Ride-hailing technology allows for shorter waiting time for customers, wider service areas and – most importantly – cheaper fares. (Antara Photo/Yulius Satria Wijaya)

Price Floor for Ride-Hailing Services: a Boon or a Curse for Consumers? 

BY :KURNIA TOGAR P. TANJUNG

JANUARY 17, 2020

Disruptive innovations developed by ride-hailing companies have transformed the transportation market in Indonesia. Since GoJek was launched in 2010, ride-hailing services have won the hearts of customers, driving them away from conventional taxis. 

GoJek, Grab and Uber – sometimes called transportation network companies (TNC) – have developed disruptive technologies, mostly within their mobile apps, that have enhanced productivity.

These innovations allow for shorter waiting time, wider areas of service and – most importantly – cheaper fares.

While these ride-hailing services offer many benefits, their business model has also triggered a long-running conflict between their so-called "driver-partners" and drivers of conventional taxis. 

Conventional taxi companies have long accused the government of playing favorites with the ride-hailing companies. 

One example of unequal treatment the government meted out was the fact that ride-hailing cars were for a long time not required to undergo the roadworthiness test (KIR), which is mandatory for conventional taxis.

The government later made the test – and a bunch of other requirements – mandatory for ride-hailing cars.

These requirements included using taximeter to calculate fares, applying a sticker on cars used for ride-hailing services and registering the company that owns the cars.  

But since then the Supreme Court has ruled that the regulations have become a deterrent for the transportation industry since it prevented consumers from receiving the competitive advantages that ride-hailing technology offers. 

One rule that has remained is the government-mandated price floor and price ceiling for ride-hailing services.

The price ceiling is there to prevent ride-hailing companies from charging exorbitant prices during peak hours.

Meanwhile, the price floor is meant to prevent predatory pricing practices that could give ride-hailing companies an unfair advantage over their conventional competitors. 

The government is of the opinion that a price floor will prevent conventional taxi companies from being driven completely out of the market by ride-hailing companies with huge capital backing that could sustain losses to keep lowering their fares.

The problem is, there is evidence that a price floor may not necessarily make the market more competitive or benefit customers, and do the exact opposite.

In the United States, the Philadelphia Taxi Association sued Uber for trying to monopolize the market by offering unreasonably cheap prices to shut down its conventional competitors.

But the US Court of Appeals rejected the charge, arguing that companies like Uber actually create more competition rather than destroy it.

The argument against predatory pricing is that once the company dealing it has a monopoly on the market it would use its power to raise prices and hurt the consumers.

But there is also the possibility that new competitors – attracted by the possibility of grabbing that monopoly – would crowd the market, turning it competitive once again. 

Also, a company dealing in predatory pricing may not be able to sustain or subsidize losses for too long and will be forced to abandon it sooner rather than later.

Meanwhile, the cheaper fares produced by the competitive pricing might have already benefited the customers. 

To date, no company in Indonesia has ever been punished for violating anti-predatory pricing regulations. 

There is one scenario when a price floor harms rather than benefits the market: when it prevents the consumers from enjoying the best – aka lowest – prices possible. 

In the long run, a price floor could also become a disincentive for businesses since it would eventually lead to a huge supply surplus.

To remedy the surplus, ride-hailing companies would be forced to lay off drivers, thus increasing unemployment.

Intervening by setting up a price floor might also show up the government for being unsupportive of disruptive technologies – and by consequence, the economy. 

Imposing a price floor could be an excessive and unnecessary policy that could potentially harm not only transportation companies but also the public. 

Kurnia Togar P. Tanjung is a lecturer and researcher at the University of Indonesia's Faculty of Law and an expert staff at the House of Representatives.

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