The antitrust case against Uber is here
The antitrust case against Uber is here
Can it succeed where employment classification suits failed?
You could be forgiven for tuning out news other than the disastrous SCOTUS term and impending demise of our democracy over the past week, but there was also some legal movement in Uberland: On June 21, three California ride-hail drivers filed a class action lawsuit in California state court against Uber and Lyft alleging their business practices violate antitrust law.
The complaint attempts to break new ground in the gig economy battle between workers and companies. A decade of employment classification lawsuits failed to get ride-hail drivers reclassified as employees rather than independent contractors, and the passage of Prop 22 in California has paved the way for a national strategy by gig companies to codify that contractor status. This lawsuit starts instead by accepting that drivers are independent, then argues that Uber and Lyft are illegally depriving their independent-contractor workers of certain forms of “economic independence” such as the ability to set prices, make informed decisions about which trips to accept, and switch freely between platforms, at a cost to both drivers and consumers.
“Uber and Lyft are either employers responsible to their employees under labor standards laws, or they are bound by the laws that prohibit powerful corporations from using their market power to fix prices and engage in other conduct that restrains fair competition to the detriment of both drivers and riders,” the suit argues.
Back in April, I spoke with Marshall Steinbaum, assistant professor of economics at the University of Utah and a consulting expert on this litigation, about the antitrust case against the gig economy. We covered a lot of the theory being applied in this lawsuit so I’d recommend checking that interview out. In the meantime, here’s how the complaint builds an antitrust case against Uber and Lyft.
Price-fixing
The lawsuit alleges that by setting the price of each ride, Uber and Lyft engage in “vertical price fixing” that harms both drivers and riders. If ride-hail drivers were allowed to set their own fares for rides, the suit argues, they would offer lower prices to riders on whichever platform compensated them better. For example, if Uber gave drivers a 30% cut and Lyft gave them a 40% cut—this is a hypothetical—you’d expect more drivers to work for Lyft and also to set lower prices for riders, because getting a bigger cut would let them earn the same amount from a lower fare. Conversely by withholding this pricing power from drivers, the suit argues that Uber and Lyft keep prices high for consumers, wages low for drivers, and maximize their own cut.
Surge pricing
One of the most important changes Uber ever made to its platform was replacing surge pricing with “upfront pricing” in 2016. Early Uber users will remember surge (and Lyft’s equivalent, Prime Time): a pop-up in Uber’s app would show a large bright blue multiplier with a minimum fare and the adjusted per-minute and per-mile rates. Riders would be asked to either agree to the higher fare or hit a button to be notified when surge ended. In this first incarnation of surge pricing, Uber and Lyft both took a fixed percentage from each fare, meaning that when surge was in effect, the driver’s pay increased at the same rate as the passenger’s payment. Uber co-founder and then-CEO Travis Kalanick frequently defended surge as a way to “clear the market” by bringing more drivers online during busy periods.
That was old surge. In 2016, Uber introduced the system it still uses today, upfront pricing. Fares were still dynamic—changing with demand, traffic, driver supply, and other factors known only to Uber—but instead of seeing a multiplier, riders were quoted a price and asked to agree to it at the start of their trip. The other thing upfront fares did was decouple what the rider paid from what the driver earned. Rather than both amounts being related by a common multiplier, the rider paid the price Uber set while the driver earned based on time and distance. This might sound like a technical change but it’s hard to overstate how big of a deal it was. Before when Uber and Lyft wanted to increase their take they had to tell drivers they were changing the terms, which was never popular. Upfront fares enabled them to quietly take a bigger cut from each trip without drivers or passengers being any the wiser, because what the driver earned was no longer directly related to what the rider paid. Uber earlier this year also rolled out upfront fares for drivers.
These days, Uber and Lyft often offer drivers surge pay in flat dollar amounts. The lawsuit argues that because Uber and Lyft can charge surge prices to riders many times the bonuses they offer drivers, they “are able to use surges to drive up take rates.” The suit claims that many drivers “plan their driving around surges because per-trip pay is too low to take too many rides without a surge bonus attached to them,” but that because surge zones can disappear before a driver reaches them, these incentives ultimately “persuade drivers to begin driving if they were not already on the road or to continue driving when it is unprofitable, without actually providing drivers with the extra compensation that they believed they would receive.”
Incentives & bonus pay
A tenet of the gig economy is that workers aren’t tied to a single platform: If you want to drive for Uber and Lyft, no problem! The reality is often more complicated. Both Uber and Lyft have devised schemes to essentially guarantee their labor supply without hiring drivers as employees with scheduled hours or shifts. They do this with gamified compensation schemes that are designed to get drivers to work more or less exclusively for one company in order to earn bonus pay. For example, Uber offers a program called Quest that offers drivers a bonus for completing a certain number of trips in a set period of time. Lyft has something similar called Ride Challenge.
The lawsuit argues that schemes like this help to lock drivers into working for a single platform for a few reasons:
Certain incentives like Lyft’s Streak Bonus require drivers to accept all consecutive rides offered by one company, preventing them from switching to another platform
Uber and Lyft have more control over drivers at the end of an incentive period, when drivers will be more willing to complete unfavorable rides to finish the terms of their current challenge
Drivers don’t know how or when they’ll be offered incentives, which, per the complaint, “prevents drivers from understanding the value of their labor, reducing their ability to demand better terms from Uber and Lyft and to assess what a competitive price would be for customers.”
Information asymmetry
The final thing the complaint really takes issue with is how little information Uber and Lyft drivers get to make decisions about their work compared to a typical independent contractor. Uber and Lyft, it should go without saying, know all relevant information about a ride. They know the customer’s origin and destination and the ride fare and driver pay, which they determine. But, the complaint asserts, “the companies hide nearly all of that information from drivers. Instead, they present only limited information about each ride… to drivers and give drivers only seconds to accept or reject the ride.” The complaint argues that withholding this information from drivers makes them more likely to accept rides they would otherwise reject. It adds that California drivers can gain access to additional details about the fare and destination conditional on maintaining a minimum acceptance rate—but that to do so often further locks a driver into working for a single company.
I am not a lawyer, but it strikes me that this complaint is trying to establish a couple things. First, that Uber and Lyft employ multiple mechanisms to tie their drivers to working for a single platform and to get them to accept rides that a better informed independent contractor might reject as unprofitable or bad business. Second, that these actions are not just bad for drivers but also harmful to consumers. Proving consumer harm is important because antitrust in the U.S. since the 1980s has operated according to a “consumer welfare” standard, which holds that monopolies are not inherently bad; they are only bad if they lead to higher costs for consumers. Establishing consumer harm vis-à-vis higher prices has become a cornerstone of antitrust in the modern U.S. (though FTC chair Lina Khan may be changing that).
As for the corporate response, no surprises there. Uber spokesperson Noah Edwardsen told the New York Times in a statement, “This complaint misconstrues both the facts and the applicable law, and we intend to defend ourselves accordingly.” Lyft spokeswoman Jodi Seth told the Times, also in a statement, that Californians passed Prop 22 and “Lyft’s platform provides valuable opportunities for drivers in California and across the country to earn wages when and how they want.” Glad we cleared that up.
Uber's dismissal notwithstanding, the facts of this case seem very clear. Uber IS a duopolist, it DOES exploit asymmetric information in serving drivers and riders, it DOES set prices for its allegedly independent contrators. It will be interesting to hear Uber's response under oath to specific questions about their business practices (e.g. does Uber "throttle" rides offered to drivers nearing a quest bonus?).
What is less clear is whether these business practices violate antitrust law. One thing working in the plaintiff's favor is Uber's recent pricing behavior. In the Travis era, consumers clearly benefitted from subsidized below-cost pricing. Not any more, given DK's urgent need to deliver on his promised profitability.
Excellent post. This reminds me of the strife around (new) car sales channels in the USA. Either a store selling new cars is a company store (see Tesla) and thus has no ability to set prices (Tesla does that, not any intermediary), or it is an independent store (typically franchised, see Ford and all the rest), in which case it gets to set prices (and BTW takes all the inventory onto its books). (And tangentially, since car dealers are thus independent contractors, they are prohibited by law from unionizing to protect themselves against the OEMs: this is why they turn to powerful lobbying associations.) Uber seems to want to have it both ways (who wouldn't?): when it comes to interacting with the customer and setting prices drivers are employees, and when it comes to interacting with drivers (e.g. re pay rates), they are contractors.
I wonder why the ridehail firms just don't make their drivers agents, as we see in insurance (see State Farm): might resolve a lot of these issues....