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Published on 4/12/2018 9:09:00 AM | Source: HT Media

Opinion | Downside of unbridled competition

Posted in Expert Views| #Wealth

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Only a renegade economist will betray his brethren with such blasphemy that too much competition can be harmful. This goes against the most basic of axioms of economics. Competition spurs innovation, makes players efficient, gives the best quality to consumers at the lowest prices, and is generally a good thing. We accept this in competitive entrance exams (so long as there is no cheating and there is a level playing field), and we implicitly also accept it in the market place for goods and services. Adam Smith’s The Wealth Of Nations, the Bible of capitalism and free markets, was written almost a century before Charles Darwin’s The Origin Of Species. The latter talks of survival of the fittest, much like the former, and perhaps takes inspiration from its predecessor. Of course these dys Darwin’s followers, the evolutionists, have to contend with stiff opposition from creationists. However, the maxim of survival of the fittest is intact and still in use among market fundamentalists.

So can competition be excessive? The latest example is from the world of app-based taxis. In Mumbai and other cities in India, the drivers of ride-share services like Uber and Ola are on strike. Against whom are they protesting? After all, they are not employees of any company. They are self-employed entrepreneurs in the gig economy and are considered business partners of Uber/Ola. They are asking for a higher share of the income that the app companies are making from their customers. However, their collective bargaining strength is rather weak. The driver-entrepreneurs were lured by initial offers, which painted a rosy picture of incomes of ₹1 lakh per month. Indeed, in the early stage, the net incomes were quite large, when the app companies were trying to build scale on the driver side as well as the customer side. The rides cost less than the conventional “kaali-peeli” licensed taxis and the drivers were being compensated generously to sign up. They got a bonus for every 10 rides completed and even to simply keep their app “open” on their smartphone.

Those early lucrative days resulted in a huge influx of entrepreneur-drivers, as has happened in cities all over the world. Mumbai now has an estimated 50,000 app-based taxis, effectively more than doubling the taxi population. The conventional licensed taxis are subject to price control and other conditions, but not the Uber and Ola taxis. The “licence” used to be traded like a precious asset and at its peak commanded a price of several lakh rupees. It could also be pledged against a loan. However, that premium has fallen steeply. The influx of drivers means that on average an Ola or Uber driver is making fewer trips and hence getting lower commissions. The companies themselves have reduced incentives and bonuses, since their earlier generosity was funded by private equity, which is reluctant to sustain the high “burn rate”. If the driver/business partner feels that his income is not good enough, he is free to leave the relationship. It’s a free market, after all.

Here lies the rub. Most drivers have taken car loans and their current earnings are just enough to pay the monthly instalment. If they don’t work those long hours, they will have to default and the car will be repossessed. If they try to opt out of Uber/Ola, by selling their car, it will fetch a very low value in the second-hand market. It’s a no-win situation for them. It’s a classic case of pecuniary externality, caused by too much competition. That’s why they are agitating.

What about the consumers—the riders? They have very low switching cost, so they can pit Ola against Uber so that their prices remain low. The duopoly is enough to get prices down to the minimum. Ola and Uber have successfully defended the charge of predatory pricing against them in the Competition Commission of India. Their low pricing, subsidized by equity investors, is called a disruptive innovation model. The drivers are, however, stuck.

Could the government have prevented this sorry state by restricting entry? Of course not. Can it insist on a minimum commission rate that the app companies must pay to their drivers? That would be egregious price control, which would make investors flee. Disruptive innovation would dry up.

These driver/entrepreneurs are an unhappy lot stuck without easy exit options. The regular taxis too have taken a beating, as business is down. In New York City, several medallion-owning taxi drivers were driven to suicide as they faced financial ruin because of competition from app-based taxi services. At its peak, only a few years ago, the medallions were valued more than a million dollars. The profession of a medallion-owning taxi driver was a ticket to the American middle class. However, the surge and influx of app-based services have killed those dreams. This genie cannot be put back into the bottle. We cannot ban such disruptions, but we can pause and think that maybe unbridled competition needs an antidote.

Excessive competition and price undercutting is currently also seen in telecom, airlines and e-commerce. Undoubtedly, it benefits the consumer. However, there is a very thin line between predatory pricing and genuine disruption and innovation. For us to retain faith in unlimited competition, we must at least ensure the aspect of a “level playing field”. And spare a thought—and some social security mechanism—for those entrepreneurs (like Ola/Uber drivers) who become collateral damage.

Ajit Ranade is an economist and a senior fellow at the Takshashila Institution, an independent centre for research and education in public policy.