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Creative Destruction: not “sharing economy” but merging market battles


Traditional supply chains are shaken up. Many of you have liked the following statement: “Uber, the world’s largest taxi company, owns no vehicles. Facebook, the world’s most popular media owner, creates no content. Alibaba, the most valuable retailer, has no inventory. And Airbnb, the world’s largest accommodation provider, owns no real estate. Something interesting is happening.”

This comes from a highly recommendable article by Tom Goodwin.

He describes a development of changes in the supply chain (see below) that I would call merging market battles. What Goodwin describes is often misunderstood as the so-called “sharing economy”.

The sharing economy, in the sense that I have something I lend to you for a favor or small price in return, is not the key thing that is happening. Of course, referring to “the sharing economy” is great for PR because it sounds very sympathetic, but this terminology does not clarify what is actually going on.

What is happening are serious economic changes in the supply chain made by removing or merging links of the chain. To look at another paragraph of Goodwin:

“Since the Industrial Revolution, the world has developed complex supply chains, from designers to manufacturers, from distributors to importers, wholesalers and retailers, it’s what allowed billions of products to be made, shipped, bought and enjoyed in all corners of the world. In recent times the power of the Internet, especially the mobile phone, has unleashed a movement that’s rapidly destroying these layers and moving power to new places.”

Another way to describe this process is “taking out the middleman” (or sometimes “coin flipping with the middleman”). For example, Booking.com, the world leader in booking accommodation online (Online Travel Agency - OTA), bypasses traditional search, advertising and booking in the hotel industry by directly providing the customer (end-user) with an overview of available accommodation possibilities. Its primary business is not a “sharing economy” type of service, but a smart innovation (search engine & booking page) with high impact on the traditional hotel industry. So high that it led to competition law claims.

But when market parties demand measures from public policy makers, it does not necessarily mean something is wrong. Maybe some companies just failed to adapt to a new (economic) situation in time. In that sense, we live in an age of creative destruction.

Competition is not only coming from more or less similar businesses (horizontal in the supply chain), but also from different types of parties that used to be seen as suppliers or distributors. Booking.com has Expedia as a serious horizontal competitor, but these full-service OTA’s experience competition themselves from players such as Travelbird, Jiba and Elizawashere (brands of the Sundiogroup), and even Airbnb.

The more battles for merging markets that arise and develop, the larger the outcry for regulation will be. Protests in the hotel sector can be seen as an example of this. Often you will hear such things as “abuse of a dominant position”, “abuse of market power” or even “monopoly”, but only rarely is an actual infringement of competition law to be found in that area. Most of the time, when a market party manages to challenge a traditional market structure, you have to look at how (vertical) agreements are made with other market parties to be sure there is no foul play.

Assuming that public policymakers are focused on consumer welfare, they should focus on protecting the field of competition rather than particular competitors.

#Regulattion #PublicPolicy #Competition #creativedestruction #singlemarket #internalmarket

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