This article has been written by Sonia Shrinivasan.
Table of Contents
Introduction
Most of us in our daily lives have used Ola and Uber to travel in and around our cities, at least once. More often than not, we might have come face to face with a notification while confirming our booking, informing us about a sudden temporary increase in the total cab fare, owing to various factors. The fares of cabs surge when demand exceeds the supply, the number of people requesting rides is greater than the available no. of cabs. The surge is added to the fixed base fare of the cab.
Ola and Uber create algorithms that calculate the number of requests at any point and equate it with the number of cabs. Higher the demand, the higher the surge, the higher the profit. Presently, Uber takes 20 percent of the total fare as commissions.
The mechanism of the algorithm is similar to that of ticket pricing of airlines.
This is known as surge pricing, which is said to have been based on the concept of dynamic pricing, i.e., changes in prices due to corresponding changes in the demand-supply factors.
The said concept was first introduced in 2012, based on observation in Boston, wherein late on weekend nights; the company noticed a spike in unfulfilled requests as the drivers clocked off their systems right before the partygoers were supposed to go home; giving rise to a demand-supply imbalance, resulting in unsatisfied customers.
Uber addressed this specific problem by replicating the idea of ‘highest bidder wins,’ with 80% of the total fare going to the cab driver.
The concept of dynamic pricing is not new in India; Airlines do it during high-demand seasons, food delivery sites do it when they are overburdened with orders, Taxi rental services did it way before the introduction of Ola and Uber.
This momentary increase in the base fare has recently been a cause of concern for many, mainly because many times, this surge is so high that commuters end up paying more than 3-4 times the normal fare. As a result, the entire issue of surge pricing has been challenged legally, holding giant cab operators like Ola and Uber responsible for the said surge and make it known to the masses the entire concept and rationale behind this pricing strategy.
Facts of the case
The appellant/informant in the said case was an independent practitioner of law and a consumer of the services provided by the respondent aggregators, by means of an application addressed to the Competition Commission of India, urging it to look into the alleged anti-competitive practices of two cab service providing platforms- ANI Technologies Pvt Ltd along with Uber India Systems Pvt Ltd, Uber B.V. and Uber Technologies Inc.- popularly known as Ola and Uber respectively; claiming that the pricing algorithms applied by the respondent parties for calculating the cab fares curtail the liberty of the said cab drivers to compete amongst each other, thereby contravening the provisions of the Competition Act, 2002.
Upon request for an inquiry into the said allegations before the Competition Commission of India, and subsequent appeals to the authorities established by the Competition Act, 2000, it was ascertained by the authorities that no such foul play between the aggregators was detected, and hence the all-anti-competitive charges against Ola and Uber were dismissed; resulting in an appeal to the Supreme Court in December 2020; wherein the matter was decided by a three-judge bench of the Supreme Court.
What does the law state?
Hereby are certain definitions mentioned under Section 2 of the Act:
Section 2(c): Cartel
Includes an association of producers, sellers, distributors, traders, or service providers who, by agreement amongst themselves, limit, control, or attempt to control the production, distribution, sale, or price of, or trade-in goods or provision of services.
Section 2(f): Consumer
It means any person who-
- Buys any goods for a consideration which has been paid or promised or partly paid and partly promised, or under any system of deferred payment and includes any user of such goods other than the person who buys such goods for consideration paid or promised or partly paid or partly promised, or under any system of deferred payment when such use is made with the approval of such person, whether such purchase of goods is for resale or for any commercial purpose or for personal use;
- Hires or avails of any services for a consideration which has been paid or promised or partly paid and partly promised, or under any system of deferred payment and includes any beneficiary of such services other than the person who hires or avails of the services for consideration paid or promised, or partly paid and partly promised, or under any system of deferred payment, when such services are availed of with the approval of the first-mentioned person whether such hiring or availing of services is for any commercial purpose or for personal use.
Section 3(1)
No enterprise or association of enterprises or person or association of persons shall enter into any agreement in respect of production, supply, distribution, storage, acquisition, or control of goods or provision of services, which causes or is likely to cause an appreciable adverse effect on competition within India.
Section 3(3)
Any agreement entered into between enterprises or associations of enterprises or persons or associations of persons or between any person and enterprise or practice carried on, or decision taken by, any association of enterprises or association of persons, including cartels, engaged in identical or similar trade of goods or provision of services, which—
Section 3 (3)(a): directly or indirectly determines purchase or sale prices.
Section 3(4)
Any agreement amongst enterprises or persons at different stages or levels of the production chain in different markets, in respect of production, supply, distribution, storage, sale or price of, or trade-in goods or provision of services, including-
Section 3(4)(e): resale price maintenance, shall be an agreement in contravention of sub-section (1) if such agreement causes or is likely to cause an appreciable adverse effect on competition in India.
Section 26(2): Procedure for inquiry under Section 19
Where on receipt of a reference from the central government or a state government or statutory authority or information received under section 19, the Commission is of the opinion that there exists no prima facie case, it shall close the matter forthwith and pass such orders as it deems fit and send a copy of its order to the central government or the state government or the statutory authority or the parties concerned, as the case may be.
Section 53B: Appeal to Appellate Tribunal
The central government or the state government or a local authority or enterprise or any person, aggrieved by any direction, decision or order referred to in clause (a) of section 53A may prefer an appeal to the Appellate Tribunal.
Arguments by the petitioner
The appellant in the said case alleged that the popular cab aggregators- Ola and Uber fixed the prices without considering the choices of the riders and drivers (Transportation Service Providers- TSPs), exercising total control over the same, unilaterally.
Furthermore, it was alleged that ever TSP is made aware of this one-sided control on pricing, which is implicative of collusion between the aggregators and the TSPs, thereby creating a ‘hub and spoke’ cartel between the two; and that there was no need for a separate agreement on restricting prices since it was common knowledge that there existed zero competition on pricing. All this consequently violates Section 3(3) of the Competition Act, 2000.
The appellant further submitted that the apps run by the aggregators could not fix/restrict prices for their users since it was against the law of the land. The apparent option with the TSPs to switch over to another platform proves to be without any meaning since the customers eventually end up running into another cartel run by Ola.
Answering the issue of whether the appellant is entitled to approach the Apex Court in the said matter, it was submitted that the applicant fell within the definition of “any person” under Section 19(1)(a) of the Act, which includes an individual who can file information virtually like an FIR in a criminal case can be filed by anybody.
Arguments by the respondent
Respondent 1, i.e., Ola Cabs, alleged that there did not exist any competitive behaviour with their existing business model and that it merely acts as an intermediary connecting the two ends of the supply chain- the commuters and the cab drivers.
The question of forming and operating a cartel under Section 3(3) of the Competition Act, 2000, which requires the existence of an agreement between members at the same level of supply chain engaged in identical services does not arise since the aggregator (Ola) and the affiliated drivers are not on the same level of the supply chain, and there exists no agreement between Ola and its drivers or the drivers themselves regarding fixing or restriction if cab fares. Both, the drivers as well as the commuters have an option of ‘multi-home’ through which they can plough their vehicles on any platform of their choice without incurring serious costs.
Clarifying the pricing mechanism of its app, it was submitted that the app-specific pricing algorithm considers multiple variables- time, distance, weather, and the availability of cabs in an area while determining the cab fare, thereby making it humanly impossible for anyone to fix/restrict prices.
On the other hand, in its reply, Uber stated that the pricing mechanism offered by it is similar to that adopted by metered taxis and auto-rickshaws operating at different times of the day. Also, its drivers have the liberty to charge lower than the amount displayed on the app, thereby eliminating any apprehension of overpricing. Among other liberties available to its drivers, Uber stated that its drivers had the option of playing passengers not using the app.
Its defence stated that its pricing algorithm protects the commuters from the TSPs quoting and charging arbitrary high prices. It added that its surge pricing model took into account the factors of demand and supply in specific areas and cities and was in total compliance with the rules framed by the government under relevant laws of the land.
Obiter dicta
Highlighting the observations and findings of the Commission and the National Competition Law Tribunal, the Apex Court confirmed their orders, while holding that no prima facie case existed against the respondents. There existed no apparent collusion between the Cab Aggregators- Ola and Uber, who used different pricing algorithms to quote potential cab fares on their respective mobile applications.
Commenting on the allegations of forming ‘hub and spoke’ cartels, which in common parlance means the facilitation of cartels through a third party, do not apply to this case. The Apex Court upheld the findings of the Commission and held that the app-specific algorithms take into account numerous factors on the basis of comprehensively large data sets comprising of time of the day, traffic situation, special conditions/events, festival, weekday/weekend which all determine the demand-supply situation, etc.
Consequently, every fare displayed on the app is unique to every consumer. For a cartel to operate successfully, there needs to exist a prima facie arrangement regulated by a third party (hub), which facilitates the exchange of sensitive information. In the present case, the algorithmic pricing cannot be deemed to be indicative of collusion between the drivers and aggregators. The reason behind this ruling is the fact that whenever a commuter book a ride during any time of the day, the same is accepted by an anonymous driver available in an area, who has no opportunity to coordinate his prices and actions with the rest of the TSPs; consequently, minimizing the opportunity of operating a cartel.
Precedents
The respondents questioned the appellant’s locus stand, stating that even if the appellant was considered to be an ‘informant’ u/s 19 of the Act, he could not be said to be a ‘person aggrieved’ empowered to file an appeal u/s 53B of the Act, citing the court’s decision in Adi Pherozshah Gandhi v HM Seervai, Advocate General of Maharashtra. The three-judge bench, citing A Subhash Babu v State of AP held that the meaning of the expression ‘person aggrieved’ should be understood in its widest sense, unlike in Adi Pherozshah Gandhi (supra.), since the Act deals with practices having an adverse impact on competition, affecting the consumers’ rights negatively.
Referring to the Apex Court’s judgment in Competition Commission of India v Steel Authority of India, the court reaffirmed the roles of the Competition Commission of India along with NCLAT while performing inquisitorial functions; their doors must be kept wide open in order to serve the public interest.
Ratio decidendi
A three-judge bench of the Supreme Court, headed by Justice RF Nariman, while dismissing the appeal, unanimously upheld the concurrent findings of CCI and NCLAT, it was held that Ola and Uber do not facilitate cartelization or anti-competitive practices between drivers, who are independent individuals, who act independently of each other, so as to attract the application of section 3 of the Act, thereby legalizing the concept and theories of surge pricing.
Conclusion
The concept of surge pricing in India has been present for a better part of the 2000s, in one form or another. With respect to surge pricing on cab service providers, it started gathering headlines first during the initial days of application of the ‘odd-even rule in the NCT of Delhi, wherein commuters have alleged paying almost 4.7 times the actual fares, earning criticism from the respective government and as a result, the surge pricing was declared to be illegal in the NCT. Soon after, similar instances were reported in major cities like Bengaluru, and around September 2020, the government of Karnataka banned surge pricing in the state.
With the state governments actively being concerned for its citizens regarding the issues centring around surges, the Ministry of Road Transport and Highways decided to step in to give a uniform solution to this problem and finally, in November 2020, issued guidelines under the Motor Vehicles Act, 2020; bringing aggregators like Ola and Uber under a framework, by fixing a ceiling for surge pricing. According to these guidelines, the surge pricing cannot be more than 1.5 times the base fares, and the cab aggregators are free to charge 50 percent lower than the base fare. Under these guidelines, cancellation of bookings will attract a penalty of 10% of the fare not exceeding Rs. 100.
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