners have the liberty to negotiate a lower fare.

8. “Cab Aggregators” do not function as an association of its driver-partners.

9. Neither Ola nor Uber hold a dominant position in the market. These two cab aggregators are not operating as a joint venture or a group. Ola and Uber, together or independently, do not hold a dominant position in the relevant market of providing services. Thus, there is no contravention of Section 4 of the Competition Act, 2002.

10. Sub-section (2) of Section 26 of the Competition Act, 2002 provides for closing of information by the CCI on arriving at an opinion that no prima facie case exists.

11. That a quasi-judicial body like CCI while appreciating the material placed before it in support of allegations of anti-competitive agreements or abuse of dominant position has to form an opinion in regard to the existence or otherwise of a prima facie case through the proper application of mind and the order reflecting such opinion of the CCI has to be informed of reasons. Any view taken by the CCI without recording reasons demonstrate lack of application of mind and exercise of arbitrary power.

TAKEAWAY

The decision rendered by CCI and the NCLAT seems to be on the right footing because in 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. In the business model of Ola/ Uber, there is no agreement between drivers inter se to delegate pricing power to the platform/ cab aggregators.

In App-based taxi services, Ola/ Uber provide a composite service of “driver-rider matchmaking”, “algorithmic pricing” and “GPS tracking”; that price charged per ride is not fixed and is dependent on several factors delineated above; thus, it cannot be said that Ola/ Uber business model is anti-competitive.

That existence of an agreement, understanding or arrangement, demonstrating or indicating the meeting of minds, is a sine qua non for establishing a contravention under Section 3 of the Competition Act, 2002; and so far as the business model of Ola/ Uber is concerned there does not appear to be any such agreement or meeting of minds between the cab aggregators and the respective drivers, or between the drivers inter se. Therefore, there appears to be no contravention of Section 3 of the Competition Act, 2002.

Moreover, there is no evidence that “algorithmically determined price” will eliminate price competition and that the price so determined will be necessarily higher than the prices that are negotiated by drivers and the riders on an individual trip basis.

Lastly, only if the “cab drivers” could have colluded using the Ola/ Uber App, it could have been said that such an arrangement amounts to cartelization, however, this is not the case here. In Ola/ Uber business model, a rider books his/ her ride at any given time which is accepted by an anonymous driver available in the area, and there is no opportunity for such driver to coordinate its action with other drivers. Therefore, this cannot be termed as a cartel activity or conduct through Ola/ Uber platform. Hence, it can be said that there is no hub and spoke cartelization in the business models of Ola and Uber.

[Article reposted with permission from Mr Shivam Goel]

REFERENCES-

[1] Hub-and-spoke cartel- how to assess horizontal collusion in disguise? DOI: 10.7206/kp.2080-1084.110

[2] O. Odudu, Indirect Information Exchange: The Constituent Elements of Hub and Spoke Collusion, European Competition Journal, 2011, 7 (2), p. 207

[3] E. Prewitt, G. Fails, Indirect information exchanges to hub-and-spoke cartels: Enforcement and litigation trends in the United States and Europe, Competition Law & Policy Debate, 2015, 1 (2), p. 63

[4] P. Van Cayseele, Hub-and-spoke Collusion: Some Nagging Questions Raised by Economists, Journal of European Competition Law & Practice, 2014, 5 (3), pp. 2-4

[5] Case No. 37/ 2018

Legal Maxim (November 30, 2022) No “Hub And Spoke” Cartelisation By Ola/ Uber. Retrieved from https://www.legalmaxim.in/no-hub-and-spoke-cartelisation-by-ola-uber/.
"No “Hub And Spoke” Cartelisation By Ola/ Uber." Legal Maxim - November 30, 2022, https://www.legalmaxim.in/no-hub-and-spoke-cartelisation-by-ola-uber/
Legal Maxim July 14, 2020 No “Hub And Spoke” Cartelisation By Ola/ Uber., viewed November 30, 2022,<https://www.legalmaxim.in/no-hub-and-spoke-cartelisation-by-ola-uber/>
Legal Maxim - No “Hub And Spoke” Cartelisation By Ola/ Uber. [Internet]. [Accessed November 30, 2022]. Available from: https://www.legalmaxim.in/no-hub-and-spoke-cartelisation-by-ola-uber/
"No “Hub And Spoke” Cartelisation By Ola/ Uber." Legal Maxim - Accessed November 30, 2022. https://www.legalmaxim.in/no-hub-and-spoke-cartelisation-by-ola-uber/
"No “Hub And Spoke” Cartelisation By Ola/ Uber." Legal Maxim [Online]. Available: https://www.legalmaxim.in/no-hub-and-spoke-cartelisation-by-ola-uber/. [Accessed: November 30, 2022]
Subscribe
Notify of
guest
2 Comments
Newest Oldest
Inline Feedbacks
View all comments
Mahesh

Very well written article with great key takeaways !

Sanju

Mr Shivam, do you think in the contemporary scenario explicit agreements are necessary for proving “cartelisation” ? Companies simply use same algorithms or AI to coordinate prices with competitors. What is your take on this ?

https://i0.wp.com/www.legalmaxim.in/wp-content/uploads/2020/06/lexim-logo.png?fit=1421%2C346&ssl=1
68 Shantipally, Rajdanga Main Rd, Kolkata, West Bengal, India
official@legalmaxim.in

Follow us:

Copyright © Legal Maxim 2020

error: Content is protected !!