When managers see red with digital platform competition

The Passau researchers were surprised at how much the managers withdrew to existing laws and norms. “It is a bit like Asterix and the little Spaniard: when new competitors from the digital industry enter an established market, the previous industry giants defiantly hold their breath and say that it is unfair, that they are angry and they are not going to be a part of this”, is how Professor König summarises the reactions. He is familiar with this from another area – namely from the reactions of the book trade to the then newly-launched online retailer, Amazon, which he has also researched, together with colleagues, in a recently published long-term study.

The researcher concludes that existing rules and norms – both written and unwritten – promote inertia among managers. “Cognitive rigidity, i.e. the tendency to stick with the old and familiar, plays a major role in the transformation of organisations – institutions play a reinforcing role here”, says König: it is not a good one either. Managers suddenly start calling for state regulation and rely on the authorities to get the new competitor out of their way – either by banning its business altogether, or severely restricting it, at the very least.  

Regulation does not affect Airbnb

However, regulation is not quite that simple, especially as the new, digital competition cannot be clearly assigned to existing categories. According to current law, which is still the E-commerce directive dating from 2000, Airbnb is actually only an app. service provider and is therefore not obliged to respect the hotel industry’s laws and regulations. 

The momentum in the call for regulation really only came when Airbnb’s business model started to have an impact on other areas, namely the housing market. “There is a shortage of housing where Airbnb arrives,” says Professor Stefan Bauernschuster, economist for public economics. This is because some landlords prefer to let their flats or properties to tourists or business people on a short-term basis, rather than to long-term tenants – this leads to an increase in rents and property prices. This becomes particularly problematic if housing was already scarce before Airbnb entered the market. On a national and regional level, there are now regulations which target Airbnb, such as Berlin’s ban on misappropriation or Hamburg’s Housing Protection Act. 
 
Professor Bauernschuster’s research is interested in how the sharing economy is changing existing markets and the impact of political measures. The evidence on the effects of Airbnb on the housing market mainly comes from the USA. Although there are initial studies from Europe, for example from Berlin, a broader picture is missing so far. “Yet a deeper understanding of the various effects and thus the consequences for socio-economic inequality between, and within, cities would not only be scientifically interesting, but also politically relevant,” Professor Bauernschuster emphasises.

There are empirical studies on the effects of Airbnb on the hotel industry. Thus, a marketing study from Texas has shown, above all, the negative effects thereof on small, reasonably-priced hotels. The platform appears to be taking customers away from these hotels in particular, rather than from the larger chains and high-priced hotels.

Hoping for the Digital Markets Act?

From an economic point of view, competition is a good thing because it stimulates business. “The positive aspect is that everyone has to work a little harder and prices go down which, in turn, benefits the customers,” says Professor Jan Krämer who, together with his team, is researching how digital markets can be intelligently regulated; Professor Krämer is also contributing his expertise at a European level. He is co-director of the CERRE-Think-Tank in Brussels.

In December of last year, the European Union presented a draft for the Digital Markets Act which, together with the Digital Services Act (presented at the same time), is to comprehensively reform the E-Commerce Directive dating from 2000. The Digital Markets Act lays down clear rules for digital gatekeepers on what online platforms may and may not do in competition in the future. It is about nothing less than the reorganisation of the digital markets in Europe. It will, however, take a few years until this is the case. The draft is currently in the complex co-ordination phase between the Commission, the Council and the Parliament.

However, the Digital Markets Act only targets online platforms which exceed a certain size and pursue certain business models. In principle, this does also includes the conveying of flat offers or hotel rooms. However, the Digital Markets Act mainly applies to the tech giants, such as Facebook, Google and Amazon. “Airbnb is not yet on this scale, but the platform may well be affected in the future,” says Krämer.

This leaves the Platform-to-Business-Regulation which came into force at the EU level last year and which also applies to Airbnb. It imposes transparency rules on digital platforms which means, for example, that Airbnb must publish the criteria according to which the flat or property offers are listed. This primarily serves private providers and their customers. It does not necessarily benefit managers from the hotel industry.

The crisis as an opportunity?

Quite the contrary, their situation becomes more acute due to the existing crisis. There are, however, opportunities to be had in crises: that which sounds like a truism, has actually been proven by transformation research. Researchers speak of ‘windows of opportunity’, occasional ‘windows’ which speed up transformation.

Founders have a particular role to play here. “The Austrian economist, Josef Schumpeter, sees entrepreneurs as the main actors when it comes to creating a new equilibrium that is shaken by a crisis,” says Professor Carolin Häussler, who researches innovation and start-ups at the University of Passau and is a member of the Expert Commission on Research and Innovation (EFI) which advises the German government on this topic. “This is why crises are often associated with opportunities, or are seen as two sides of the same coin.”

This could also be the reason why Airbnb managed a successful flotation, even during the crisis: the platform can handle crises. It is, in fact, one of the examples which took advantage of such a window of opportunity. It went online in 2008, in the middle of the financial crisis, as did others that have since grown big: Uber, the taxi service; Zalando, the online clothing store and Bitcoin, the crypto-currency.

“Digital platform ecosystems, and their environments, are spaces of innovation and new digital entrepreneurship”, says Häussler. Digitalisation can also help companies in traditional industries to innovate and modernise. However, this requires investment in research and development – these investments are, however, declining as the EFI Commission states in its current report: According to this survey, small and medium-sized companies expect to reduce their spending on research and development by 9% during the 2020 crisis year, and by another 5% in 2021 – hardly ideal conditions for taking advantage of the opportunities offered by digitalisation and emerging from the crisis (stronger) with innovative products and services.  

Text: Kathrin Haimerl