When an irreversible merger flouts Singapore’s competition law at consumers' expense

The Competition and Consumer Commission of Singapore (CCCS)’ recent imposition of a S$13 million fine on Grab and rival Uber for their merger marks the first time in Singapore’s history that the authorities has imposed a financial penalty for a merger.

Beyond this, the CCCS has further directed Grab to cease its exclusivity tie-ups with drivers and taxi-fleets and to maintain its pre-merger pricing algorithm.

The impetus for the merger is a clear one. The nature and business model of ride-hailing parties are such that there is a great incentive for ride-hailing companies to grow their network as fast as possible to establish dominance in the market.

The more users and drivers it has, the more easily it will attract more users and drivers, thereby creating a ‘virtuous cycle’.

Pre-merger, the network was organically grown by Grab and Uber through the use of their respective aggressive discounts and incentives to attract both drivers and riders to join their network, but this strategy has since been stated by Grab and Uber to be unsustainable.

Yet the merger of the two entities runs foul of section 54 of Competition Act, which states that mergers which substantially lessen competition are prohibited.

By eliminating its closest rival through combination, Grab has gained a significant degree of market power overnight and has altered market structure in a manner that may be detrimental to Singapore's drivers and riders.

What can we expect from the new market then, taking into account Grab’s business model, the CCCS directions as well as any other restrictions under Competition Law?

Grab would naturally want to raise prices with the newly-gained market power and may do so in three ways - altering its pricing algorithm, reducing its incentives and bonuses for drivers and reducing the discounts offered to riders.

The first option is clearly out as the CCCS has ordered Grab to maintain its pre-transaction pricing, pricing policies as well as product options, and in particular, the pricing algorithm and surge factor cap.

However, the second and third options are open to Grab.

Grab has already rolled back the discounts, and is likely to continue to do so in the future.

Furthermore, Grab has had about six months of critical breathing space for an aggressive rollout of its Grab Financial products and its other online-to-offline initiatives in an attempt to entrench and consolidate its market position before more competition emerges.

If Grab fails to do so, and CCCS’ decision does result in a bit more competition in the ride-hailing scene, will drivers and riders see a return to the generous discounts like in the pre-transaction days?

Perhaps, and herein lies a second problem.

Under section 47 of the Competition Act, if Grab attempts to engage in its aggressive tactics to prevent other competitors from entering the market, Grab now runs the risk of abusing its position of dominance.

This will, of course, depend on how such discounts or incentives are structured, and whether they have the effect of driving out as-efficient competitors.

Without any immediate competitors, however, there is no real competitive pressure for Grab to lower prices in the interim.

IS THERE SUFFICIENT DETERRENCE?

CCCS’ decision include a S$13 million fine for the two parties involved in the merger, but it is unclear if this will serve as sufficient deterrence for future parties seeking to employ similar strategies.

When weighed against a substantial potential payoff, parties may choose to risk the potential exposure to penalties and possible remedial measures imposed by the CCCS.

In this case, what makes the Grab-Uber merger so remarkable is the fact even though both parties were fully aware that their merger risks violating section 54 of the Competition Act, they nevertheless proceeded with the merger without notifying and obtaining approval from the CCCS.

The parties sought to conduct the merger in a manner which made it irreversible as well.

The asset-light nature of these companies meant that few assets were actually being transferred from Uber to Grab.

Neither was there any integration or transfer of Uber’s technologies to Grab. There was simply no way the CCCS could have unwound the transaction to reinstate the lost competition.

Given that Uber still holds shares in Grab, if Grab can profit from its monopoly position, the short-term losses by Uber would be more than adequately made up by the future profits.

The deterrent effect of CCCS’ financial penalty is likely to be further ameliorated with the presence of apportionment clauses in the Uber-Grab agreement.

Uber and Grab had likely anticipated the financial penalties and made contingency plans to cushion the impact of penalties levied by the CCCS.

As such, it is unclear whether the penalties imposed had a sufficient deterrent effect.

Instead, all the CCCS could and have done was to impose alternative remedies that aim to ensure favourable market conditions for market contestability.

WHAT MORE COULD BE DONE THEN?

One possible solution, which did not seem to be considered in the immediate case, is the possibility of divesting Uber’s ownership of the shares in Grab as a result of the merger.

A divestment would make tactics of irreversible mergers more costly, as the party exiting the market would no longer be able to reap the benefits from the increased market power post-merger.

This will alter the cost-benefit analysis in favour of complying with the law, and goes towards serving the deterrence objective.

A second solution going forward is perhaps to implement some form of mandatory notification regime.

Currently, the notification to CCCS for merger assessment is a voluntary one, and it may be done before or after the merger has been completed.

This stands in contrast to the European Union mandatory notification regime where the parties are mandated to notify the European Commission for clearance when certain thresholds are met.

These thresholds are defined by criteria such as the turnovers of the companies involved.

Under such a regime, mergers which are likely to have a considerable impact on the market are generally under more scrutiny, and these notifiable transactions are typically suspended before a clearance is obtained.

Perhaps, it is time for us to reconsider Singapore's position on the voluntary notification system.

The biggest takeaway from the Grab-Uber saga is that while CCCS has the power to unwind any completed transactions, this may not always be possible and any subsequent remedies may only act as a stop-gap measure to prevent further damage to the market competition.

By giving companies free rein in such anti-competitive transactions, the ultimate losers are the consumers of Singapore.

ABOUT THE AUTHORS:

Kenji Lee and Allen Sng are recent graduates of the National University of Singapore’s law school and winners of the Lim Chong Kin Prize in Competition Law.