Competition between social and private landlords

As part of a wider research project, this paper aims to shed light on the behavioral aspects of competition between social and private landlords. Drawing on data from thirty in-depth qualitative interviews with housing association managers, letting agents, and private landlords in two local housing markets, Coventry in England and Breda in the Netherlands, this study explores landlords’ perceptions of providers in the other rental sector, as well as the influence of the structure of the local rental market on these perceptions.

Key Words: Competition, interfirm rivalry, housing associations, private landlords, comparative housing research 1 Introduction In the last two decades, there has been a surge of social housing privatization through transfers of public housing stock to private non-profit housing associations, tenant cooperatives, and profitoriented landlords in most European countries (Scanlon & Whitehead, 2007). This shift in the supply structure has been accompanied by a change of housing policies from object subsidies to means-tested demand-side subsidies (Kemp, 2007). For that reason, policy makers have required social housing suppliers to operate more market-orientated in the social housing sector and have encouraged them to increasingly operate in commercial housing, including the market rental sector (Haffner et al, 2009a). Simultaneously, public authorities have tried to strengthen the role of private landlords in the provision of rental housing for low-income households and homeless people in various countries. This development has been facilitated by the relative increase of means-tested subsidies for private renters (Hulse & Pawson, 2010; Retsinas & Belsky, 2008;

O’Sullivan and DeDecker, 2006). As a result, the once clear demarcation between the activities of social and private landlords appears to be shifting, which has possibly led to increased competitive pressure on both landlord groups. As part of a wider research project, this paper aims to shed light on the behavioral aspects of competition between social and private landlords.

To contribute to a better understanding of the process of increasing competitive pressures, various housing researchers have sought to give meaning to the notion of competition between social and private renting in a comparative perspective (e.g. Hulse et al, 2010; Haffner et al, 2009a; Kemeny et al, 2005; Atterhög & Lind, 2004). Here, the authors have primarily focused on structural and political aspects of competition between social and private renting. As a result, there remains a lack of understanding of how competitive pressures affect landlords themselves and how landlords shape a competitive relation through their own decisions in the rental market.

It is therefore the aim of this study to explore and build explanations for the competitive relation between and competitive conduct of social and private landlords in mixed rental markets.

The paper proceeds as follows: First, the next section will juxtapose the two main economic approaches to competition between firms and will highlight why the business and management literature seems to be a superior approach when analyzing competition between landlords in mixed rental markets for the firs time. Section 3 describes the qualitative and methodological approach of the study. Sections 4 and 5 present the empirical findings on how the two landlord groups perceive each other in local rental markets and what these perceptions are based on. The paper concludes on its main points.

2 Competitive behavior of firms in a theoretical perspective The economics literature on interfirm competition can be divided in two main concepts, one emphasizing the competitiveness of the structure of a market and the other one focusing on the competitive conduct of individual firms. In neoclassical economics the behavior of the firm is a property of market structure, which means that each market form (perfect competition, monopolistic competition, oligopoly) has its own equilibrium to which firms need to adapt if they want to avoid the risk of being driven out of the market. Accordingly, a theory of firm conduct becomes only interesting if a market is imperfectly competitive, because here firms are able to gain a superior position through, inter alia, pricing or marketing decisions. However, irrespective of the market form the idea prevails that there are optimal, profit-maximizing strategies; firms are therefore regarded to be limited in their decision-making processes (Martin, 2010; Tirole, 1988).

Notwithstanding the clarity and predictive power of mainstream economic theory – particularly modern models of game theory, which can address issues such as bounded rationalities of market actors, stand out in this regard – there are two primary reasons why this more formal and theoretically

Abstract

approach to analyzing interfirm competition seems to be of limited use in the context of competition between landlords in rental housing.

First of all, the whole traditional and also modern industrial economics strand is based on the assumption of rational, profit maximizing suppliers. The outcomes of the conventional models of competition analysis, e.g. Bertrand competition in a duopoly, stand and fall with profitmaximizing equilibrium pricing or output strategies. Yet, in mixed rental housing markets social and private landlords do not necessarily share the profit-driven business paradigm, which particularly applies to the social housing industry where nonprofit organizations share a more diverse set of objective functions. Here, the economics literature of nonprofit organization has shown that the existence of different objective functions among firms in the same markets has important implications for our understanding of how firms compete (Young et al, 2010;

Hansmann, 1987).

Equally important, in the neoclassical notion of competition, managers are seen as anonymous actors who have to operate along prescribed structural settings. The processes and intentions that lead to strategic decisions on competitive pricing and investments, as well as managers’ views on competition tend to be neglected by the analysis. As a result, if we want to understand competitive behavior of individual landlords in rental housing markets a different path might be more useful. This paper argues that if one wants that get a better understanding of the competitive processes between social and private landlords, the explicit focus on competitive conduct in the concept of interfirm rivalry as presented in the business economics and management literature (see Nair & Selover, 2011) might provide a more useful theoretical framework.

Competition as a process of interfirm rivalry The essence of rivalry is that there are at least two firms striving for incompatible positions in the market (Baum & Korn, 1996). To put it with Porter (1980), “firms feel the effects of each other’s moves and are prone to respond to them.” This definition of rivalry entails four major aspects:

First, rivalry is relational as it is based on the actions and reactions of competing firms. It is thus a dynamic process, which is shaped by the conscious strategic choices of managers (Kilduff et al, 2010). Second, it takes place between firms directly, which means that a firm’s competitive actions are consciously targeted at their competitors in order to gain a competitive advantage;

there are moves and countermoves (Chen, 1996). Third, managers have incomplete and biased knowledge about markets and competitors and they have differing cognitive capacities to understand their markets and competitors’ actions. As a result, rivalry tends to be highly subjective (Nair & Selover, 2011). This in turn has two main effects: On the one hand, subjective psychological stakes can trigger individual managers to depart from rational economic behavior.

On the other hand, there might be a cleavage between objective (as measured by structural criteria such as supply concentration) and perceived levels of competition (Paton & Wilson 2001;

Porac, 1995) Interestingly, competition research indeed shows that perceptions of rivalry are stronger in concentrated than in highly competitive markets, since it is easier to observe the moves of competitors (Baum & Korn, 1996). Fourth, the subjective nature of rivalry means that it is not necessarily a reciprocal perception. In reality, one firm might see another firm in the market as a close competitor, while the other might not see any competitive relation at all. This can lead to rivalrous behavior of one firm, which does however not induce a rivalrous reaction of another firm (Chen, 2007).

Various authors have sought to analyze the conditions under which strong perceptions of rivalry and rivalrous behavior can prevail (e.g. Kilduff et al, 2010; Baum, 1996). Although these studies tend to make no direct connection to the industrial economics literature on market structure, one can observe some implicit analytical approaches to unfold how the structure of a market influences interfirm rivalry. Nair & Selover (2011) for instance that perceptions of rivalry and rivalrous strategic behavior are positively related to similar firm size – where similarly large firm sizes is a particularly strong driver of rivalry – as well as product similarity. Equally, Baum (1996) provides some evidence that rivalry is positively influenced by the market domain overlap of competing firms, which means that if firms operate in various identical market segments, the potential for multi-market contact increases, which in turn increases the chance that firms identify each other as rivals and direct their competitive actions against them. Nonetheless, the literature also provides evidence that the drivers of rivalry are not necessarily related to market structural issues. To give but two examples, Paton et al (2000) show that perceptions of rivalry tend to stronger among firms who have existed in the same market for longer periods. There thus seems to be a time component that makes rivalry a path dependent process. Chen (2007), on the other hand, shows that the capability, including financial and cognitive resources, to behave competitively is a major driver of rivalry.