Antitrust in the Sharing Economy

Thursday, November 30th, 2017 at 11:22 am, by Ahamed Hossain

In August, the Second Circuit reversed a district court denial to compel arbitration in a putative class action lawsuit between the ridesharing company, Uber, and an Uber driver, Stephen Meyer. The court decided that Uber provided reasonably conspicuous notice of its arbitration clause and that Meyer manifested assent to its terms. The case was nonetheless remanded so that the district court can decide whether Uber waived its right to arbitration by engaging in the litigation. Meyer alleges that Uber’s former CEO Travis Kalanick (Uber itself was not originally named) engaged in illegal price-fixing. Whether the case ultimately lands in arbitration or not, this dispute and others raise the question of whether traditional antitrust laws are well suited for the sharing economy.

In his lawsuit, Meyer alleges that Uber’s CEO committed both horizontal and vertical price-fixing. Horizontal price-fixing, the classic example of anticompetitive behavior, involves an agreement to set prices between competitors on the same tier of distribution. If found, such an agreement is per se illegal, which means that the agreement itself violates antitrust laws independent of its actual economic effects. Vertical restraints on trade involve coordination between agents on different tiers of distribution. They are typically not treated as per se violations and instead hinge on whether the procompetitive benefits (e.g., the introduction of a new product to the market or lower prices for consumers) outweigh the anticompetitive effects. Liability for vertical collusion therefore depends on actual or expected economic effects, with a clear emphasis on the consumer.

Meyer argues that Uber’s business practices constitute a horizontal price-fixing conspiracy between drivers, one of whom is Kalanick himself. Since Uber is a platform used by hundreds of thousands of independent drivers, Kalanick contends that such an agreement is “wildly implausible.” At the pleading stage, Judge Rakoff was not convinced by Kalanick and emphasized the role of technology in possibly helping to facilitate an implicit horizontal agreement between drivers.[1] This type of anticompetitive agreement, where the need for explicit cooperation between competitors is reduced by the existence of a central coordinator, is not new to antitrust law and is appropriately called a “hub-and-spoke” conspiracy. Still, the vertical components of this structure are not enough and liability requires inferring real horizontal collusion, which some refer to as the “rim requirement.” There is reason to doubt the existence of even an implied horizontal agreement in a business structure with numerous apparently independent “spokes” agreeing to generally consumer-friendly pricing models. Why would so many drivers conspire to make lower profits? This is why Meyer’s lawsuit focuses specifically on “surge pricing,” wherein Uber charges customers a multiple of normal rates during peak times. Although this was only the pleading stage, the technology that platforms like Uber and Lyft use to connect and coordinate horizontal agents, in conjunction with collective pricing algorithms, might expand the traditional conception of a hub-and-spoke conspiracy.

The contention that Uber’s practices vertically restrain competition depends on economic considerations. Here too traditional methods of analysis (and the policies behind them) are strained when applied to sharing companies. Firstly, “consumer welfare” is the central focus of modern economic analysis in antitrust, but the very reason for sharing companies’ success and disruptive nature is that they blur the line between the consumer and producer. To be sure, it is not analytically difficult to discern between the consumer and producer in each discrete transaction; rather, Uber and other two-sided sharing companies create classes of midstream producers with characteristics that challenge the underlying policy goals behind antitrust law’s emphasis on the consumer. There is considerable debate among scholars about the ultimate goal of antitrust law and the consumer welfare standard, but theories include promoting allocative efficiency, protecting economic freedom, and even transferring wealth. Notwithstanding the judicial vagueness and scholarly disagreement, an emphasis on the consumer (in this case the passenger) at the exclusion of producers (drivers) may conflict with the spirit of antitrust law when applied to companies like Uber whose operations involve hundreds of thousands of independent midstream producers, most of whom work part-time, holding little bargaining power against any of the parties with whom they transact.

Secondly, in order to assess the effects of potentially anticompetitive behavior on a market, one must first define the boundaries of that market. In response to Meyer’s lawsuit, Uber argues that the relevant market for analyzing the economic effects of its pricing practices includes cars-for-hire, taxis, and other forms of public transportation. This would likely lead to the conclusion that Uber’s practices, even if anticompetitive to some, are overall beneficial to consumers due to the lower prices and additional options they enjoy. Meyer argues that the relevant market is only the ridesharing industry of which Uber and Lyft are the only major players. The disruptive nature of sharing companies makes it difficult to determine whether they are actively carving out new industries sufficiently independent from existing ones to warrant distinct economic and antitrust attention.

Finally, to return to the Meyer lawsuit’s recent step towards arbitration, it is worth noting that even the arbitrability of antitrust claims may seem out of place in the context of sharing companies. Whereas most of the cases developing the arbitrability of antitrust claims involved corporations and other sophisticated players, Meyer and others with similar claims are far less sophisticated. Additionally, since sharing companies in their current form and scale are a relatively new phenomenon, there is a strong public interest in establishing judicial precedent with respect to such institutions and, if appropriate, allowing federal antitrust law to evolve to the changing economic landscape.

 

[1] Ironically, it is the same type of technology that Uber emphasized in its arguments for compelling Meyer to comply with its arbitration clause that Judge Rokoff alluded to in his decision to allow Meyer’s lawsuit to survive summary judgement.