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Will Uber take over Finland’s so far well-protected taxi markets?

An Aalto University research group is studying the effects of opening highly regulated markets on the competitive balance between established and new actors.

On 1 July 2018, the Finnish taxi market experienced a sea change: the previously heavily regulated industry was freed of vehicle and driver quotas set by official municipal bodies. New taxi operators have been allowed to open shop and given free rein to set their own fares. Questions remain, however, about how the markets will take shape and whether all actors be treated equally by the new, less rigid regulation.

According Aalto University researchers, there are distinctive mechanisms at play whenever a regulated market is opened to competition.

‘There are many ways to deregulate a market. The most important issue to consider is whether the playing field will become level or will some see unfair advantages. Airbnb and Uber have shown that new technology can revolutionise heavily regulated industries. Even when markets are opened by amending legislation the need to do so is often dictated by technological development,’ explains Eero Aalto, a doctoral student at Aalto University.

Together with fellow doctoral student Zeerim Cheung and Professor Robin Gustafsson, Aalto is involved in a large, ongoing study looking into the deregulation of Finnish and Swedish telecommunications markets and trends in political regulation during the 1980s and 1990s. It is part of the Academy of Finland Strategic Research Council's project Digital Disruption of Industry.

A recent article by researchers Aalto, Cheung and Gustafsson on asymmetric regulation, converging markets and corporate political strategies has recently been selected as one of the best papers at the renowned Academy of Management Annual Meeting.

Convergence of markets refers to a situation where previously distinct market areas and the companies within their confines start competing for the same customers. Oftentimes convergence is the result of changes in legislation or a disruption in the market brought on by new technologies. When disruptions occur, market actors—who have up until that point been protected by regulation—react in a predictable and uniform manner.

‘First, market actors claim that the rules of the game are different for some players. Then, after the playing field has been made more level, the claim becomes that the common good requires strong regulation just like before. What is ignored is the fact that deregulation always entails creating new rules, not just doing away with old ones. The new rules are always unbalanced to some extent and favour some actors over others,’ Zeerim Cheung remarks.

Companies protected by strong regulation can, according to the researchers, work against their own interests over the long run. Advocating and lobbying regulation that favours your achieved interests may bring short-term benefits, but when new players enter the protected market, regulations that were previously advantageous can quickly become liabilities.

‘Resources accumulated over time can either provide an unfair advantage or lose their value in a new market. It’s for company management to decide whether to defend their market position by lobbying for favourable regulations or to adapt and innovate new technologies, services or business models,’ says Eero Aalto.

When a new business model or digital service enters the market, established actors might find themselves in trouble and lose their market position.

‘The Finnish taxi market is, technologically speaking, quite advanced, but only in the past few years have customers had digital services available. There has been little to none incentive to develop new business models in a state of highly limited competition—which is why Uber and other new digital services have the power to cause a major upheaval,’ adds Aalto.

‘Strong regulation carries a risk of major disruption. Our research highlights clear mechanisms for how technological development or legislative amendments affect competition, business operations and entire markets,’ says Cheung.

 

Publication:

Eero Juhani Aalto, Zeerim Cheun, and Robin Gustafsson: Asymmetric Regulation, Managerial Discretion, and Corporate Political Strategies. Academy of Management Proceedings, Vol. 2018, No. 1.

DOI: https://doi.org/10.5465/AMBPP.2018.225

 

More information:

Eero Aalto

Aalto University

Department of Industrial Engineering and Management

[email protected]

tel. +358 50 3484 303

 

Zeerim Cheung

Aalto University

Department of Industrial Engineering and Management

[email protected]

 

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