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Just ignore the people who say Uber is a monopoly

Summary:
Here’s a piece in the Financial Times that claims that Britain has lots of monopolies and that a state that believes in “private business and free markets … would bust more trusts”. The FT has a long-running vendetta against Uber (about half of its Alphaville blog is devoted to posts about it being financially unviable, overvalued, exploitative, and useless) and this adds to that pile.Its big mistake, in my mind, is to confuse market share with market power. Market power means a firm being able to price its products above the level that would emerge in a competitive system – it requires quite a bit of speculation about what the ‘true’ competitive price should be, but maybe you know it when you see it (if this seems a bit loose to you, read Ford’s article to see the sort of approach he

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Here’s a piece in the Financial Times that claims that Britain has lots of monopolies and that a state that believes in “private business and free markets … would bust more trusts”. The FT has a long-running vendetta against Uber (about half of its Alphaville blog is devoted to posts about it being financially unviable, overvalued, exploitative, and useless) and this adds to that pile.

Its big mistake, in my mind, is to confuse market share with market power. Market power means a firm being able to price its products above the level that would emerge in a competitive system – it requires quite a bit of speculation about what the ‘true’ competitive price should be, but maybe you know it when you see it (if this seems a bit loose to you, read Ford’s article to see the sort of approach he takes). Market share is what portion of a given market’s total revenue goes to a particular firm. 

The two are related, but different, and if you get them mixed up you’ll go awry. That’s because a firm that has a large market share might still be in a precarious position and need to price its products highly competitively to maintain its share of the market. Tesco, for example, has a large share of the grocery market – around 28%. But it has been forced to engage in a fierce price war with stores like Aldi and Lidl over the last ten years, cutting prices by 1.8% in the past year despite positive CPI inflation throughout that period. Ryanair is by some measures the largest airline in Europe, but who thinks that would stay the same if it suddenly raised its prices to British Airways levels?

The shakiness of using market share as a stand-in for market power is made clear by some of the other markets Ford says are ‘concentrated’ – mobile networks, groceries and banking. None of these really pass the smell test. You can get mobile plans that give you nearly unlimited 4G, minutes and texts for £14/month, and the big firms are investing heavily in 5G. The grocery market, as already discussed, has been getting more competitive over the last decade, and my guess is that the biggest barrier to this is the difficulty of Lidl and Aldi in getting planning permission for new stores. I admit that I am not even convinced that banking, dysfunctional in so many other ways, is uncompetitive when it comes to current accounts for ordinary consumers – many accounts will literally pay you to move and switching is easy (I’ve done it three times in the past two years). The biggest problem, as with the energy market, is that most people do not realise the benefits and easiness of switching.

So when Ford writes that “the real scandal here is the way Uber has been allowed to hoover up the London taxi market” (although he doesn’t even have data about Uber’s market share in London), the question is whether this actually harms consumers or not – and it having a large-ish market share is not proof of that. It seems very difficult to claim that Uber has any market power yet – it is barely profitable and may subsidise large parts of its service. And consumers mostly seem to love it – for example, 850,000 people have signed the petition to ‘Save Uber in London’ – which is evidence that it has not harmed them yet.

Ford doesn’t actually claim that Uber is harming consumers, merely that it might do so in future once it’s established a dominant position. But pre-emptive trust-busting is a strange idea. It asks us to prosecute businesses solely on the basis that, someday, they might do something wrong. 

Got that? You’ve come up with a great idea that gets people from point A to B quicker than anyone else, and you’re making a profit while doing it. You’re making money and you’re winning customers – indeed you’re so popular that some Financial Times writers think you need to be stopped now, before someday you raise your prices. They don’t have any evidence that you can raise your prices without new competitors coming in, and they don’t have any evidence that you’ve done anything to harm consumers yet. But they don’t like the cut of your jib. We don’t punish people because they might break the law some day, and we should ignore newspaper columnists who want to prosecute businesses because they might act monopolistically someday too.

Some say that Uber’s business model only works if it has a monopoly and that it must be engaged in ‘predatory pricing’ – it intends to keep prices artificially low until all rivals are eliminated, after which it will raise prices. The case in favour mostly rests on the fact that Uber is loss-making – why would they burn money if they didn’t expect to have some powerful position in the future? 

Firstly, Uber does not seem to need to exploit consumers to make a profit. It is (apparently) profitable in London and the United States already without causing harm to consumers, and although it might like to have a monopoly until it does there is no case for prosecuting it as one. Lots of businesses, tech firms and brick-and-mortar firms like restaurants alike, lose money for many years before they become profitable.

But maybe getting bigger gives Uber market power. This idea relies on the concept of network effects – when a business gets better the more customers it has, so the market gives a big advantage to whichever product manages to get a critical mass of users first. Think Facebook, for instance, where a large part of the appeal is simply the fact that everyone you know is on it.

Does, or could, Uber benefit from network effects in a monopolistic way? Drivers can (and in cities with multiple Uber-like services, do) have multiple ride-hailing apps running at the same time, so ‘lock-in’ even on a single evening seems unlikely. Consumers are betters off the more drivers there are, and more consumers means more drivers, but the costs of using two or more different services (Uber or black cabs, say) are very low and, in practice, the benefits of having the choice are very high to an individual. 

For the claims of predatory pricing to work (and I stress that Ford does not say this, I am making the best possible version of his argument for him here) Uber would have to have some unchallengeable position once the minicab and black cab drivers went out of business. The fact that Lyft and other services are looking to get into the London market long after Uber has established itself as the dominant app suggests that, if present at all, network effects are not very strong. If someone can show me an example of a single city where Uber, once eliminating more expensive rivals, has raised prices above what its rivals’ prices used to be, I’ll change my mine. 

Maybe Uber really is fundamentally unviable, as Ford and others at the FT insist. A lot of investors disagree, but if they're wrong, then Uber is a giant voluntary wealth transfer from investors to consumers and drivers. Who cares?

In the end, I'm pretty sceptical about armchair entrepreneurs who claim to know how Uber can and can't make money. Anyone who claims to know what these markets will look like in the future is selling baloney. Unless they knew ten years ago that taxis, of all things, were going to be a huge market for tech, why should I listen to them now? The best thing we – and regulators – can do is wait and see how Uber and similar firms end up making money, and wait and see whether they're hurting consumers in doing so.

There’s one point that Ford makes that I think does stand up, though. Regulatory barriers to entry to the London taxi market may be holding competition back – not only are would-be rivals to Uber, like Taxify, being kept out by the difficulty of getting a license, even Uber itself faces the risk of being regulated out of existence in London. Removing barriers to competition to prevent monopolies is smart. Breaking up firms that are giving consumers a good deal isn't.

Sam Bowman

Sam Bowman is Deputy Director of the Adam Smith Institute, Britain’s leading libertarian think tank, where he has worked since 2010. He is responsible for managing the Institute’s team on a daily basis, working on the ASI’s overall strategy, acting as a media spokesman for the Institute and writing and researching in his spare time.

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