Disruptive innovation and competition in Latin America and the Caribbean
In the run-up to the Latin American and Caribbean Competition Forum in Mexico-City on 12-13 April 2016, James Mancini, OECD Directorate for Financial and Enterprise Affairs looks at the competition enforcement challenges and advocacy opportunities around disruptive innovations in Latin America and the Caribbean
”Disruptive innovation” is a popular term among researchers, businesses, consultancies and journalists discussing market change. While there is some debate about the precise application of the term, the phenomenon it describes is redefining markets around the world and the Latin American and Caribbean region is no exception. Disruptive innovations in the region are fundamentally challenging traditional business models and regulatory frameworks.
Several recent examples originate from mobile technologies introduced by both large players from outside the region and locally-developed businesses. With respect to mobile taxi-hailing applications, for instance, Uber competes with local companies such as Tappsi and Easy Taxi. Financial services innovations in the region also use web and mobile technologies to target segments of the population that are cut out of traditional markets. These innovations include the development of alternative credit scores using social media and transaction data (e.g. mobile telephone top-ups), allowing low-income individuals without borrowing history to access loans that would otherwise be unavailable. Other innovations include low-cost remittance services that offer payment via utilities companies and gift cards, and mobile telephone-based electronic payment services that may evolve into a wider range of financial services. In both the financial and taxi sectors, disruptors face incumbents with established business models and extensive regulation.
In this environment, competition authorities have an opportunity to ensure that disrupted markets remain competitive ones, and therefore that consumers will benefit from innovation. This will require both conventional and novel approaches.
Competition authorities should first ensure that competition laws are enforced in disrupted markets as they are in any other market, despite the challenges that may arise. This requires an understanding of the economics underlying enforcement tools rather than the rigid application of rules of thumb. For instance, when defining a market (the prerequisite for analysing competitive effects), competition authorities are challenged by rapidly-changing markets whose boundaries may not be clear. Both overly broad and overly narrow approaches to this exercise carry significant risks of which authorities must be aware. Two-sided markets (e.g. markets for platforms that allow buyers and sellers to transact, such as Airbnb and eBay) must be recognised and analysed using methodologies that do not simply treat each side as a separate market. Authorities also need to be alert to more typical issues, such as disruptors abusing a dominant position in a market and incumbents engaging in anticompetitive conduct to prevent disruptor market entry. Anticompetitive acquisitions of disruptive innovators by incumbents need to be prevented. While new approaches may be required to identify these acquisitions, they should be dealt with using established approaches.
Authorities should also advocate in favour of competition when disruptive innovations affect regulated markets, which they often do by operating outside of existing regulatory frameworks. The avoidance of regulation is core to the business model of some disruptive entrants who seek to innovate in markets where regulation favours the status quo. As disruptors begin to capture segments of existing markets, incumbents call for regulations to be applied equally. This can have significant implications for the ability of disruptive innovations to produce consumer benefits. Sector regulators therefore face the challenge of balancing fairness, consumer protection, the promotion of competition and any other goals their regulation seeks to achieve.
Often, however, regulators are unwilling or unable (without legislative change) to unilaterally adapt to, or choose to ignore, innovative new entrants to their respective markets. As a result, the default response is often to attempt to prevent the operation of disruptive innovations, as has generally been the case with Uber. This approach probably has the greatest impact on smaller disruptive entrants without the resources to pay fines and undertake legal action to gain market access. In this context, competition authorities can consider being a part of, or triggering, an evaluation of existing regulatory frameworks, making use of their advocacy toolbox in order to ensure that competition and innovation are kept at the forefront.
There are many potential tools available to authorities to undertake competition advocacy in regulated markets, depending on the powers granted to them by legislation. Market studies can play a role in the early identification of competition issues and in enhancing knowledge of a market. To this end, the OECD is working with Chile, Colombia, Costa Rica, Mexico, Panama and Peru to help these jurisdictions develop their market study methodologies. In some cases, however, the identification of markets on the verge of, or undergoing early-stage, disruption can be challenging. Holding preliminary open hearings with interested stakeholders and tasking authority staff with monitoring markets for potential disruption are potential solutions, although authorities may wish to ensure that such efforts do not detract from traditional enforcement resources. Authorities can also engage in regulatory advocacy, commenting on proposed regulation and participating in the design of regulatory frameworks in response to market disruption, including the reduction of competition-limiting regulation and the development of new pro-competitive measures.
Competition authorities can also play a role in fostering collaborative links between disruptors and regulators. This encourages transparency over conscious non-compliance with regulations and can enable regulators to consider adapting their approaches to disruptors in a proactive way, rather than responding to violations in an atmosphere of controversy. As a result, outright bans on disruptor activities could be avoided in favour of regulatory adjustments. Adopting a facilitative advocacy approach could be advantageous for competition authorities in terms of encouraging the resolution of regulator/disruptor conflicts, avoiding the stifling of competitive innovations through regulation, and facilitating a broader assessment of the need for certain sector regulations given their competitive impact. Such efforts can benefit regulators, market participants and, ultimately, consumers. The OECD’s Competition Committee has identified “digital economy and innovation” and “market studies” as strategic priorities for its work over the coming years in order to help promote this outcome.
 For further information regarding two-sided markets, please see, for instance, Rysman, Marc (2009), “The Economics of Two-Sided Markets”, Journal of Economic Perspectives, 23(3), https://www.aeaweb.org/articles.php?doi=10.1257/jep.23.3.125.