Uber and the Regulatory Challenge of a Horizontal Merger
According to recent reports, Uber is in talks to acquire an electric scooter company such as Bird or Lime. Acquiring a method of transportation outside of their core ridesharing business could help to increase market power, increase product differentiation and create economies of scale. In the acquisition, they will likely face significant regulatory challenge. If the merger passes and Uber is able to take advantage of cost synergies across their products, the merger could reduce marketing and product development costs for both businesses.
Reducing competition and increasing market power is an important motivator for Uber but also a significant regulatory hurdle. Acquiring a scooter company reduces the number of substitutes in the market Uber competes with for on-call transportation. A paper by Matthew Weinberg examines the price effects of horizontal mergers, reviewing papers examining mergers across a variety of industries including the airline industry, banking, microfilms, publishing, consumer products and gas. He found that of the fourteen case studies of individual mergers, eleven were found to result in higher prices charged by the merging parties and reductions in consumer welfare.
It is important to point out that the mergers studied arebiased in a few ways. The first is that only mergers that pass could be studied in this way, so mergers that regulators blocked because they would reduce consumer welfare are left out of the study. In the other direction, the studies suffer from positive results bias because papers that contain negative or null results often end up unpublished.
With their route finding system as a core competency, Uber could use scooters as a way to further shorten routes, dropping a customer off where they can take a scooter for the remainder of their route. Building the scooter service into the Uber app would create marketing advantages as well, reducing friction points for customers who would no longer need to create separate accounts for the two services and allowing the company to market both services simultaneously.
Section 7 of the Clayton act prohibits mergers if “the effect of such acquisition may be substantially to lessen competition.” The Federal Trade Commission guideline on horizontal mergers states that the agencies seek to identify and challenge harmful mergers while avoiding interference that are either competitively beneficial or neutral. In order to pass, Uber must prove that the cost efficiencies and innovation that the merger creates offset the increase in market power to result in no loss of consumer welfare.
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