I was asked specific questions about GRAB’s operations in the Philippines on a microeconomic level, and here’s how it went.
What is GRAB’s business model?
GRAB Business has provided a platform that allows transactions between service providers (taxi drivers and private car/motorcycle/restaurant owners) and customers (end-users and business account users).
The GRAB Application creates a virtual market where supply (service providers) and demand (customers) meet. Every successful transaction translates to a commission, which is a percentage of the total amount the customer paid for the service rendered.
What does it sell or provide? Who are its customers?
At a glance, GRAB sells transportation solutions, courier services, and food delivery, which we can collectively call CONVENIENCE SERVICES. A customer will choose to get a GRAB service over public transport.
The convenience of being picked up and dropped off at a predetermined location weighs more as compared to transferring on various inefficient and unconnected public transport systems here in the Philippines.
When it comes to food delivery, busy people who do not have the luxury of dining out due to work demand opt to avail of this service to save time and still enjoy a good meal. Similarly, GRAB Express is a hit for internet-based businesses.
This allows them to send a package item for sale to a customer within an hour. GRAB services espouse a lifestyle, especially in the way we do things in a fast-paced urban environment.
What value do they bring to customers?
Initially, GRAB gives its customers a sense of safety. Being a service provider, their app presents details about the drivers. A rating system serves as a feedback mechanism employed to measure customers’s satisfaction with the service provided.
At the time that business was really good in the country, people chose GRAB over hailing taxis for a better commuting experience. The whole experience later evolved into convenience after getting used to the process. Customers developed the willingness to pay extra for that convenience.
GRAB changed the way transport and logistics services are being delivered. They raised the quality of the service so much that people were willing to pay extra and likewise shifted the customer's mentality toward buying convenience.
There was even a time that they were offering the services of an assistant to run simple errands on your behalf. In a fast-paced society, we cannot undermine instant solutions to make life easier.
What is the business really about?
Grab is a business service provider that primarily focuses on addressing logistical concerns (transport and delivery). Simply put, it is like a marketplace that doesn’t need to own a vehicle or store but only partners with the service provider or stores.
As society gets more engrossed in doing things fast, GRAB was able to identify and address this need through their app, which serves as a medium that anyone can access to lessen inconvenience. Imagine the time spent finding a place to park a car, let alone the exercise of simply parking it; the time wasted having to retrieve an item forgotten; queuing in a line to buy food, etc.
These are some inconveniences that people who avail of GRAB’s services do away with at a price. Partnering with various business outfits allows them to deliver the service to the customer, where all parties benefit.
How much market power does GRAB have?
GRAB’s market power in ride-hailing became prominent after it acquired another TNC operator, Uber, in 2018, thus increasing its market share by 93%. Whereas before, both TNC companies would be fighting for customers by outdoing each other with the lowest fares and best discounts or rewards; however, with the exit of Uber, GRAB’s rates have shown to have drastically inclined while their incentives and rewards have steadily declined.
Not only that, but their service has also deteriorated with more frequent driver cancellations, forced cancellations of booked rides, and higher waiting times. With the substantial increase in market share, GRAB is now identified as having a virtual monopoly on the ride-hailing market.
What is its source of market power? How has it obtained such power?
This market share is the first source of GRAB’s market power, wherein they are now the key resource for a service. GRAB has since been exhibiting monopolistic behaviors, such as having the ability to dictate its prices higher than the market price.
Through the price-surging structure, it is likewise able to price discriminately during peak hours when there is high demand and road congestion, thus resulting in deadweight loss, and even during off-peak hours when there are not enough drivers accepting rides, resulting in consumer surplus where supplier surplus is able to meet the demand given a price that is higher than the marginal cost.
Another source of its market power is its scale, with a pool of 46,000 drivers in the country after the merger. The additional 6,000 drivers would make GRAB closely meet consumer demand, according to the Business in its article titled “Business case study, GRABbing market shares,” dated July 26, 2018. Furthermore, when the TNC companies entered the Philippines, there was a significant drop in the regular taxi industry by 30%.
This gave the ride-hailing industry substantial power over the market, not just over its customer base but over the drivers as well.
With GRAB’s market power, the drivers are left with no other alternative, even given the lower quality of their working conditions, such as harder targets to get an incentive, lower take-home income due to lower rates, etc.
Does having such power concentrated in GRAB’s hands benefit or harm consumers and other firms?
The concentrated power of Grab in the ride-hailing market in itself does not harm the consumer for the reason that they have the scale and capacity to service the demand. Consumers who are willing to pay the price imposed are able to avail of the service when they want, thus minimizing the deadweight loss.
This way, the consumer surplus goes to the supplier surplus, and the markup gained is expected to benefit the drivers. With a higher-than-market price, consumers can demand better service. This is because customers could easily go to the alternative, which is the regular taxi, should the quality deteriorate so much that the value for money is lost.
Perhaps what the government should be regulating is the way the TNCs are conducting their business in terms of how well their drivers are being compensated so that the consumer as the end user benefits more with the good
The service they receive matches the price they pay. Firms would also benefit because they would be able to freely compete and enter the market by offering their service at a lower price with the same or better quality of service.
How might a potential new entrant challenge GRAB in its current and future business? Will this benefit or harm consumers and other firms?
A potential new entrant can challenge GRAB by offering relatively lower prices and better services. Better services mean benchmarking the existing value propositions of GRAB, both to riders and drivers, and making sure that all of them are provided in better quality.
Further, the new entrants can innovate in some areas of services that GRAB has not yet provided. These innovations may include free Wi-Fi, device charging, food and drinks for sale inside cars, and training for drivers to establish a standard for drivers on how to effectively interact with riders from pick-up point to monitoring and eventually drop-off point.
This will surely benefit consumers because it will increase competition, improve service, and lower the price in the long run. However, the new entrants will require high fixed costs in order to provide such innovations and establish mobile app technology.
Also, GRAB is enjoying low variable costs because the higher portion is shouldered by the driver, which may include license, fuel, and maintenance. For these considerations, the new entrants cannot just charge a very low price, while GRAB can do otherwise.
The entry of new competitors will cause a decrease in demand for GRAB services (shifting GRAB’s Demand Curve to the left). Consequently, the decrease in demand for GRAB’s services will result in a decrease in price, thus making it beneficial to consumers.
However, GRAB has advantages in product differentiation in terms of branding, advertising, and value-added services like courier and food services. Furthermore, GRAB can substantially reduce the price with its advantage in economies of scale, which gives GRAB a lower marginal cost than new entrants.
In this case, the new entrants will have difficulty challenging GRAB, especially since it bought Uber recently, which further increased its already strong market power.
Having no competitors, GRAB will behave as a price-maker, dictating prices higher than the equilibrium price, a socially beneficial and desirable price in a perfectly competitive market, depriving some of the consumers who have a lower willingness to pay (consumer surplus).
How are TNVS or other app-based transport services, such as GRAB, regulated in the Philippines and in other countries?
In the Philippines, app-based transport services are regulated by the government in terms of the number of drivers or cars on the road. This is relevant to the limited road capacity in urban areas where heavy traffic is an issue.
This is an application of government intervention to regulate supply in the market. However, in India, the focus of regulation is on the price being charged by the app-based transport service providers. It is evident from the established consumer protection policies of India that the government interferes immediately upon consumer complaints.
How should the government respond to the current situation and GRAB’s market position?
When there is too much market power, there is a clear "market failure" that can support government action.. The government can work on several policies by focusing on agencies that can scrutinize the market position of GRAB.
First, the Philippine Competition Commission (PCC), tasked by the law to look into any and all anti-competitive acts, can, in fact, nullify the UBER-GRAB deal from the start.
Though at present PCC has already charged GRAB for this acquisition, stricter measures can be introduced once proven and are able to solidify their case against monopolistic practices. Once proven, PCC could impose based on its recommendation of both a fare price cap and a rate of return regulation.
With the fare price capping, peak hours would be set at a pre-computed maximum rate comparatively competitive to other transport services, thus establishing a ceiling. Similarly, assessing the size of the firm and evaluating what the level of profit from their capital base would be could validate the acceptable range. These are to be taken during the absence of competition.
Simultaneously, the government, through the LTFRB, must help promote competition in ride-hailing, likewise resisting the temptation to overregulate, as some lawmakers, to some extent, have pondered requiring congressional franchises before any and all ride-hailing firms could operate in the country—a clear barrier to entry. The government should instead encourage entrants into the new TNC by providing an incentive in the form of tax holidays in their initial year of operation.
The technology used to set up in this industry requires a certain degree of capitalization that is coupled with additional investments in marketing activities to obtain both TNVS partners and customers.
There is a minimal trade-off in considering the social benefit of having more industry players.
In relation to the imposed cap of $65,000 for TNVS, LTFRB should regularly conduct a rapid assessment of this figure. As a regulatory body, it must not be complacent and satisfied with imposing a less dynamic figure but rather be able to keep track and adjust based on obtained reports and assessments.
Likewise, the LTFRB should put into effect an equal division of the set quota relative to the number of licensed TNCs. On the other hand, TNC’s must be obliged to regularly submit and update information about their registered TNVS. Discontinuance of a registered partner, change of vehicle, and other pertinent information concerning partner-operated vehicles should be included in these reports.
Finally, the “no garage, no car policy” and “age of the vehicle” should be strictly observed and placed into effect for TNVS before being granted a Certificate of Public Conveyance (CPC).
These vehicles being utilized for public transportation must be well maintained, secured, and in good condition. TNC’s found accepting beyond the limit or having TNVS partners that fail to comply would be fined and penalized to the extent of suspension or revocation of its business license.
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