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Will Grab-Uber Merger lead to Monopolistic Prices in Singapore?



Ever since the Grab-Uber merger, with Uber taking 27.5% stake in the new Grab entity, there were serious questions asked about the effects of market dominance or even a monopoly foothold in the private car booking app market. The Competition Commission of Singapore (CCS), the national anti-trust agency, has also probed the merger to ensure there are no negative outcomes on consumers arising from the merger, and has yet to approve the merger.


It is worth pointing out that Grab is upfront about not raising fares at least in the short to medium term. See: https://www.todayonline.com/singapore/grab-top-exec-plays-down-concerns-over-uber-deal-pledges-not-raise-charges


However, one has to ask whether there will ultimately be a monopoly in this industry, leading to higher prices in the long term?


In the theory of market structure, although a monopoly could result in higher prices, higher economies of scale and hence cost savings can also lead to lower prices. Furthermore, the theory of contestable markets states that so long as there are low barriers to entry, the threat of potential competition will induce the monopoly to charge low prices, as high prices are likely to result in the monopoly being susceptible to hit-and-run competition.


With the merger, Grab is already the monopoly in the space, if we define the market to be "chauffeured personal point-to-point transport passenger and booking services". The more pertinent question is whether the market remains contestable (i.e. is there a threat of potential competition?).


Grab is quick to point out that there are low barriers to entry in the market, with the impending news that Indonesia's Go-Jek and Singapore's Ryde intending to enter the market. This appears to signal to CCS that the market is contestable. However, with tremendous brand equity, as well as a larger driver and passenger data due to its first-mover advantage in this current market, it remains to be seen if Ryde or even Go-Jek can stand a chance competing with Grab head-on.


There also exists strong synergies from the Grab-Uber merger as there will be combined access to a larger consumer and driver base, allowing Grab to match drivers to passengers more readily, with the optimal outcome of having drivers getting the job even before the current job ends, so there is no waiting time. Consequently, Grab can then raise the commission fees to drivers to raise profits in the short to medium term.


Grab is also branching into other markets such as payments in the form of GrabPay and food in the form of GrabFood. This will ensure greater consumer stickiness to its app, as Grab accounts for more day-to-day transactions of a typical consumer. It can be argued that the positive network externalities created may even raise the barriers to entry in the long-term, making the market less contestable.


If consumers then can have a shorter waiting time while booking a private car, and use more of Grab services on a day-to-day basis, Grab would then have a good reason to raise prices, on the pretext that there is improved quality of user experience with its range of services.


Therefore, the higher prices will come in the "long term", in line with Grab's strategic grand plan. Consumers will ultimately have to accept it to be fair as Grab seeks to raise the prices in commensuration with higher service quality.


For further questions on the application of economic theory to understand firm behaviour in the market, you may consult our Principal Economics Tutor, Mr Clive Foo during his economics tuition classes

conducted @ Toa Payoh Branch.


#Grab #Uber #Merger #MarketStructure #ContestableMarket #Economics #BarriersToEntry

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