Taxis

Sorry, but Uber Isn't Conspiring to Fix Ridesharing Prices

Surge pricing is a market mechanism, not an illegal pricing scheme.

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credit: John Christian Fjellestad via Foter.com / CC BY

Uber CEO Travis Kalanick faces a lawsuit for violating federal antitrust law by supposedly conspiring with the company's hundreds of thousands of drivers to drive up prices. Though Kalanick filed a motion to dismiss the case, and in a win for conspiracy theorists everywhere, U.S. District Judge Jed Rakoff allowed the suit to move forward.

The class-action lawsuit seeks to establish a nationwide plaintiff class of Uber riders who paid extra because of the company's "surge pricing" mechanism. Surge is a form of dynamic pricing that increases the rate for Uber rides when demand exceeds supply. Lyft, Uber's main competitor, has a similar dynamic pricing tool known as "prime time."

It is important to note that Judge Rakoff's decision does not say that Uber is engaging in anticompetitive behavior, but that the plaintiff has made a prima facie case so that moving to the next phase of the trial process is appropriate. Indeed, all Rakoff's opinion says is that the plaintiff has met the low standard of "plausibility."

However, the plaintiff in this case, Spencer Meyer (no relation to the authors, who are also unrelated), alleges that by signing up to use Uber's pricing algorithm, Uber drivers—who are categorized as independent contractors—are engaging in a massive, global conspiracy to fix the price of mobile ride sharing services. To Meyer, "each and every driver-partner joined a single 'horizontal' agreement—that is, an agreement between direct competitors—to fix prices when using the Uber App."

Under antitrust common law and the Sherman Antitrust Act, a "horizontal" agreement to fix prices between competitors (such as all steel producers agreeing to sell their product for the same price) is per se, or inherently, illegal—a category that requires invalidation of the agreement regardless of its "reasonableness" as a restraint on trade.

Yet, the Supreme Court has been retreating from a hard per se rule since 1979, instead choosing to examine the reasonableness of the trade restraint. The Court has declined to apply per se treatment to innovative business arrangements when it "ha[s] never examined a practice like this one before," (such as Uber's business model) and directed lower courts to examine the market conditions' reasonableness in such cases, applying the full "rule of reason."

Moreover, it is easy to argue that Uber's price structure is not a "naked price restraint," but an ancillary restraint to the agreement between Uber and its drivers that the company will provide a platform to connect them with riders. Ancillary restraints are not per se illegal, and are analyzed under the "rule of reason." This point about what rule applies is critical to Uber's case. As long as the per se rule does not apply, the court must actually examine market conditions and apply reason to its decision.

Since the market conditions created by Uber's pricing are relevant for the lawsuit, as Uber's business model is clearly innovative, it is important to realize the benefits of dynamic pricing. This policy not only benefits drivers, it also benefits customers. Because of dynamic pricing, people can usually get an Uber or Lyft within ten minutes, even in times of high demand. It is simple economics.

Dynamic pricing encourages people who do not really need a ride to postpone their trip or take another form of transportation, lowering demand. At the same time, the increased earning incentive gets more drivers on the road. Far fewer drivers would want to risk working during a snowstorm, or late at night when they could be asleep at home, if the option for higher fares was off the table.  

In the case complaint, Meyer defines Uber's marketplace as the "mobile app-generated ride-share service [market]," with a "relevant sub-market of Uber car service." He needs this self-serving definition to sustain his claim that competitors in the market are agreeing to a price-fixing scheme.

Meyer claims that the relevant market is Uber and Lyft—and completely ignores competition and the effect of other ridesharing services, traditional taxi services, private car ownership, and public transit. Uber correctly maintains that Meyer's "market definition is facially inadequate to satisfy a rule of reason analysis."

For example, there was an average of 150,000 daily Uber rides in January 2015 in New York City. Out of the total daily rides in New York City from yellow taxis (360,000), Boro "green" taxis (68,000), Lyft (11,000), city buses (2,500,000), and the subway (5,600,000), Uber holds a market share that is under two percent—and this ignores private car ownership. A market share under two percent is a far cry from monopoly status and shows how difficult it would be for Uber to implement an effective price-fixing scheme.

This question was not substantively decided by Judge Rakoff, and remains an open issue in the case. It is likely that at trial or on appeal, a court will find for Uber that "driver-partners, traditional taxi services, and public transit are reasonably interchangeable such that the change in price for one service would affect demand in the others." Thus, the relevant market is not "mobile app-generated ride-share service[s]," but transportation services generally.

There is also a significant factual question that remains over whether there even is an agreement to fix prices considering that Uber drivers "are free to provide competing services as taxi drivers or by using competing platforms, and they frequently do." Simply put, it is difficult to prove a conspiratorial agreement to fix prices if each "co-conspirator" is free to switch to another ridesharing application's pricing mechanism or to provide traditional taxi services that compete with Uber itself. This means that Uber may not even have the concert of action required for a conspiracy when its own co-conspirators can and do engage in actions directly affecting the allegedly "fixed" price.

That argument is reinforced by Uber's business model: The drivers are independent while Uber merely provides a connection app. Drivers are free to use other apps or provide traditional services, and Uber is competing for drivers' business.

Recently released court documents from a settled class-action employment lawsuit against Lyft reveal that over half of the company's drivers drove with another ridesharing company. Out of these drivers, 83 percent drove with another ridesharing company at the same time that they were driving with Lyft. There is no comparable public data on Uber drivers, but it is likely that a similarly large percentage switch between various ridesharing platforms, and perhaps also taxis, while working—and Uber has asserted as much in court filings.

Dynamic pricing is critical to ridesharing's ability to provide transportation options whenever they are needed. Passengers value the ability to get rides promptly, and the benefits of pricing that adjusts with real-world supply and demand cannot be overlooked. Unless we want to go back to the era of waiting (often fruitlessly) for an open for-hire vehicle, dynamic pricing must be maintained. Sorry, conspiracy theorists, but there is nothing to uncover here.

Jared Meyer is a fellow at the Manhattan Institute for Policy Research. Randal Meyer (no relation) is a legal associate in the Cato Institute's Center for Constitutional Studies. Follow them on Twitter @jaredmeyer10 and @randaljohnmeyer.

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  1. I can conspire every day with billions of people every day to set the value of things. I use a very secretive tool, price, to relay that information.

    1. Well, you know what that leads to! Market Failure! Global Warming! Drinking beer!

      1. Whew! For a minute, I thought you might say dancing.

      2. As long as dogs and cats don’t start living together.

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  2. Things are going to be awkward at the next Meyer family reunion.

  3. How dare they raise prices to adjust to conditions that change demand?

    Everyone must be made to suffer equally without service!

    Otherwise it’s not fair!

  4. OT: Is Loder going to review Hard Luck Harry?

    1. or whatever it’s called?

      1. Happy Harry Hard-On?

        1. Yeah, that one. The GoPro movie that ESPN is flogging endlessly.

          1. By the shaky look of the camera work, I think the highest best use of that film is to get people who swallowed poison to vomit.

        2. I think that’s Happy Hairy you’re thinking of.

          1. Happy Hairy Palme d’Or award winner?

    2. “Hardcore Henry”……….which sounds like gay porn.

  5. Wait…these are the people that defend taxi cartels, right? You know, where there is actual price fixing in a controlled market? Uber is already cheaper than them. That’s why they win.

    1. But that not fair to the poor cabbies and their million-dollar medallions!

      *stamps feet*

    2. But that’s a government-regulated cartel, managed by selfless public servants for the good of us all — which makes it all OK (seriously, that’s what they think).

  6. And when I spout my conspiracy theories, the only ‘surge’ I get is that woozy feeling of a Haldol coma.

  7. Good. I hope they win. And then I can file suit because it’s unfair that union workers get paid extra for working weekends, Sunday’s, holidays, and evenings.

    1. What is really unfair is that people will only pay me for work! I want commenting hours to be billable.

      1. If you aren’t being paid for this, you are a sucker. I’m rolling in Koch dollars.

        1. No money for me, but I was promised that every thousand comments allows me to direct the Kocktopus at an enemy progtard of my choosing.

  8. Um, a conspiracy with 100s of thousands of members? That’s…not even plausible.

  9. Can someone translate this post into English for Non-Lawyers? Seriously, I zoned out about a third of the way through.

    1. Some dipwad who hates Uber is suing for a stupid reason.

    2. It’s mean that Uber charges more when it starts to rain and more people want to ride.

      1. Oh, they’re gouging. Why didn’t the authors just say so. Off with the drivers’ heads!

        1. It’s a similar concept to ‘happy hour’ at a bar. Except they charge MORE when demand is at it’s peak. Like the way your monopolistic utility does legally every day. But because of stupidity and feelz, it’s not ok for a private company that has actual competitors to the same thing.

        2. I hate you even more.

    3. The plaintiff is trying to allege that Uber is a marketplace in and of itself, and because surge pricing raises fares for all drivers in an area, they’re effectively colluding. Never mind that Uber is competing with other rideshare apps and traditional transportation.

      1. Someone should sue Microsoft for having a monopoly on Windows operating systems.

    4. I hate you so much.

  10. Also known as Judge Red Jakoff.

  11. I don’t see how anti-price gouging laws don’t apply to this, and that sort of stupidity gets by. I’ve mentioned here before I know a couple of people that used to ride down to Florida with a couple pick-up loads of plywood after every hurricane and make a few bucks – since Florida passed the anti-gouging laws they don’t get to go down there and profit by selling high-priced plywood any more. They sure as hell don’t go down there and sell regular-priced plywood either. People that used to have a choice of buying high-priced plywood or going without now only have a choice of going without. Good thing they fixed that market failure.

    Here you have a market failure of Uber trying to match supply with demand through a pricing mechanism instead of through unicorn magic and the power of government and that sort of nonsense needs to stop.

    1. “People that used to have a choice of buying high-priced plywood or going without now only have a choice of going without. Good thing they fixed that market failure.”

      It’s called envy.

      That is what the anti-price gouging laws are really all about.

      If all cannot get what they want at the “regular” price, then all should be forced to equally do without altogether.

      Everyone must be required to be equally miserable. It just ain’t fair that your rich neighbor down the street could get the food, gas or whatever he needs at the higher price in the wake of some scarcity causing event because he has the money to pay for and you don’t.

      1. Anti-gouging laws are beyond stupid. Stuff like gas during Katrina would have been much more plentiful without anti-gouging.

        Truck in gas, sell it for 10 bucks a gallon, the consumer only buys what they need = more people get gas. Then as word spreads more vendors enter the market, offer less, more customers buy until the price hits equilibrium. The commodity will arrive sooner because of crazy things like incentives to make money.

        Really, we shouldn’t even have to bitch about this cause the upside is so fundamental that its double retarded to even consider engaging in anti-gouging laws.

        1. So you go into the Doctor’s office with some pain. They do an EKG, and figure out that you are just starting to have a heart attack. That is when they mention the “surge pricing” on the drugs that will keep you from dying today. Maybe the drugs would be cheaper at the hospital across town. You might even still be alive when you get there.

    2. Price gouging laws usually only apply in emergencies. (They are a bad idea even then, but that’s another discussion.)

      1. They are a[n especially] bad idea even then

        Imposing a mandatory shortage in the middle of an emergency should be a capital offense.

  12. Uber sets the rate. They have a base rate and surge rates. If there’s a 2.4x surge, that means the rate will be 2.4 times the base rate. The drivers have no more direct say in the rate than riders.

    Uber makes offers. It tells riders if they want a ride, here’s the rate. When a rider accepts, Uber then offers that ride, at the agreed on fare to drivers until one accepts.

    Uber is the only party setting rates, so unless it is colluding with itself, there is no collusion going on at all.

    (Of course, even if there were collusion going on it’s none of the government’s damn business anyway.)

    1. Local law enforcement is also colluding with Uber. The price surge occurs when all the DUI checkpoints come out. That’s when ridership increases, cuz no one wants the bullshit of a DUI. And what driver in his right mind wants to ferry around a bunch of drunk 20 somethings for base rate, when the rest of the drunks are driving home after last call? That’s a premium service.

      1. But LEO’s have qualified immunity. So the laws they enforce really don’t apply to them anyway.

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  20. Absurd.

    “Ok let’s pretend that all the Uber drivers are in a union and coordinating to increase prices at peak times. Oh, it’s ok now? Super fucking awesome special pleadingness!”

  21. “It is likely that at trial or on appeal, a court will find for Uber that ‘driver-partners, traditional taxi services, and public transit are reasonably interchangeable such that the change in price for one service would affect demand in the others.'”

    Ha! Just to clarify: there is *zero* chance this farce of a case will make it even past the initial pleadings stage, let alone trial. Rakoff should’ve arguably dismissed it on summary judgment — though as noted in the article, the burden for overcoming it is exceptionally low — but I’m assuming he didn’t only because of the extant per se rule under antitrust law. Once Uber’s attorneys (or Kalanick’s) make it clear that they’re obviously not “price-fixing,” Rakoff should grant a motion to dismiss ASAP.

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  22. “dynamic pricing” has nothing to do with serving the customer, even if it feels good to pretend that is what you are doing. Surge pricing is charging an old lady $800.00 to tow her car when she gets a flat on the highway. Surge pricing is raising the price of an inexpensive drug, because people will go into debt rather than just die. It is usually about basic morality. Dynamic pricing is an excuse you use when you want to take advantage of people. be honest about your motives.

    1. Surge pricing is charging an old lady $800.00 to tow her car when she gets a flat on the highway.

      But that is impossible: there are always moral people around, like you, who tows the old lady’s car for $8.00.

      Surge pricing is raising the price of an inexpensive drug, because people will go into debt rather than just die.

      But that is impossible: there are always moral people around, like you, who possess the inexpensive drugs and sell them to the sufferers cheap.

      1. I understand that many people find it incomprehensible that anyone would put their sense of morality above their lust to become the richest person in the world, or whatever. Personally, I would change the old lady’s tire for nothing. And if I was in the towing business, I would not base my prices on how vulnerable and desperate the customer seems.

        And the drug thing is just silly. There are companies that deliberately raise the price to whatever the market will bear, usually when there is no alternative source for the drug. And the maximum price in that case is likely how ever much money the patient can come up with by selling all of their assets.

        1. “I understand that many people find it incomprehensible that anyone would put their sense of morality above their lust to become the richest person in the world, or whatever.”
          And I understand that many people find it incomprehensible that anyone would think they don’t have a right to a service at whatever price they think reasonable, whatever the provider thinks about it. You don’t have a moral right to my productivity just because you’d feel better if you got it, and at a price you’d like. Why does the customer deserve the money more than the provider? Because you want to get a scarce commodity at lower than the market-clearing rate? Fine, then wait for the taxis if you don’t want it that much. If greed is evil then the customer’s greed is as evil as the producers.

          Oh and BTW I doubt you’d change that old ladies tire at all, let alone for nothing.

          “There are companies that deliberately raise the price to whatever the market will bear, usually when there is no alternative source for the drug. ”
          Why yes there are, and why is that price so high? Because government restricts competition. Of course nobody does “surge pricing” for drugs for obvious reasons so you’re OT here.

        2. “I understand that many people find it incomprehensible that anyone would put their sense of morality above their lust to become the richest person in the world, or whatever.”
          And I understand that many people find it incomprehensible that anyone would think they don’t have a right to a service at whatever price they think reasonable, whatever the provider thinks about it. You don’t have a moral right to my productivity just because you’d feel better if you got it, and at a price you’d like. Why does the customer deserve the money more than the provider? Because you want to get a scarce commodity at lower than the market-clearing rate? Fine, then wait for the taxis if you don’t want it that much. If greed is evil then the customer’s greed is as evil as the producers.

          Oh and BTW I doubt you’d change that old ladies tire at all, let alone for nothing.

          “There are companies that deliberately raise the price to whatever the market will bear, usually when there is no alternative source for the drug. ”
          Why yes there are, and why is that price so high? Because government restricts competition. Of course nobody does “surge pricing” for drugs for obvious reasons so you’re OT here.

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  27. RE: ? Sorry, but Uber Isn’t Conspiring to Fix Ridesharing Prices

    Isn’t the idea of conspiring to fix ride sharing costs up the government?
    Isn’t that why we give them our hard earned tax dollars for?

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