The answer is actually very simple, that is, this case is really too difficult, which not only challenges many conventions, but also has many technical obstacles. Three difficulties: First, the attitude towards VIE structure; The second is the definition of relevant markets; The third is the identification of market forces.
Chen yongwei CYW
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(The author is Chen Yongwei, a researcher at Peking University Market and Network Economy Research Center, and the director of Comparative Research Department. The article was originally published in the Economic Observer, and the interface was authorized to forward. The article only represents personal views. )
At the recent press conference of the State Council Information Office, Wu Zhenguo, director of the Anti-monopoly Bureau of the State Administration of Market Supervision (hereinafter referred to as "the General Administration of Market Supervision"), revealed to the outside world that the General Administration of Market Supervision is conducting an anti-monopoly investigation on the merger of Didi and Uber according to law. As soon as this news came out, the "Didi Uber merger case" that has gradually been forgotten by people has once again become the focus of public opinion.
At the beginning of August, 2016, many people were still trying to refute the rumor that "Didi acquired Uber China". The phrase "If you fight, you will be earth-shattering, and if you are together, you will love it to the end" released by Didi Company made all the rumors become rumors. According to the usual practice, mergers and acquisitions between industry giants such as Didi and Uber must be reported to the Ministry of Commerce and approved before they can be carried out, but Didi does not declare on the grounds that its income does not meet the reporting standards. Just as the outside world speculated about how Didi would get through the declaration, Didi announced to the outside world that it had completed the merger and acquisition of Uber China without declaration.
In September 2016, the Ministry of Commerce stated that the merger of Didi and Uber was not reported to the Ministry of Commerce, and an anti-monopoly investigation was being conducted in accordance with the Anti-Monopoly Law and other relevant laws and regulations. Since then, people who pay attention to this matter have been waiting for what kind of judgment the Ministry of Commerce will make on the "Didi Uber merger case" and what kind of treatment will be given to Didi. However, this wait is two years. In the past two years, great changes have taken place in the world: Didi has gone from triumphant progress to trouble, and the centralized review function of operators of the Ministry of Commerce has also been transferred to the newly established General Administration of Market Supervision in the process of institutional adjustment, but the results that people are waiting for have not yet appeared.
So, what is the reason for the delay in the investigation? The answer is actually very simple, that is, this case is really too difficult, which not only challenges many conventions, but also has many technical obstacles.
The first difficulty: the analysis of VIE architecture
The first difficulty in the investigation of Didi Uber merger case is the attitude towards VIE structure. VIE(Variable Interest Entity), also known as "agreement control", refers to an investment structure in which foreign investors control domestic operating entities through a series of agreement arrangements, and obtain economic benefits of domestic operating entities without acquiring the equity of domestic operating entities. In practice, many foreign investors use VIE structure to enter industries where foreign investment is restricted or prohibited in China, while some domestic companies often use VIE structure for overseas listing.
According to Article 20 of China’s Anti-monopoly Law, operators refer to three situations: "(1) merger of operators; (2) An operator obtains control over other operators by acquiring equity or assets; (3) An operator obtains control over other operators by means of contracts or can exert decisive influence on other operators. " Obviously, controlling the behavior of domestic operating entities through VIE framework should belong to the third situation mentioned above, so in theory, it should belong to the situation that operators need to investigate intensively. However, historically, due to the existence of relevant legal loopholes, the Ministry of Commerce often shows an evasive attitude when encountering cases involving VIE structure (of course, it is also said that the parties in these cases did not take the initiative to declare).
One exception is the case of Wal-Mart’s acquisition of 33% equity of Newsea Holdings in 2012 (hereinafter referred to as the "Wal-Mart case"). In this case, the Ministry of Commerce gave a conditional decision. In the attached conditions, Wal-Mart is required not to engage in the value-added telecom business originally operated by ECHO (originally controlled by Newsea through VIE structure) through the VIE structure after the transaction. This case is regarded by many people as an example that the Ministry of Commerce does not exclude the VIE architecture review. However, some people think that the decision to review this case is an important reason for the Ministry of Commerce to take an evasive attitude towards the VIE structure later. The reason is that in the decision of this case, the Ministry of Commerce made a stipulation that the industry is forbidden in the form of attached conditions. If this convention is followed, then in order to show fairness, similar provisions should be made in subsequent cases involving VIE, which may disrupt the strategic layout of many local enterprises that adopt VIE architecture for overseas listing. Whether this view is reasonable or not, I don’t know. However, from a realistic point of view, the Ministry of Commerce did not face the review case with VIE architecture after that, especially the relevant cases in the Internet industry.
If we compare the "Didi Uber merger case" with the "Wal-Mart case", it is not difficult to find that the former is much more difficult than the latter. In the Wal-Mart case, only the acquired party, namely Newsea Holdings, adopted the VIE architecture, while in the Didi Uber merger case, both the acquirer and the acquired party adopted the VIE architecture. Even if the Ministry of Commerce wants to adopt a similar analysis and handling method to the Wal-Mart case, it becomes impossible. The difficulty in dealing with the VIE architecture is probably an important reason why the "Didi Uber merger case" has been pending.
The second difficulty: that definition of relevant market 1. the definition of relevant market is not an easy task.
If the difficulty in VIE architecture mainly comes from convention, then the difficulty in defining the relevant market can be said to come from the survey itself.
The so-called relevant market is the market involved in anti-monopoly cases. In all anti-monopoly cases, including centralized review of operators, defining the relevant market is usually the first step of analysis. It is generally believed that the follow-up discussion is meaningful only if the relevant market is clearly defined (of course, there have been different views on this in recent years, which is another story and will be discussed later).
Unfortunately, it is very difficult to define the relevant market. In reality, different people’s views on the relevant market in the same case are often contradictory and even contradictory. Many people are used to using this to attack anti-monopoly. For example, a famous economist once said: "If you define carbonated drinks as a related market, then Coca-Cola is a monopolist; But if you define soft drinks as related markets, then its share is very small, and it is not a monopolist at all … In anti-monopoly law enforcement, this definition of related markets depends on the subjective judgment of law enforcers, and different judges may make completely opposite judgments. "
However, the difficulty in defining the relevant market can only remind us that we need to be cautious in the anti-monopoly review, and we cannot use it to deny the anti-monopoly work itself.
Anyone who has been exposed to anti-monopoly investigation will know that law enforcers in reality are not arbitrary, but rather very cautious when considering the relevant market. They will ask the parties involved to invite economic experts to analyze and issue reports respectively, and then judge according to the opinions of both parties before giving their opinions. Generally speaking, in the trial of a case, defining the relevant market may take up half or even more of the workload of the whole case analysis. In fact, the reason why the investigation on the merger of Didi and Uber has been delayed is that it has been difficult for regulators to determine the relevant market of the case.
2. Traditional tools for defining relevant markets.
So, how is the relevant market defined? In fact, it is not difficult in principle, mainly around the concept of "substitution". If certain commodities can be substituted for each other, then they should belong to the same related market.
We can imagine the following fictitious case: Zhang San is the only apple grower in a certain area. One day, he tried to raise the price of his apple, which caused dissatisfaction among local residents. They went to the judge to report Zhang San, saying that Zhang San used his monopoly position in the local apple market to squeeze consumers and infringe on consumers’ welfare. If you were a judge, what would you think of this case? Yes, Zhang San did "monopolize" the local supply of apples, but can he sit on the ground and start the price at will, greatly raising the price of apples? I am afraid the answer is no. Because if the price of apples rises too much, consumers may stop buying apples and buy pears or oranges instead-after all, these are fruits, which are similar to apples in function. If there are no apples to eat, eating them is the same. In this sense, pears and oranges may be substitutes for apples, and perhaps they should be included in a related market when analyzing the case. In antitrust analysis, this related market is the so-called product market. In addition, after Zhang San greatly increased the price of apples, people can not only eat pears instead of apples, but also eat apples produced in other places or pears or oranges from other places. Therefore, the relevant market involved in this case may not only include the local market, but also include other fruits and sell them to local areas. This related market is the so-called regional market. Generally speaking, in anti-monopoly cases, product market and regional market will be defined at the same time.
In practice, people will use some quantitative methods to judge the substitution between commodities:
One way is to look at the price correlation between commodities. According to the theory of economics, if two commodities are substituted for each other, there will be a high correlation between the price trends of the two commodities. This feature can help us in defining relevant markets. For example, in theory, pears and oranges seem to be substitutes for apples, but in the analysis, should both be put into relevant markets? At this time, we can look at the correlation between the prices of these two fruits and the prices of apples. If the price correlation between pears and apples is high, but the price correlation between oranges and apples is low, then we should only include pears in the relevant market, not oranges.
It should be pointed out that the observation of price correlation can only help us to test the goods suspected to belong to the same related market, and it cannot be used to determine whether two goods belong to the same related market. In reality, prices are influenced by many factors, and there are many reasons for the similar price trends of the two commodities. Therefore, it is not certain that they will replace each other and belong to the same related market only by price trends. One of the simplest examples is a table and a chair. Obviously, these two commodities are far apart in function, but because the materials used to produce them are similar, they tend to keep the same price trend.
Another method is transfer ratio. The intuition behind this indicator is intuitive: assuming that the two commodities A and B can replace each other, if the price of commodity A rises, many people will give up commodity A and buy commodity B instead. If the number of people who give up A commodity is A and the number of people who buy B commodity instead is B, then B/A is the so-called transfer ratio. In practice, when we see that this ratio is high enough, we can infer that there is a strong substitution between the two commodities and they can be classified into a related market; If this ratio is small, it means that the two are weak in substitution and should not be included in the same related market. For example, if we find that when the price of apples increased, most consumers who gave up buying apples bought pears instead of oranges, then pears should be included in the relevant market of the case, while oranges should not be included.
It should be said that compared with the price correlation, the transfer ratio excludes many unnecessary interference factors, so it is relatively strong in objectivity. However, how high the transfer ratio is to determine whether the two commodities are highly replaceable still requires subjective judgment. In order to overcome this problem, people have developed another relatively more objective method-SSNIP analysis.
The full name of SSNIP analysis is "small but significant and not-transitive increase in price" analysis. It is very difficult to read, but the economic meaning behind it is simple: if an enterprise gains a monopoly position in the market, it will be profitable to raise prices immediately. If this is not the case, it can only show that the market it monopolizes now cannot form a related market independently, and consumers can choose to buy other goods to avoid the impact of price increases. At this time, in order to completely define the relevant market, we need to add other commodities to rethink, and see if enterprises can make profits by raising prices after completely monopolizing this larger market. If the answer is yes, then this big market is the relevant market we want, otherwise, we need to continue to add goods and repeat the test. Take the previous virtual case as an example. If we want to define the relevant market by SSNIP, we can start with Apple to test the price increase, then gradually add pears and oranges, and finally get the required market.
It should be said that compared with the methods of price correlation and transfer ratio, the advantages of SSNIP test are very prominent. First of all, it is easier to explain. After adopting this method, people no longer need to argue about how high the price correlation is and how big the transfer ratio is, as long as the profit after the price increase is increased or decreased. Secondly, it can avoid arbitrariness in dividing relevant markets as much as possible. As the operation of SSNIP method is from small to large, the products under consideration are gradually added, so the problem of dividing the relevant market too big or too small can be better avoided, and the reliability of the conclusion can be better guaranteed. It is precisely because of these excellent properties that in practice, SSNIP analysis is often favored by law enforcers and analysts, and its application can be seen in many cases.
3. Failure of traditional tools under platform conditions
Although we already have many methods to define relevant markets, including SSNIP analysis, when we apply it to the "Didi Uber merger case", we will be surprised to find that they are no longer effective! Why? The reason is that the above methods strongly rely on the important variable of price in the application process, and for platform enterprises like Didi, the price information itself is not reliable, so it is naturally difficult to analyze based on them.
As we know, the platform is a multilateral market, which will trade with many kinds of subjects at the same time. In the process of trading, the platform can use the "non-neutral price structure" to cross-subsidize the prices of all sides and realize the improvement of profits. Extremely speaking, many platform companies will even charge zero prices in one or several markets to gain users, and then raise prices in other markets to subsidize them. If this is the case, then it is difficult to directly use the relevant market judgment based on price.
In the case of Didi Uber merger, there is this problem. As a platform, Didi Platform will share the charges between drivers and consumers. At this time, if we only start from one side and rely on SSNIP or other methods to define the relevant market, it may cause serious misjudgment. In fact, before the merger of Didi and Uber happened, the problem was even more complicated. At that time, because each platform burned money to compete for the market, there was not only cross-subsidy between the various markets, but also the overall subsidy of the platform. Obviously, to comprehensively consider so many problems, the existing tools are seriously inadequate.
At present, many scholars have put forward their own opinions on the relevant market in platform antitrust. For example, David Evans, an economist, thinks that the relevant market can be defined by the sum of the prices of various markets. The reason behind this view is very simple. When the prices of all sides are summed up, the problem of price structure will no longer be a problem, and the problem of cross-subsidy will naturally disappear, leaving only the problem of total price. The total price can be handled by traditional methods such as SSNIP. However, in the case of Didi M&A, the problem seems to be not so simple. The reason is that in this case, we should consider not only the competition between platforms, but also the competition between platforms and traditional enterprises. Even when considering the replacement of Didi special car and taxi, the charge of Didi to drivers and consumers is considered comprehensively, but what is the significance of comparing this total charge with the price of taxi? At least in theory, it doesn’t make sense.
In this case, some experts suggested that the relevant market should be defined directly from the perspective of function instead of quantitative tools. This is convenient in operation, but at the same time it completely puts aside the platform attribute of Didi. It is still controversial whether it is feasible to analyze these enterprises with completely different business models in a related market, such as car platform, taxi company and even bus company.
The third difficulty: the determination of market power.
Through the previous analysis, we have seen that it is difficult to clearly define the relevant market of Didi because of its platform attributes. Now, let’s forget this problem for a while, and suppose that some scholar has successfully put forward a method to solve this difficult problem. So, is the following work easy?
In my opinion, the answer is probably no. In the case of concentration of operators, once the relevant market is defined, the next step is to evaluate the possible changes in the market structure to see if it will significantly increase the market power of enterprises and cause potential monopoly risks.
There are many problems involved here. The first one is how to calculate the market share.
For ordinary enterprises, the calculation of market share is very easy. According to the turnover, one plus and one minus will come out. However, for platform enterprises, the problem seems to be much more complicated. By definition, a platform is just an intermediary. It does not provide goods or services, but only matches supply and demand. According to this definition, the turnover of the platform should be its intermediary fee, not the GMV(Gross Merchandise Volume) of the platform. Assuming that the relevant market we define is only the network car platform, then of course there will be no problem with this calculation. However, if taxis, buses, or other means of transportation are included when defining the relevant market, the problem will immediately become troublesome. These enterprises earn their income by directly providing services, which will not generate intermediary fees, so they cannot be compared with Didi’s income. So what about the GMV of Didi? There are also problems. Because this is only the transaction scale generated on the platform, it is not equal to the revenue of the platform, and even there is no fixed proportional relationship with the revenue of the platform. It is obviously problematic to use such a numerical value to directly compare with the turnover of various traffic operators.
Even if we find a suitable method and successfully calculate the market share, it does not mean that the market power of Didi has been effectively evaluated. In anti-monopoly analysis, people’s evaluation of market power depends not only on the market share occupied by enterprises, but also on whether they can build strong barriers to entry and what the overall changing trend of this market will be. For us now, all this is no longer a problem-we have witnessed a series of events after the merger between Didi and Uber, and we clearly know that after the merger, many emerging online car companies will come in to challenge Didi’s dominance. However, if the time goes back to before or shortly after the merger, who can predict all this? Who would have thought that after the merger of the two giants, there would be so many new challengers?
In addition, there is an unavoidable problem that is the influence of data. In the era of digital economy, data has become the most critical resource. Although it is difficult to express the value of data by specific amount in the merger case, its function can not be ignored. In the "Didi-Uber merger case", Didi and Uber not only realized the merger of assets, but also realized the connectivity of data, which will obviously have a great impact on the market power of Didi. But how to evaluate this impact? Don’t say that two years ago, even now, there is no definite answer.
The biggest difficulty: fait accompli
In all fairness, although there are a lot of technical analysis problems in the "Didi Uber merger case", this in itself does not delay the conclusion of the investigation results. Compared with various technical difficulties, the former Ministry of Commerce and the current General Administration of Market Supervision may face a more intractable problem. Whether it is approved or not, the merger of Didi and Uber is a fait accompli.
Didi completed the whole merger before the Ministry of Commerce intervened in the investigation, which actually put the Ministry of Commerce in a very embarrassing position. If the conclusion of the investigation is yes, then the outside world is likely to understand this as a kind of acquiescence afterwards, which is likely to lead relevant enterprises to choose the same operation as Didi when encountering similar situations, which will obviously damage the credibility of the government and the law. What if the conclusion of the investigation is that it is not approved? Can you really ask Didi and Uber to split up and restore the original state? This is possible in theory, but it is almost impossible in practice. It is relatively easy to split assets and personnel, but how to split the merged data? This is really a headache to think of. If the split is actually impossible, then you can only fine it. However, according to the current law, even if it is punished according to the top standard, its amount is just a Mao Mao rain for Didi. Such punishment will only shake the public’s trust in law enforcement agencies. From this point of view, when dealing with the "Didi Uber merger case", the Ministry of Commerce can really be said to be "worrying about progress and worrying about retreat".
Now, with the institutional adjustment, the hot potato of "Didi Uber merger" has been transferred to the newly established General Administration of Market Supervision. How will the General Administration of Market Supervision handle this case? We can’t be sure. But it is almost certain that Didi will not be split.
In fact, more than two years have passed since this high-profile merger. In the past two years, the market situation has changed greatly, and many up-and-coming enterprises have begun to pose challenges to Didi. In this environment, it seems unnecessary to dwell on whether the M&A process includes "original sin". For the newly established General Administration of Market Supervision, there is no need to worry about the attitude towards the merger itself. In contrast, it may be more important to pay more attention to what happened in the market after the merger and acquisition, and whether Didi or other online car-sharing companies engaged in the behavior of excluding and restricting competition and infringing on the welfare of consumers.
Source: Economic Observer
Original title: Why is it so difficult to investigate the case of Didi Uber merger?