Understanding the global economy after Platform companies

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Lukuaika: 7 min. 

Uber and other platform companies have showed that digitalization is an engine of deregulation. However, the need of governments to intervene in issues such as lower wages of Uber drivers is an issue of intense debate between free-marketeers and supporters of continuous state regulation, especially after the present Corona crisis.

Markets in advanced democracies are constantly changing through digitalization and by providing faster and easier access for citizens. All industrialized sectors and services can start facing new forms of competition in an ever-increasing globalized and interconnected world. These changes have originated great debates in economics and politics on the nature and role of oligopolies, monopolies, markets and states.

These new companies challenge natural state oligopolies or heavily regulated markets. Since most of the older companies relied on the safety and demanding regulations on which states allowed them to operate, they can be understood as a specific type of oligopoly. Most of these companies were not public companies but they operated under strict government regulation that had never before been put to the digitalized and globalized market test.

 

Platform companies

Areas of business that have been considered regulated, organized and relatively stable, such as taxi companies or housing can and have started to face fierce competition from new companies. Some of these new platform companies are already familiar to many, such as Uber, Airbnb, or Foodora. These are companies that deliver services, rather than products.

New companies challenge natural state oligopolies or heavily regulated markets.

These new companies have used certain flaws, over-regulation and the limited size of companies in the existing markets to their advantage being able to export their model to almost every country in the world.

One of the examples of these platform companies is Uber but anyone of these previously referred companies entered a specific market and forced the existing competitors to a complete reevaluation (or even offered an entirely new service). In this article, the case of Uber will be discussed at length.

 

The digitalization and de-regulation of service markets

A free market interpretation of this topic would give merit to the conclusion that profitable markets are more likely to face new competition as the attractiveness of higher profits draws in more and more companies trying to win a share of the customers.

A new business model can also lead to even more competition through improvised competitors that rely on the micro-flaws of the original model. For example, Taxify/Bolt/Lyft became competitors against both Uber and the traditional taxis and also trying to gain more markets.

Globalization and digitalization thus provided formulations and reformulations of markets that had a tendency for being local or national and usually heavily regulated. The protection and regulation of these former traditional companies was, to some extent, high.

This legislation was originally devised to ensure the security of both providers and users and also to prevent exploitation. A good example of this would be a taxi-license, in use in numerous countries around the world.

By avoiding some of the regulations, by applying attractive pricing, and the use of new hand-held technologies, former oligopolies now faced stiff competition from platform companies. Some areas have become deregulated, but in the case of new business, it would be more accurate to describe it as a failure to regulate against them.

New technologies enable new businesses that can compete in a new way. Local or national taxi companies had infrastructure in place that could only be circumvented through new technological innovations (generally low-cost and mobile internet access).

The strategy of these new companies or services is mostly based on these two factors: attractiveness of prices for the consumer and less bureaucracy.

The strategy of these new companies or services is mostly based on these two factors: attractiveness of prices for the consumer and less bureaucracy. They also rapidly expanded throughout the world being a sort of a substitute for industrial performance. The scalability of their tech and the easiness to set up servers are also other reasons for how and why these companies grew at such a rapid pace.

It is then perhaps possible to assume that digitalization favors competition and a greater access to the internet also allows faster market expansion in certain types of services.

 

Resistance against change

The shift in existing business models was so intense and involved so many sectors that states were, at times, forced to intervene. Uber, for example, was temporarily shut down in Finland for almost a year. In Portugal, in turn, the state attempted to regulate these services in order for both traditional taxis and ride-sharing platforms to have a more equilibrated operation.

Passenger carrier services in most European countries were rigorously regulated by national-level legislation and national authorities or agencies by different means. Such examples are the assigning of special license plates, specific car colors or stripes and lighting mechanisms on the roof of the vehicle, driver exams, visible identification and licensing of the driver inside the vehicle, taximeters and written information of prices per kilometer. It thus stands to reason that overregulation had overpriced the service, for both customers and drivers.

In other countries such as South Africa, Uber would perhaps have greater difficulty to enter such market as a great number of taxis are driven by individual people without ties to any contractor and already providing low-cost services.

Despite regional variations, the legal and practical adaptability of these new services and their attractiveness for both drivers and customers completely transformed the existing markets. This evolution also shows that overregulation can at times become ineffective if a large number of clients support new platforms.

Overregulation can at times become ineffective if a large number of clients support new platforms.

Uber referred to its services as “ride-sharing” as an initial legal solution, although it presently acts as a standard taxi company. Other carrier companies and even state regulation were forced to adapt but they did not completely stop these platform companies.

 

Deregulation of the markets, regulation by the state

Uber has been used in academia as an illustrative example of new services being delivered more effectively, with greater customer attractiveness. In research conducted in the US, the potential benefits listed are numerous:  freer schedules for drivers, Uber’s larger scale, faster matching and possible proximity, the over-regulation of traditional taxis, the higher number of Uber drivers, and the fact that Uber is around 38 percent better in capacity utilization.

This margin also explains why Uber quickly faced other competitors that were quick to enter the market, often by competing in price. These platforms can also have green advantages, as it gives users greater choice in terms of transport (e.g. favoring electric cars). The services are also far more transparent for users – with ratings for customers and drivers – that allow for more accountability of service.

The concern of lower wages that these services offer to their entrepreneur-employees appears to not have damaged the attractiveness of these platforms so far.

The concern of lower wages that these services offer to their entrepreneur-employees appears to not have damaged the attractiveness of these platforms so far – ease of use seems to have trumped other concerns. However, reductions in the salaries of Uber drivers (for example in Portugal) have been greatly contested by the drivers and civil society.

It is important to remember that Foodora or Uber do not regard their workers as typical employees under regular job contracts but more as independent contractors which has been another topic of discussion between states, platform companies and employees due to the fears of exploitation.

In the case of Uber, in fact, the fear of exploitation and the fact that Uber drivers did not have to follow most of the regulation as normal taxis, created an incredibly distorted market that quickly grew contentious. States intervened in order to equilibrate the distortions in this market and make all transport types work under fairer rules. The need of governments for such intervention is still an issue of intense debate today mostly between free-marketeers and supporters of continuous state regulation and supervision.

If we look at citizens or government regulators as rational beings and consumers, with an evolutionary intention of gaining profit, politically or financially, and avoiding loss, it is natural to assume that they will naturally consume the assets or adopt measures that best fit their needs.

If we look at citizens or government regulators as rational beings and consumers, with an evolutionary intention of gaining profit, politically or financially, and avoiding loss, it is natural to assume that they will naturally consume the assets or adopt measures that best fit their needs. Being aware of natural tendencies that humans have, both states and platform companies behave and apply procedures or regulation that best fit their ideals (whether to generate profit or for political gain).

 

Digitalization opens new markets

The fact that states had long considered transport services as relatively balanced systems for many decades signaled a failure in the understanding that competition in this area was generally lacking and the old model was showing signs of decay. Digitalization opened the door for innovation and market transformation.

State regulation had stifled necessary and welcome market innovation in large areas of the economy. The case of Uber is perhaps a sign that greater digitalization will lead to greater competition and the effectiveness of this new competition will change both regulators (legislative power) and the market itself.

Uber and other platform companies thus proved to be great legislative disruptors, in other words, disruptors of the power of states and regulation, subsuming large economic areas around the world. The power of platform companies thus comes from the ability to circumvent regulation, redesign markets, making private enterprise gain the ability to change markets in a seemingly unimportant area that, all of the sudden, became a highly discussed subject in politics, society and academia.

Luckily it seems that given the opportunity, markets frequently adapt and reinvent themselves at the face of state regulation or when facing new crises. Digitalization should, in this context, be understood as an engine of deregulation.

Given the opportunity, markets frequently adapt and reinvent themselves at the face of state regulation or when facing new crises.

As such, a backlash is predictable. The success of private companies can lead to restrictive – regulating – state responses: in addition to the troubles faced by Uber, many cities have restricted or further regulated the activities of Airbnb, for example. This has been due to inflated rental costs for locals as a result, especially in older cities in southern and central Europe. However, state intervention still creates great dissension between advocates and opponents to such measures.

Understanding the emergence of new technology and new forms of business necessarily informs our understanding of existing and future state activity as well, in the context of markets and state oligopolies. This development is also regionally varied, meaning local conditions influence the behavior of the markets and of the state. No doubt economists, political scientists and other academics will follow this closely. This Corona crisis will also prove to be a test on which types of operators will have the ability to adapt more quickly to the demands of life and services with the ever-present risk of pandemics.

 

Luís Sargento Freitas received his doctorate from the University of Jyväskylä in Finland in 2018 and is presently developing his post-doc project.

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