Dynamic Pricing vs Dynamic Price-Fixing

The antitrust laws require that each entity to establish prices and service levels on its own.

This is a copy of the author’s request that officially asks the United States Federal Trade Commission (US-FTC), the United States Department of Justice (US-DOJ) to investigate Uber Technologies, Lyft Platform, Gopuff, Grubhub, Uber Eats, Postmates, DoorDash and similar “gig economy” marketplaces on the grounds of alleged violation of Federal Trade Commission Act of 1914, and alleged violation of Sherman Antitrust Act of 1890, as well as any other possible violations of antitrust and consumer protection laws currently ratified and enforced in connection with possible price-fixing practices.

Attn: Citizen Complaint Center, Antitrust Division
950 Pennsylvania Ave., NW Room 3322
Washington, DC 20530

Attn: Office of Policy and Coordination, Room CC-5422
Bureau of Competition
Federal Trade Commission
600 Pennsylvania Ave. N.W.
Washington, D.C. 20580

When companies agree to fix prices or allocate some customers, all consumers lose the benefits of open competition. In the last decade, the Internet has become a channel for price-fixing and consumer allocation, starting with the wide adoption of gig economy platforms such as Uber; Lyft; Amazon Marketplace; Amazon Home Services; Gopuff; Handy, etc. Such platforms operate by setting prices and terms for millions of independent small businesses, via the Internet.

Dynamic Pricing

An example of legitimate dynamic pricing is Felix scooter rental company based in the Netherlands. According to Felix: “In February 2020 we introduced a new pricing model for our e-mopeds to increase availability. We call this dynamic pricing.”

The reason Felix offers this option is that: “Sometimes the demand for our e-mopeds is too high or too low when and where you need them. To get our e-mopeds in the right place, the price per minute is adjusted based on time and location. For a price change up or down of just a few cents per minute, supply and demand are back in balance. This increases the availability of our e-mopeds and helps you to find e-mopeds at the right time and the right place.”

Felix is an excellent example of competitive networks effects and a fair and balanced pricing policy that always works for consumers. By offering a dynamic competitive price to consumers, at all times, Felix can utilize their fleet more effectively and subsidize areas with low scooter demand with lower prices to get more people interested. This is an open market at work. Felix offers these discounts for their self-performed services, not services of third parties. In effect, availability increases, and the company shares these savings with consumers.

Dynamic Price-Fixing

Dynamic price-fixing is a seemingly similar mechanism to dynamic pricing, except the platforms sets prices for services performed and fulfilled by third-party contractors. Uber is an excellent example of a platform that utilizes dynamic price-fixing of serviced performed by Uber drivers, independent contractors.

Antitrust law generally holds that price-setting activities are permissible within business firms, but bars them beyond firm boundaries. Uber does not provide transportation services to consumers. Uber drivers are not employees, but Uber sets the terms on which they transact with customers, including prices.

In the 1951 antitrust case United States v. Richfield Oil Co., the court ruled for the government that Richfield Oil Corporation Co. exercised ‘’de facto’’ control over “independent businessmen,” in contravention of the antitrust laws, although they were not company employees. This has become the basis for delineation between the domains of labor and antitrust: if subordinate entities are “independent businessmen” and not employees, it is illegal to exercise control. The United States Supreme Court affirmed the same basic principle against coercion of non-employees by vertical supply contract in the 1964 case Simpson v. Union Oil Co. of California.

Online marketplaces like Uber, Lyft, Handy, Amazon Home Services, DoorDash, and Instacart have perfected a process where workers deal bilaterally with tasks offered by customers that assume no standard employer obligations, while the platform operates the labor market to its benefit, a “for-profit hiring hall.” In effect, service providers in these schemes do not have any control over their fees or other terms, and instead rely on an illegal restraint on trade in violation of the Sherman Antitrust Act to deliver a homogeneous service for a price set by a third-party in self-interest.

Other than to hire drivers as employees, there is only one exception to the Uber dilemma. In some cases, it is in customers’ interest to buy services where prices are set by a public utility. In 2020, the California Supreme Court has ruled that Uber is a utility and the California PUC has a rate-setting authority over Uber and Uber drivers. This ruling was made in response to an allegation that Uber violates the Sherman Act by price-fixing services of independent drivers. This ruling, however, incorrectly allocates California PUC price-setting authority over Uber drivers. Unlike Uber itself, Uber drivers do not have a permit to operate that is issued by the California PUC. In effect, while California PUC does have a rate-setting authority over Uber and its employees, it does not have a rate setting authority over random contractors that use Uber application. If Uber refuses to hire drivers, that only means to conclude that California PUC has an authority to establish a take rake an Uber may charge for connecting a driver to the customer. The confusion by the courts in this matter is not unusual or unexpected, after all, a typical rider thinks that they are “getting into an Uber car” rather than “a random car driven by an independent contractor hired via Uber app.”

Three-Sided Marketplaces

Food delivery apps do not only set prices for delivery drivers, but they further engage in price fixing with “restaurant partners.” In their agreements with restaurants, delivery apps typically include clauses requiring uniform prices for restaurants’ menu items throughout all purchase platforms called No Price Competition Clauses. Such agreements prevent restaurants from charging different prices to meal delivery customers than they charge to dine-in customers for the same menu items.

The purpose and effect of the No Price Competition Clause is to act as an unlawful price restraint that prevents restaurants from offering lower prices to consumers directly.

In effect, three-sided marketplaces price-fix services of independent delivery drivers and further enter into price-parity agreements with food preparation services in order to solidify the monopolistic tendency across the entire product flow — from the restaurant’s kitchen to the consumer’s dining table.

In these schemes, the colluding delivery drivers and colluding restaurant owners are “reluctant” participants in the schemes, often getting “the short end of the stick” in collusion with a dominant platform. Nonetheless, consumers, legitimate restaurants, and legitimate food delivery marketplaces suffer unwillingly as a result of such price fixing.

Price Fixing Is a Felony

Unfortunately, some consumers don’t personally care that Uber drivers are in a hub-and-spoke conspiracy with one another, as well as a vertical conspiracy with Uber. The reason is simply that price-fixed rates set by Uber are ultra-competitive, they are set lower to attract more consumers into the scheme.

The government, however, is obligated to care. Uber does not pay the hard costs of these price-fixed prices, meaning, the drivers who perform the driving end up doing work for fees far below what is needed to survive. Most drivers, after costs of operations, make below minimum wage and eventually quit. Uber sets fares lower without having to pay for the high costs of hiring people, costs of vehicle maintenance, depreciation, fuel, down time, etc.

Therefore, “Uberizing” is not a definition for modern commoditization, but rather a definition for modern price-fixing for services offered and fulfilled by an independent entity, other than an employee.

Prices for price-fixed services are ALWAYS artificially high, in the long run, because they are exclusionary by nature. When businesses use the Internet to fix prices (dynamically or otherwise,) divide business between themselves, and make “blanket” anti-competitive arrangements, all interests are harmed: (1) consumers (2) legitimate highly-competitive service providers (3) legitimate e-commerce channels.

Aside from the gig economy, a number of online schemes attempt to “Uberize” other industries via the Internet. For example, the online residential real estate sector is now being subjected to similar price-fixing tendencies.

UpNest; Tomo; Opcity; Opendoor Brokerage; Clever Real Estate; Better.com; Blend Realty; IdealAgent, etc. all operate by price-fixing commissions of independent Realtors® as a way to earn blanket referral fees.

These products blatantly “dangle” price-fixed home buyer and home seller savings before consumers while enriching themselves with kickbacks. The difference is that these schemes do not deliver any real estate services, but merely fix prices for services supplied and delivered by independent Realtors®. Each one of these schemes is a registered broker itself, making a case for price-fixing between brokers even more compelling.

Sherman Act violations are criminal felonies. Violators can be sentenced to up to 10 years in federal prison for each offense. The maximum damages are also doubled of a loss involved.

What is the alternative? Open marketplaces.

For example, my online real estate platform, HomeOpenly, requires all Realtors® to compete so that we can deliver more savings to consumers. Collusion in the real estate market between Realtors® means that the Open Marketplace™ is less effective, less profitable. Price fixing is unacceptable to either myself or to consumers when buying and selling homes for several reasons. One big reason is the lack of housing affordability. In reality, Collusion between Realtors® makes buying and selling homes more expensive, not less.

Open marketplaces are possible to build on the Internet only if price-fixing is obliterated. As long as Uber and Lyft are setting prices for drivers to serve their take rake, no independent platform will be able to compete against these schemes, and no contractor will be able to define their own fees schedule.

Without a doubt, neither Uber, nor Lyft, nor GoPuff, no DoorDash, nor Instacart will ever hire drivers as employees. In an event that the regulations find a way to force these platforms to act as employers, a much more likely scenario is that they will utilize a network of subsidiaries, or franchises that will hire employees for them.

The underlying problem of the gig economy can only be solved by addressing the core of the problem — dynamic price-fixing of services performed by a third-party is unlawful by the mere fact that any such agreement restrains free trade.

Regardless of the eventual determination of employee status for gig workers, it is the government’s responsibility to address the dynamic price fixing issue on its own merit. Thus far the FTC and the DOJ have yet to file any charges against gig platforms despite the fact that these price fixing policies are “per se” violations of the law and that a number of consumers have already filed private lawsuits against these products.

The government must further review state’s legislative propositions (often funded by gig platforms) where voters are asked to set prices and rates for gig workers, instead of the open market, or local state utilities. Voters must not be allowed to set rates for independent contractors anywhere, since all such efforts are self-serving. State utilities are able to study the costs and adjust mandated rates as independent third-party, which is why they exist.

Consumers need to become aware of the long-term damages from price-fixing, including dynamic price-fixing. The federal consumer protection agencies must treat price-fixing schemes, such as Uber, as hardcore price-fixing schemes, instead of consumer-friendly startups.

Dynamic pricing is not the same thing as dynamic price-fixing. The required mindset shift in favor of open e-commerce allows for an Internet environment where prices and service levels for all services and products are set independently and fairly, serving everyone equally.

Author: Litesand

Antitrust, real estate, e-commerce, fintech, proptech, bigtech

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