The Analyses of the Competition Mechanism of Didi

李桐（西南财经大学 经济与管理研究院，四川 成都 611130）

付璇（西南财经大学 经贸外语学院，四川 成都 611130）

Abstract：Ride-hailing industry in China has flourished in recent years, and Didi, a leading mobile transportation platform is both the pioneer and veteran in this highly competitive playing field.This paper is to give an insight on its competition mechanism based on its business development.

Keywords: Ride-hailing, Didi, Competition Mechanism

Business development of Didi

Didi Chuxing offers mobility options for over 450 million users,including Taxi, Premier, Hitch, Express, Designated Driving etc.Founded in 2012, Didi Dache App had lured scores of customers because of the scarce taxis.In 2015, Kuaidi, a nemesis for Didi, had forged with Didi on February 14th.The merger between two giants in Chinese car-hailing market eschewed vicious competition through a barrage of subsidies for both drivers and hitch hikers.The newly merged company named Didi Kuaidi, facing the competition on premier service from not only Chinese companies, but Uber, an American technology company who got access to Chinese market in 2014.Until 2016, Didi has acquired more than 85% market share (based on the daily order volume) in ridehailing industry in China.In addition, Didi acquired Uber China in August 2016, ended up with an 18% stake for Uber in Didi.The ridesharing service provided by Didi has successfully expanded globally through investment and technical cooperation with other companies such as Lyft, Uber, Grab.

Timeline of the competition

In July, 2012, Didi acquired Series A round of funding by angel investor Wang Gang, and launched Didi Chuxing in September, while Kuaidi App kicked off in August.In October, 2013, according to iResearch, the market of Didi reached 59.4%, ranking top one in carhailing Apps.After the third round of funding valued 100 million dollars,the subsidy battles between Didi and Kuaidi broke out.Users of their Apps, including drivers and passengers, would be subsidized by red envelopes to deduct the online payment.When the subsidy war came under the way, Uber China announced to go into operation in March,2014.The two tycoons wore out their initial advantage with a plethora of compensations and allowances doled out.The subsidy volume of Didi was managed to over 1.4 billion RMB; meanwhile, almost 10 billion RMB for Kuaidi.Encountered by the stress of fi erce competition, Didi forged with Kuaidi and ended this costly subsidy race in February 14th, 2015.Uber China penetrated into the Chinese car-hailing market in the fi rst year but stumbled for lacking of localization and strong competition from Didi.Finally, Didi acquired Uber China in 2016.

How did Didi grow out of rivals

Ⅰ.Competition with Kuaidi

Early New Yorker deemed that a monopolist was to emerge in the competition of technology industries[1], since the network effect helped accumulate users, and zero marginal cost made it easy to provide service.These two drivers produced a virtuous circle and promoted increasing consumers.Initially, since the ride-sharing was a new thing, the chances were slim for ride-sharing App going to the maket if few users and drivers use.Yet things differed after ride-sharing service became ubiquitous, people were willing to use it as their friends were using it too, where network effect played a part.

However, competition in ride-sharing market is more than a Bertrand game, meaning that low price is used to carve up the market.According to Rochet and Tirole’s view [2], monopolist should charge high fees from users who have high demand elasticity and charge less with low demand elasticity.

Based on the data summarized by LiXin Meng [3], the average subsidy to users was 10 yuan per order fi rstly, and gradually increased to 15 yuan, yet dropped slowly to 0.About 46.7 percent of users said they had be accustomed to using car-hailing service (from iiMedia Research),so the proportion of subsidy to users reduced in alignment with the higher demand.Therefore, the demand elasticity can be the main incentive for Didi to adjust the price.

Didi had invested about 1400 million yuan when slugging it out with Kuaidi by the end of May in 2014, and Didi’s market share aggrandized from 39.8 percent to 45.6 percent (from Analysis International).Both Didi and Kuaidi maximized the network effect by using low-price strategy, but at the cost of massive fi nancial loss.

Ⅱ.Competition with Uber

Uber’s former CEO Kalanick said only two ways can conquer China: becoming more efficient than Didi, or depleting its capital.However, visibly, Uber worked well in neither of them.Uber is a greenhand in Chinese market, the only customer service provided for users is through email, which is less eff i cient than a phone call.Besides,the core engineering team resides in America so that the complicated communication with low eff i ciency crippled Uber to compete.

Furthermore, comparably Didi’s financing ability was stronger than that of Uber.From May 2015 to 2016, Didi had raised more than 8000 million yuan, while Uber China just raised one eighth of it.It’s impossible for Uber to beat Didi by “depleting its capital” through“subsidy war”.

Summary

Didi has survived every competiton since its foundation in 2012.Coasting on the abundant funds and proper price structure, Didi won the fi rst battle against Kuaidi.Knowing more about local market, Didi thwarted Uber’s ambitions to conquer China.