Should the government stop the Uber-Careem acquisition deal?

In late March 2019, the global ride-hailing giant Uber announced its acquisition of its Middle-Eastern competitor, Careem, for $3.1 bln, subject to antitrust approval by the countries in which the companies operate. The elimination of Uber’s most important competitor in the region brings with it the threat of abuse of market power, and a resultant increase in prices.

Should authorities block the move? Absolutely not. In fact, consumers are much more likely to be winners than losers in this megadeal.

Antitrust policy aims to maintain fair market competition, in part by breaking up monopolies. When the US government alleges that a company is a monopoly, it must demonstrate two things.

First, that the company has power over price and output in a market.

Second, that the power was the result of commercial decisions driven by the desire to impede competition.

In the case of Uber and Careem, it is straightforward to argue that neither condition is satisfied. While Careem is Uber’s most important direct competitor, Uber is actually far more constrained by its indirect competitors than its direct ones.

To see why, remember the initial days of Uber circa 2010, when it was expanding across the US. Its rapid acquisition of market share initially came at the expense of traditional taxis, and it unleashed a massive counter-lobby that is still restricting its growth in many countries. London black cabs would not have bothered pressuring their mayor, Sadiq Khan, into an anti-Uber stance were it not for the fact that Uber was a highly successful competitor.

But focusing on taxis still yields an inaccurately narrow view of Uber’s competition. The company’s long-run strategy is to convince people to simply stop purchasing cars – or at the very least to dramatically scale back their use of them. Across the entire world, many people use public transportation for their daily commutes, due to the advantages it confers upon travelers.

Uber seeks a similar dynamic, whereby it wants to convince people to rely on Uber as their primary means of road transportation.

And that is why Uber fails to satisfy the second condition, too. It has much loftier goals than monopolizing ride-hailing services, or driving traditional taxis out of business. It wants to effect a fundamental transformation in the entire transportation system. Seen through this lens, it is laughable to think of the Careem purchase as a precursor to sitting back, raising prices, and living off the fat of the land. The most plausible explanation for the purchase is that it wants to exploit potential economies of scale in the future, so that it can continue to expand aggressively and realize its mission.

But that’s not the only reason why antitrust authorities should approve the deal. The potentially more important one – discussed by Brookings Institution fellows Robert Crandall and Clifford Wilson in a 2003 paper in the Journal of Economic Perspectives – is that there is actually very little evidence that antitrust authorities in general provide any discernable protection to consumers when they do choose to intervene.

For example, in the famous case of Standard Oil, which was forcibly broken up by US authorities in 1911 due to its perceived monopolization of upstream and downstream oil operations, prices actually went up in the immediate aftermath of the government’s decision. Thereafter, they resumed a previous downward trend. Thus, if anything, the government’s actions merely disrupted an organic decline in the company’s market power.

This pattern is repeated in many other cases, due to two fundamental weaknesses in antitrust policy. The first is that the time taken for the government to study the case, choose an action, implement it, and resist any ensuing appeals, is often so long that by the end of it, the market has already changed significantly, necessitating a different course of action. This is not the result of pointless bureaucracy – the checks and balances are crucial for protecting entrepreneurs and consumers from capricious government administrators who might otherwise abuse their power.

The second – and more important – reason is that the tools at the government’s disposal have a negligible impact on the market compared to the more important factors working in the background, such as the development of new technology. For example, in the late 1990s, the US government sought to check the expansion of the grocery store chain Safeway in a bid to protect small grocery stores. However, the efficiency gains associated with centralizing the grocery store supply chain were so big that Safeway and other giants continued to expand unabated.

In the case of Uber and Careem, in time potential economies of scale will surely materialize, and this pressure will tell sooner or later. Moreover, the story of Uber’s birth is what will almost guarantee that the benefits of economies of scale will be passed on to consumers: The entry costs in the market are very low, and the market itself is highly dynamic, meaning that there will always be new opportunities emerging. The minute Uber shifts its focus from expansion to consolidation is the minute its decline will begin – the transport market is extremely competitive.

And that speaks to a broader lesson that consumers in the Middle East see in action every day across many different products and services: As long as it is easy for entrants to join the market, companies will respect consumers. Authorities should focus on ease of entry, not market share, and in a market as dynamic and unpredictable as transport, there is little that Uber can do to consistently and substantively restrict entry.

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Omar Al-Ubaydli

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