Recently, I read a great research by Professor Benjamin Edelman and Professor Damien Geradin about new Peer-2-Peer platforms and their impact on incumbents of the market. In their thoroughly researched paper, the professors observe and formulate what they call a “spontaneous private deregulation” of traditional markets by entrants and how it fundamentally changes the landscape of competition.
What is Spontaneous Private Deregulation?
According to the research, spontaneous private deregulation is the open defiance to obey current regulations that are seen as roadblocks to innovative ideas and holdovers from another age that is no longer current.
In more and more industries, startups circumvent regulations that cost traditional players of that particular market and makes them less competitive. It can be observed that regulations may be excessive or out of date, protecting consumers against possibilities that seldom happen.
Examples For Spontaneous Private Deregulation
For instance, take Uber. A platform such as Uber doesn’t need a license to launch operation. It is not obliged to conform to regulations for disabled people and its drivers as well as cars won’t be subject to the rigorous inspections and quality checks that normal taxi services have to abide by. These parameters will make Uber far more competitive than traditional transportation services. But, on the other hand, less regulation means less security and safety, which can translate into a greater risk for customers.
Another great example of spontaneous private deregulation is Airbnb, a website for people to list, find, and rent lodgings. The company was founded in 2008 and has already more than 1.5 million listings in 38 thousand cities and 190 countries. According to Reuters, in 2015, it was anticipated to double its bookings compared to 2014 to reach a staggering 80 million nights booked. As famously once said, imitation is the sincerest form of flattery. Right now, more and more established hotels are turning to Airbnb to advertise and fill their rooms.
Looking at how these Peer-2-Peer platforms manage to bring buyers and sellers together, without providing any other service except for the added value of creating a rich and competitive marketplace through the accumulation and structuring of relevant data, I was reminded of Alvin Toffler’s book “Powershift: Knowledge, Wealth, and Power at the Edge of the 21st Century”. There he claims that “Knowledge is the most democratic source of power” and that “the control of knowledge is the crux of tomorrow’s worldwide struggle for power in every human institution.” Uber and Airbnb are great examples where this exactly happened.
Some Historic Examples
But the fight between incumbents and entrants is nothing new throughout the course of history and spontaneous deregulations have happened before.
In the automobile industry, in 1865, vehicles were not allowed to drive more than 2 miles per hour in cities and towns and not more than 4 miles per hour elsewhere. In addition, every vehicle was obliged to have a person 60 yards ahead carrying a red flag to warn approaching horse-drawn carriages and riders. Over time, as people became more and more familiar with cars and their benefits, the regulations were loosened.
Similarly, in the aviation industry, fundamental regulatory questions arose that went to the heart of the definition of a landowner’s property. Until then, a landowner’s property stretched “from the bowels of the earth to the heavens above.” With such regulatory barriers, organizing a mere single flight would be a nightmare. Fortunately, the legislative recognized this problem early on and responded accordingly.
Who Is Affected By This Trend?
According to the professors, traditional businesses can be more vulnerable to this rising trend than they may think. The targeted industries aren’t limited to the transport and lodging sectors but can encompass other niches like lawyer service providers or financial professionals.
The paper establishes 3 fundamental questions that determine whether a particular business or sector is threatened with the rising trend of spontaneous private deregulation:
1- Are consumers unnecessarily protected?
Traditional regulatory systems require formal training, licenses, regular inspections and more. These requirements cost and the expenses are passed over to the customer. Innovative startups tend to ignore these regulations and create their own version of protection system that is essentially based on a reputation mechanism.
2- Can the business practice be codified?
The rise of the Internet has made information available to many people at near zero costs. In combination with new software platforms, this phenomenon can enable “amateur” providers to deliver quality like professionals.
3- Do the regulations protect third parties?
Many regulations protect third parties, like some fire safety measures. The costs for these regulations are passed on to the customers. Entrants like Airbnb usually ignore these rules and consequently have a competitive advantage.
What to Do, Facing This Trend?
The professors continue suggesting 4 options, in case a business feels vulnerable to this emerging trend:
1- Engage the law:
This is what the taxi industry, especially in Europe, has done. But beware that you could appear as a sour loser and lessons from history show that regulations tend to change in favor of new ideas over time.
2- Embrace the changes:
This is also what part of the taxi industry had done. New apps where you can book a taxi, instead of calling a grumpy operator, are commonplace these days.
3- Play to your strength:
Airbnb lodgings can’t always offer the 24/7 service that traditional hotels offer and some amateur Uber drivers don’t know the shortcuts a veteran taxi driver knows. Hotel booking sites usually offer better cancellation terms than the likes of Airbnb, Emphasizing these advantages can help.
4- Accept the truth:
By recognizing the reality and embracing the inevitable, a traditional business can avoid a great waste of time and money. Closing down early or reinventing the whole business after the new model is sometimes the only option.
Whether you are an incumbent or an entrant, knowing the trends and how they play to your advantage or against it will greatly help you to avoid disaster and create a strategy that lets your business flourish in a fast changing market.