Last taxi to Europe

Financial Mirror (Cyprus) - - FRONT PAGE -

The con­trast be­tween Europe’s re­sis­tance to Uber and Amer­ica’s warmer re­cep­tion for the ride-shar­ing ser­vice high­lights once again how Euro­pean reg­u­la­tory struc­tures, in prin­ci­ple de­signed to pro­tect con­sumers, end up pro­tect­ing en­trenched sup­pli­ers and sti­fling in­no­va­tion. This con­trast can also point us to the ways Europe’s gov­ern­ments should amend their rules, en­cour­ag­ing en­trepreneurs to de­velop cut­ting-edge busi­ness mod­els at home rather than be­ing forced to ac­cept in­no­va­tions only af­ter they have be­come best prac­tices abroad.

Anti-Uber protests by cab driv­ers are part of a long tra­di­tion of es­tab­lished sup­pli­ers chal­leng­ing new tech­nolo­gies that could cost them their jobs. But when, say, the Lud­dites of the early nine­teenth cen­tury protested against newly de­vel­oped tex­tile ma­chin­ery by smash­ing it, the au­thor­i­ties did not in­ter­vene to limit new tech­nolo­gies. As a re­sult, the Industrial Revo­lu­tion ul­ti­mately led to an un­prece­dented in­crease in living stan­dards around the world.

But, by the time su­per­mar­kets started to en­ter the re­tail sec­tor in the sec­ond half of the twen­ti­eth cen­tury, Euro­pean gov­ern­ments’ ap­proach had changed. Many coun­tries en­acted reg­u­la­tions in the early 1970s to pro­tect ex­ist­ing small shops against com­pe­ti­tion; as a re­sult, the devel­op­ment of more mod­ern dis­tri­bu­tion sys­tems was de­layed. A gen­er­a­tion later, th­ese re­stric­tions were lifted in re­sponse to con­sumer pres­sure.

But, as the re­sponse to Uber shows, Europe’s gov­ern­ments have not learned their les­son – and the Euro­pean econ­omy suf­fers as a re­sult. The prob­lem is that en­try into any mar­ket de­pends on the per­ceived op­por­tu­ni­ties for profit from new ini­tia­tives at a par­tic­u­lar point in time. Reg­u­la­tions can de­lay mar­ket en­try, but tech­nol­ogy can­not be stopped for­ever; new en­trants even­tu­ally will break through. How­ever, their busi­ness mod­els may no longer be prof­itable, or may be less prof­itable than they would have been.

In­deed first-mover ad­van­tages are com­mon in many in­dus­tries, ow­ing to economies of scale, or be­cause they lock in a cus­tomer base, or sim­ply as a re­sult of sunk costs. Es­pe­cially for “plat­form” mar­kets, where com­pa­nies ex­ploit ear­lier in­vest­ment to en­sure en­try else­where, this means that de­lays caused by un­jus­ti­fied reg­u­la­tory re­stric­tions can have a more pro­found neg­a­tive ef­fect, pre­vent­ing po­ten­tially suc­cess­ful com­pa­nies from en­ter­ing the mar­ket.

For ex­am­ple, Italy, which lib­er­alised its re­tail sec­tor only in 1998, has far fewer gro­cery chains to­day than France, Ger­many, and the United King­dom. In­deed, th­ese coun­tries’ chains, forged in the fires of com­pe­ti­tion at home, now dom­i­nate emerg­ing mar­kets in Europe and else­where. In Italy, the lim­i­ta­tions on large stores cre­ated mar­ket power at home for those few that nonethe­less man­aged to emerge and grow, but left them too weak to ex­pand abroad.

In the same way, Europe’s re­stric­tions in the car-ser­vice mar­ket are pre­vent­ing the con­ti­nent’s en­trepreneurs from de­vel­op­ing ser­vices like Uber. Like a su­per­mar­ket chain, Uber de­pends on economies of scale to al­low its plat­form to work ef­fi­ciently. And, like any plat­form, Uber started small, cov­er­ing its fixed costs through step-by-step ex­pan­sion. Now that it has achieved the min­i­mum ef­fi­cient scale, new en­trants can­not eas­ily use com­pet­i­tive pres­sure to squeeze Uber’s mar­gins.

When Uber started in San Fran­cisco in 2009, its mar­ket en­try was nei­ther chal­lenged nor sub­jected to a dif­fi­cult autho­ri­sa­tion process. Thus, Uber could test its new busi­ness model – based at the time on pro­vid­ing luxury cars – and grow, first in San Fran­cisco and then in other US cities, even­tu­ally ex­pand­ing to other coun­tries (as well as us­ing its plat­form to push into other ser­vices).

In Italy, by con­trast, even the pro­vi­sion of luxury car ser­vices via a smart­phone ap­pli­ca­tion would have been pro­hib­ited. Un­der Ital­ian law, for-hire car ser­vices are strictly de­fined as those that start from the garage where the car is parked, and they must be booked in ad­vance. Be­cause Uber’s app mim­ics taxi ser­vices, it would have been outlawed; Uber would never have been able even to start de­vel­op­ing its plat­form.

If Europe is to pros­per, it must ease mar­ket en­try for in­no­va­tors, so that plat­forms will begin to de­velop in­dige­nously, rather than mov­ing in af­ter they have been per­fected else­where. We should value the in­no­va­tion brought by new mar­ket en­trants more than we value the pro­tec­tion of ex­ist­ing mar­ket par­tic­i­pants.

This can be achieved by adopt­ing an out­come-based reg­u­la­tion aimed at the pro­tec­tion of con­sumers, not pro­duc­ers. Though in some cases this may mean sim­ply chang­ing the way ex­ist­ing rules are in­ter­preted and ap­plied, very of­ten the reg­u­la­tions them­selves will have to be changed.

New en­trants could still change the com­pet­i­tive struc­ture of ma­ture plat­form mar­kets – not just taxis, but tourism, con­sumer credit, and many other ser­vices. And if an out­come-based reg­u­la­tion is adopted, in­no­va­tive en­trants may well in­flu­ence the com­pet­i­tive struc­ture of other plat­form mar­kets that re­main un­der­de­vel­oped, such as health care, real es­tate, and pro­fes­sional ser­vices.

In all mar­kets, when in­no­va­tors can en­ter eas­ily and are not blocked by un­jus­ti­fied reg­u­la­tions, ev­ery­one stands to ben­e­fit – even­tu­ally even those whose oc­cu­pa­tions are dis­rupted or dis­placed. Just ask any pro­fes­sional, uni­ver­si­tye­d­u­cated de­scen­dant of a nine­teenth-cen­tury tex­tile ar­ti­san.

Newspapers in English

Newspapers from Cyprus

© PressReader. All rights reserved.