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China taxi app merger shows limits of web rivalry

Tie-up doesn’t look like a true merger.

China’s taxi app merger shows that rivalry doesn’t have to mean competition. The tie-up between two cab-hailing services backed by e-commerce company Alibaba and gaming giant Tencent is a rare co-operation between the two groups. Even for apparent adversaries, the chance to get more pricing power is irresistible.

Tencent-backed Didi Dache and Alibaba-backed Kuaidi Dache have been a great example of market forces chipping away at an over-regulated economy. Smartphone apps not only match local supply and demand, but also let passengers offer a higher fare to lure a cab their way when rides are scarce. Some 172 million passengers now use Didi or Kuaidi.

It has been a costly process. Together the two apps paid out some 2.4 billion yuan ($390 million) in subsidies – mostly tips to drivers and fare cuts for passengers – in the first six months of 2014 alone, according to Xinhua. Some of that helps lure drivers who otherwise wouldn’t use the technologies at all, but a big chunk of it is just spent by the apps on winning market share from each other.

By getting rid of that war of attrition, investors of the two companies should benefit. New backers may also be set at ease. The two apps have raised a total of $1.3 billion since December, mere months after previous capital raisings. Moreover, a united front may be more effective when up against the country’s regulators. China’s Ministry of Transport recently banned unlicensed drivers from using taxi-hailing apps. As for consumers, they probably won’t see any difference.

The tie-up doesn’t look like a true merger: the two apps will continue operating independently with their own respective chief executives. That may be a way of softening up taxi drivers, who could end up with less bargaining power and fewer subsidies, and who might yet provide a challenge to the combination. But the fact that the two sides have come to an agreement is a tacit admission by China’s fiercely competitive tech companies that in some cases carving up a market is better than fighting over it.

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