Organizing & reorganizing markets [First edition, impression: 1.] 9780198815761, 019881576X

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Organizing and Reorganizing Markets

OUP CORRECTED PROOF – FINAL, 12/2/2018, SPi

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Organizing and Reorganizing Markets Edited by

Nils Brunsson and Mats Jutterström

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Great Clarendon Street, Oxford, OX2 6DP, United Kingdom Oxford University Press is a department of the University of Oxford. It furthers the University’s objective of excellence in research, scholarship, and education by publishing worldwide. Oxford is a registered trade mark of Oxford University Press in the UK and in certain other countries © Oxford University Press 2018 The moral rights of the authors have been asserted First Edition published in 2018 Impression: 1 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, without the prior permission in writing of Oxford University Press, or as expressly permitted by law, by licence or under terms agreed with the appropriate reprographics rights organization. Enquiries concerning reproduction outside the scope of the above should be sent to the Rights Department, Oxford University Press, at the address above You must not circulate this work in any other form and you must impose this same condition on any acquirer Published in the United States of America by Oxford University Press 198 Madison Avenue, New York, NY 10016, United States of America British Library Cataloguing in Publication Data Data available Library of Congress Control Number: 2017953559 ISBN 978–0–19–881576–1 Printed and bound by CPI Group (UK) Ltd, Croydon, CR0 4YY Links to third party websites are provided by Oxford in good faith and for information only. Oxford disclaims any responsibility for the materials contained in any third party website referenced in this work.

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Preface

Markets and formal organizations constitute the fundamental forms of the economy. For a long time, research on these forms has largely been divided among academic disciplines, each with its own perspective. Scholars in the field of economics have concentrated on the study of markets and have been fascinated by processes of mutual adaptions among market actors, but they have had less to say about organizational aspects of markets. Scholars in organization theory have devoted almost all their efforts towards an understanding of formal organizations, whereas markets have been seen as part of the unorganized environment of organizations. In this book, we argue that organization happens not only inside but also outside formal organizations and that markets provide one example of such organization. Together with our co-authors, we demonstrate and discuss how markets are organized and show that concepts and theories from organization studies can be useful for advancing our knowledge about markets. In this way, we aim to supplement knowledge about mutual adaptation and institutions in markets and add to an understanding of how these phenomena are interrelated with organization. We also compare the organization of markets with the organization of formal organizations, discussing both similarities and differences. Our common interest in market organization and reorganization led us to the investigation of a large spectrum of markets—for computer software, pension funds, taxi services, and healthcare, for example. What happened in the markets we studied was often surprising, not only to market organizers but also to us! Moreover, the organization of markets is a less well developed area of research than is the organization of formal organizations. Hence, it is an intriguing area of study, not least because it provides the opportunity for revisiting fundamental issues about organization in general. The studies in this book relied on the availability and the time of many informants. During our process of writing this book, we and our co-authors had the opportunity to benefit from the wise comments of our colleagues at Stockholm Centre for Organizational Research (Score) and other places. Later, Nina Colwill, our highly devoted and skillful language editor, made a

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Preface

great job turning the texts into proper and readable English. Riksbankens Jubileumsfond (The Swedish Foundation for Humanities and Social Sciences) has generously provided resources for a large research program at Score on Organizing markets (Grant M2007-0244:1-PK). Mats Jutterström received a grant from Vetenskapsrådet (the Swedish Research Council) for research on organizing markets, and Anders Forssell and Lars Norén received a grant from Handelsbankens Forskningsstiftelser (Handelsbanken Research Foundations). Our warm thanks to all! Uppsala and Stockholm December 2017 Nils Brunsson Mats Jutterström

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Contents

List of Figures List of Tables List of Contributors 1. Markets, Organizations, and Organization

ix xi xiii 1

2. The Organization of Markets

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3. Creating a Market Bureaucracy: The Case of a Railway Market

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4. Primary Healthcare: What Type of Market and What Level of Organization?

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5. Experience-Based Learning and Market Change

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6. When Sellers Create Markets: Dilemmas and Challenges in Markets for Professional Services

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7. ‘The Most Regulated Deregulated Market in the World’? Sellers Organizing across Markets

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8. Markets as Open Systems: Organizing and Reorganizing a Financial Market

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9. Markets, Trust, and the Construction of Macro-Organizations

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10. Shaping the Consumer: A Century of Consumer Guidance

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11. When Market Organization Does Not Help: High Ambitions and Challenges in the Market for Eldercare

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12. Dealing with Asymmetric Information: Organizing and Reorganizing a Market for Child Insurance

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13. Reform and Rescue: International Organizations and the Organization of Markets

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14. Organizing Marketplaces: The Constitution of Trade Shows in a Cutting-Edge Industry

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Contents

15. Handling Opposing Market Logics: Public Procurement in Practice

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16. From a Free Market to a Pure Market: The History of Organizing the Swedish Pipe and Tube Market

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17. Multiplicity, Complexity, and Recurrent Change

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18. Organizing and Reorganizing Markets and Formal Organizations: A Comparison

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Index

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List of Figures

4.1

The organization–market continuum. Source: Walsh 1995: 46.

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4.2

Market continuum: High to low level of organization.

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Market organization forms.

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5.1 12.1

12.2

12.3

15.1

Number of child accident insurance policies sold in the Swedish market, 1914–1981. Sources: Enskilda försäkringsanstalter 1914–1981; Statistisk Årsbok 1953–1958.

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Premium income for Skandia’s child and youth insurance, 1980–2009. Source: Unpublished data from actuary Daniel Höök, Skandia Liv, 15 December 2010.

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Search results for ‘child insurance’ in Mediearkivet. Number of hits for the publication period 1982–2011 (n = 1,257). Source: Mediearkivet—a digital archive covering all the big dailies, local newspapers, and journals in Sweden—5 March 2012.

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Purchase situations in different markets. Source: Axelsson 1998.

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List of Tables

4.1 4.2

The marketing process and tools according to the textbooks contrasted with what the rulebooks say. Differences in italics

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A comparison between franchises and chains according to Bradach (1998) and the county councils as ‘mother’ of a chain of HCCs. Differences marked in italics

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4.3

Two examples of market organization

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5.1

Number of companies in the market in 2001. Source: Brandén, 2004

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12.1

Comparison of reformers’ criticisms and the final law 2011

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List of Contributors

Nils Brunsson is professor of management and affiliated to Uppsala University and Score (Stockholm Centre for Organizational Research). Mats Jutterström holds a PhD in business administration, lectures at Stockholm School of Economics, and is a researcher at Score. Göran Ahrne is professor of sociology and affiliated to Stockholm University and Score. Susanna Alexius is associate professor in business administration at Stockholm University and is a researcher at Score. Patrik Aspers is professor of sociology at Uppsala University. Daniel Castillo is assistant professor in sociology at Södertörn University College. Matilda Dahl holds a PhD in management and is a lecturer at Uppsala University. Asaf Darr is associate professor in behaviour and organization at the University of Haifa. Anders Forssell is associate professor in management at Uppsala University. Staffan Furusten is associate professor at the Stockholm School of Economics and the director of Score. Ingrid Gustafsson holds a PhD in public management and is a researcher at Score. Martin Gustavsson is associate professor in economic history at Stockholm University and a director of research at Score. Eva Hagbjer holds a PhD in business administration and is a senior analyst at the Swedish Agency for Health and Care Services Analysis. Anna Krohwinkel holds a PhD in business administration and is a research leader at Leading Health Care, Stockholm. Leina Löwenberg, MSc, works at the Swedish Tax Authority. Lars Norén is associate professor in management at Gothenburg University. Kristoffer Strandqvist holds a PhD in business administration, is affiliated to the Institute for Economic History Research in Stockholm, and is a researcher at Score. Kristina Tamm Hallström is associate professor in management at the Stockholm School of Economics and a director of research at Score. Anna Tyllström holds a PhD in management and is a researcher at the Institute for Future Studies, Stockholm.

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1 Markets, Organizations, and Organization Nils Brunsson and Mats Jutterström

Markets have become popular in recent decades—more popular than organizations. Politicians, management experts, and other opinion builders have emphasized the advantages of ‘market solutions’, which they have contrasted with activities within large, allegedly bureaucratic and inflexible organizations. Large corporations have outsourced functions: former departments such as IT operations, for instance, have become independent companies that compete with other vendors to sell their services to the corporation. Equivalent changes within states are termed privatization: instead of being government-run, operations have been farmed out, with many companies bidding for contracts or competing directly for the public’s choice. New markets have been organized for such previous state monopolies as schools, eldercare, motor vehicle inspections, and the rail service. Relationships among people and departments within large organizations have been replaced by relationships among multiple smaller organizations or people in various markets. Markets have not always been this popular. They were less beloved after the financial and economic crisis of the 1930s, whereas the World War II years and following decades saw an upturn in support for the idea of the organization over the market. Myriad activities were incorporated into burgeoning states. Large corporations grew by subsuming often unrelated businesses into their organizations—the conglomerate was a popular model. Attempts to put lofty ideas into practice often constitute the most serious threat to those ideas. Recent developments may be seen partly as a reaction to long-standing experience with the problems of inefficiency, inadaptability, and governability, to which large organizations are prone and which many people hoped could be averted in markets. Likewise, many people are now gaining extensive experience with the difficulties of market solutions, which

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has led to many requests for and attempts at reform. And in the perhaps not-so-distant future, organizations may once again appear to be the more attractive solution. On the other hand, proponents of markets can withstand criticism because their idea is embedded in wider notions. With their imagery of sovereign market ‘actors’ freely choosing what to buy and sell, markets fit contemporary images of individuals and organizations. At the same time, such contemporary individuals and organizations are not likely to accept passively any feature or outcome of market processes. Rather, they tend to air opinions, to intervene, or to suggest that others should intervene in order to organize markets in ways that protect social values or special interests. In this respect, markets do not differ from contemporary organizations that are also objects of extensive interventions (Meyer and Bromley 2013). Such interventions from sellers, buyers, and others constitute the theme of this book, both when they are attempts to create markets and when the purpose is to change them.

Markets or Organizations Fluctuations in the popularity of markets and organizations are facilitated by the idea that markets and organizations are different social forms with very different characteristics—which makes it seem likely that the problems discovered in one of them will be solved by exchanging it for the other. The distinction between markets and formal organizations such as states or firms finds a great deal of support in social science. Economist Alfred Marshall (1920) argued nearly a hundred years ago that markets and organizations constitute the two fundamental social forms of an economy. In contemporary social science, the differentiation between markets and organizations has been a sharp one. Traditionally, markets and organizations have even been analysed within different disciplines. Markets have been the primary subject for studies in the discipline of economics, whereas the study of organizations has expanded enormously since the early 1960s in other disciplines and now constitutes almost a discipline in itself. Economists have often treated the organization as an exception to the more or less natural markets, a last resort solution when markets do not function well enough. Oliver Williamson (1975) believed that ‘In the beginning there were markets’ (p. 20). The organization is seen, at most, as ‘the means of achieving the benefits of collective action in situations in which the price system fails’ (Arrow 1974, 33). The idea of a sharp difference between markets and organizations is also at the core of so-called transaction cost theory, by

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which one tries to explain the conditions for the appearance of organizations (in the theory called ‘hierarchies’) rather than markets, as well as the other way round (Coase 1937; Williamson 1975). In organization studies, on the other hand, markets have most often been treated as the environment of organizations and therefore only indirectly relevant. And markets have generally been seen as a phenomenon outside the scope of theories of organization, to be handled by theories and concepts other than those used for analysing formal organizations. In short, there has been a great deal of discussion about markets or organizations. It is rarely useful, however, to regard markets and organizations as very different, or as opposites. This perspective may even be misleading. The sharp distinction between markets and organizations common in social science seems exaggerated. We argue that markets and organizations share at least one characteristic: they are both organized. In this book, we discuss the organization of markets. We see organizing as an activity that need not result in or take place in a formal organization. Furthermore, we believe that the view of the market and the formal organization as two ready-made forms of coordination is inaccurate. Like formal organizations, markets can be more organized, less organized, or differentially organized. And the organization of markets may change over time: Reorganization is not typical merely of large organizations (Brunsson 2009); as we demonstrate in this book, it is also common in markets. Reorganization offers a less radical solution to practical problems in both forms than does a shift from one to the other. The similarities between markets and organizations make it likely that theories, concepts, and experiences from the study of organizations are useful for analysing markets. Expanding the field of organization studies to include the study of markets seems to be a promising project. Economists have sometimes used market theories and concepts originally developed for markets for analysing formal organizations. In the same spirit, we do the opposite in this book. We investigate how and to what extent markets can fruitfully be analysed with the same concepts that students of organization use for analysing formal organizations.

Markets and Organizations: Definitions, Connections, and Similarities Rather than further discussing markets or organizations, we now turn to the issue of markets and organizations, how they connect to each other and what similarities they have. We start by defining these two forms.

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Definitions What do we mean by organization and market? These are broad concepts, the meanings of which are far from self-evident. Of the two, it seems easier to agree on the meaning of organization: an organization is a strong and well developed institution, not only in people’s minds but also in law. There is conspicuous agreement within organizational research about what constitutes an organization, and there is little difference between this scholarly definition and the popular notion of organization (Strang 2017). It is telling that in one of the most influential classic books in organization theory, Organizations (March and Simon 1958), the authors did not define the concept of organization, counting instead upon the readers’ understanding, by merely enumerating a couple of empirical examples of formal organizations. Uncertainty and discussion about what constitutes an organization are relatively rare in organization studies. One uncertainty concerns states. There are strong arguments that states are a form of organization just like firms and associations are; yet scholars in the organization field have seldom analysed states as organizations. Furthermore, there are sometimes doubts about what an organization is and what constitutes part of an organization. Should business groups with many subsidiaries or states with many administrative units be considered as one or several organizations? And as for units without legal status, it is sometimes unclear for both practitioners and scholars whether they should be classified as organizations or not (Taylor 2011; Dobusch and Schöneborn 2015). But these uncertainties are exceptions rather than the rule. The concept of market assumes more meanings. Journalists often refer to a group of buyers and sellers in stock markets and describe markets as persons: the market can be optimistic, pessimistic, depressive, or ambivalent. In other cases, the concept of market is confused with competition or with people’s freedom of choice—much broader phenomena than markets. Situations in which either one of these phenomena exists are called markets, irrespective of other characteristics. People talk about the ‘marriage market’, even in cultures where neither brides nor grooms are bought or sold. Or one refers to a university market, even in countries where higher education is free of charge. Many scholars take the opposite stance, defining market in an extremely narrow way, as something that works according to a highly stylized model (Williamson 1975; Powell 1990; Walsh 1995; Håkansson and Johanson 1993). The term ‘market’ is then used to describe an ideal type in close correspondence with what economists have called ‘highly organized markets’ (Marshall 1920; Walras 1954) or ‘perfectly competitive markets’ (Samuelson 1969): an exchange system with characteristics such as clear and homogeneous products and transitory contacts among buyers and sellers, limited to exchange in 4

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which each party is immediately willing to change partners when better offers appear. This ideal type is often compared to another ideal type—‘the hierarchy’—that is assumed to mirror some aspects of formal organizations. As is usual when comparing ideal types with empirical data, one finds that a large part of social reality falls between the forms, calling for new concepts for describing reality: ‘hybrids’ (Williamson 1991), ‘networks’ (Powell 1990; Håkansson and Johanson 1993), and ‘quasi-markets’ (Walsh 1995), for instance. If the term ‘market’ were to be defined in this way there would be few markets: primarily certain stock exchanges and exchanges of standardized raw material. And because market studies using this definition would cover few empirical phenomena, they would be of relatively limited interest to social scientists in general. In this book, we define ‘markets’ not as an ideal type but as an empirical phenomenon having only two defining characteristics: markets involve the exchange of goods or services that occurs under competition, meaning that sellers or buyers or both can choose among more than one counterpart. A market is a social structure that can be defined and delimited by the products exchanged (such as the market for shoes or steel) or by the place where products are exchanged (such as the town market or a market on the Web, such as eBay). With this definition in mind, it is clear that whereas there is a great deal of competition outside of markets (to say the least), there are no markets without competition. We have no prejudices that a market must be like an elaborate ideal type in order to be called a market. There are markets with some similarities to the common ideal type. But there are many markets in which the products are not homogeneous and are less clear—where sellers and buyers have long-lasting relationships that include much more than exchange, and in which they seldom and unwillingly change partners (Håkansson 2009).

Connections Even if organizations and markets represent different social forms, they coexist and are closely interrelated. Although it is common to talk about most contemporary, developed economies as ‘market economies’, they could equally well be called ‘organization economies’. Interactions within markets are common, but interactions within organizations are even more so; individuals spend much more time as employees than they do as market actors, and most of a firm’s activities do not revolve around selling or buying (Simon 1991). Modern markets do not exclude organizations; rather, they presume their existence, a fact that can be demonstrated in at least four ways. Organizations are key market actors, market reorganization typically involves attempts at 5

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reorganizing formal organizations, formal organizations are the main organizers of markets, and formal organizations and markets are often combined. First, organizations are key market actors. Only individuals and organizations can buy and sell in markets. It is they who are equipped with the identity, rights of ownership, autonomy, and responsibility that market actors must have. When firms in the 19th century were ascribed traits similar to those of individuals and were defined as legal persons, one purpose was to make them capable of performing the role of a market actor (Djelic 2013). In contemporary markets in developed countries, organizations serve as both buyers and sellers, whereas in almost all markets other than the labour market, individuals are merely buyers. In an overwhelming majority of market relationships, organizations are present on at least one side. The creation of virtually all markets is thus predicated on either the preexistence of organizations or the potential to create them. The recent formation of markets through outsourcing and privatization has been accomplished through the formation of more organizations. The fundamental idea of the New Public Management movement to transform units in the public sector into more complete and autonomous organizations was necessary for achieving its preference for markets. Different from former administrative units, these new organizations had the autonomy, local responsibility, clear boundaries, and ownership rights that enabled them to act as buyers and sellers in internal and external markets (Brunsson and Sahlin-Andersson 2000). Second, the significance of organizations in markets is demonstrated by the fact that market reorganization typically involves attempts at reorganizing formal organizations. People who are intent on reorganizing markets cannot do so directly; markets are not actors that can change. The market reorganizer must induce one or more individuals or organizations to change, whether directly or indirectly, and more often than not it is organizations that must change their behaviour. Reorganizers try to make firms act in new ways as sellers or buyers, or influence what products they sell and buy, or arrange their production or accounting systems in new ways, to make them cooperate with each other more, less, or in different ways. Or organizations setting rules for monitoring or sanctioning sellers and buyers have to be formed or be given new tasks. Third, as demonstrated in this book, formal organizations are the main organizers of markets. Fourth, formal organizations and markets are often combined. Stock exchanges and other exchanges constitute obvious examples; they are formal organizations within which markets are organized. So-called internal markets arranged within large firms or states constitute another example. The inclusion of markets within formal organizations is not a threat to either form. Indeed, as described in the next chapter, it seems difficult to achieve anything like a ‘perfect’ market without subsuming it within a formal organization. 6

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Similarities: Mutual Adaptation, Institutions, and Organization Formal organizations and markets represent different social forms, and as ideal types they have been described as very different. But a closer look at how they work in practice reveals similarities as well. Markets and organizations are ordered by the same fundamental processes: mutual adaptation, institutions, and organization. The question of how markets come into existence and change is an old one. Economists commonly emphasize spontaneity and gradual emergence when describing markets, often citing Adam Smith’s (1779/1981) formulation of the ‘invisible hand’ guiding the market. A seller offers a good for exchange, which then attracts customers and competitors, and a market arises. Markets and how they develop are described as a natural consequence of people’s mutual adjustment (Lindblom 2001). In markets, economic men and women signal their preferences through prices, and there will be supply-and-demand equilibrium in each market (Hayek 1973, 1988). Market order—oligopolies, for instance—can arise as a result of such adaptations (Tirole 1988). The idea that markets are spontaneously ordered as a consequence of mutual adjustment is not merely a standard theme in economics; many sociologists share the emphasis on spontaneity and mutual adjustment (e.g. Luhmann 1982; Smith 2007; White 2008). In research on formal organizations, on the other hand, there is a long tradition of emphasizing the opposite of mutual adaptation and spontaneity: planning, management, and decision making. Formal organizations have been defined as systems of decisions (Luhmann 2000). An organization is created by decisions, and more decisions are necessary in order for the organization to persist. A network or spontaneous collaboration is sometimes reshaped into an organization, but this reshaping requires a decision. And new decisions are made about how the organization shall be structured and how it shall function. When differentiating organizations from other social systems, such early theorists as March and Simon (1958) highlighted the importance of decisions in organizations. But seeing individual organizations and their design as the outcome of decisions is also an everyday, institutionalized notion of organizations. More recent research on organizations and markets has produced a more complex picture, however—a picture in which the differences between markets and organizations are less dramatic. The early emphasis on organizational order as created by decisions has given way to a more complex view of organizational life. Scholars noted early on that decisions do not necessarily create an intended order. Decisions are merely attempts to create an order—attempts that often do not succeed. Early research in this tradition demonstrated problems of implementing 7

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decisions in organizational action and unintended consequences of decisions that have actually been implemented (Merton 1936; Pressman and Wildavsky 1973). Furthermore, more than 50 years of studying organizational practice demonstrates that organizational order results, to a considerable extent, from more spontaneous processes of mutual adaptation among organization members (Czarniawska 2008; Weick 1979). Furthermore, shared beliefs and norms may gradually emerge among the members of organizations—institutions that are difficult to overcome through central decision making (Selznick 1949). Also, much organizational order is not the result of local decisions, but rather of wider societal institutions (Meyer and Rowan 1977). Processes of mutual adaptation and institutions may form an obstacle to decisions and their implementation, but they can also make decisions unnecessary; a high degree of order and coordination may be created without decisions. In fact, it is difficult to imagine how a large organization could function without all these types of ordering processes. Likewise, in the case of markets, more recent work in economic sociology has stressed the fact that behaviour is formed not only by mutual adaptation; it is also formed partly by shared beliefs and norms among market actors. Such institutions include not only property rights, but also the very conception of what a market is and what market actors are supposed to do—ideas that are part of the early socialization of young people in advanced market economies and that make people behave similarly in various markets. But there are also institutions that emerge in specific markets and make different markets function differently (Aspers 2011). Finally, markets are formed by processes of organization. They are the objects of decisions. There are people and organizations that decide not only on their own actions in markets, but also on the actions of others. In the next chapter we suggest a definition of organization that allows us to discuss organization not as the opposite of markets, but as something that exists both within markets and within formal organizations. Organization involves decisions about how others shall behave. The most fundamental organizational decisions are those about membership, hierarchy, rules, monitoring, and sanctions. Many types of organizations are involved in making such decisions; they can be directed at both sellers and buyers and can concern such different aspects of markets as goods, transactions, prices, and competition.

The Intricacies of Market Organization Although organization is an elemental source of market order, the study of market organization is less developed and less well recognized than are 8

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approaches building on mutual adjustment and institutions. In this book we develop an organization perspective on markets by investigating an extensive number of empirical cases of market organization and reorganization. We raise four fundamental questions about the organization and reorganization of markets and a fifth question regarding the specificity of market organization. The first question concerns the drivers of market organizing. What problems and solutions motivate and can be used as justification for more, less, or different market organization? We have seen that the relevant perceived problems may be existing ones, such as uninformed and irrational consumers, or future problems, such as the risk of future power imbalances between sellers and buyers. A common problem justifying reorganization is subtler: a perceived difference between idealistic models of markets and how they work in practice. Throughout the empirical cases, the expansion of organization has been viewed as a solution to perceived market problems; in some cases, the amount and other characteristics of market organization increased radically over time. The second question concerns the organizations that intervene in markets as organizers. Which organizations intervene and why? We demonstrate how industry associations, state authorities, local governments, civil society associations, and sellers and buyers are active in market organization—the opposite picture of occasional ‘state’ interventions in markets only. It is not uncommon for organizations to be created with the sole purpose of organizing one or several markets. Sellers may become active organizers of markets other than the one in which they have their own businesses. We also demonstrate how organization may be used as an attempt at limiting the number of organizations in a market. The third question concerns the content of market organization: What decisions are made and how can they be explained? One explanation is the organizers’ source of inspiration. Sometimes abstract ideas about markets in general determine the choice of organization content, whereas the organizers’ experiences with a specific market sometimes play a larger role. We demonstrate that such experience may imply significant change in the content of market organization—in the organizational elements used, and in the market aspects targeted. Recurrent, almost perpetual change in market organization was a common phenomenon in the empirical cases. The fourth question concerns the effects of market organization. From studies of formal organizations, we know that daily practice tends to deviate from the decided order of management—often considerably (Meyer and Rowan 1977). But what are the effects of market organization? We provide examples of the intricate relationship between market organization and market practice. In several cases, market actors did not behave as expected; they were less 9

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interested in seeking personal benefits and less rational than the organizers had assumed, for example. Those organized could also actively resist or quietly avoid attempts at organizing. Market problems were often difficult to solve with organization. This was a driver for new reorganizations, but also an incentive to support organization efforts with information activities or new technology. The answers to these four questions provide the basis for a fifth question about similarities and differences between the organizing of markets and formal organizations. To what extent can we use insights from the organizing of organizations to understand the organizing of markets, and in what respects are the conditions and processes so different that the study of market organization can produce new insights for those interested in organization in general? We find similarities as well as differences. The differences prove to be matters of degree rather than fundamental. And in some respects, the differences among markets and among organizations are as prominent as they are between these two forms.

Studying the Organization of Markets A period of marketization offers an excellent opportunity for conducting empirical studies of the organization and reorganization of markets. In this book, we report on 14 such studies. As argued by Mises (1963, 257), we believe that an empirical analysis of markets must be oriented to processes rather than end states. The current order in a market can be partially explained with reference to organizers who have appeared and met with resistance and support and by the fact that one organization has succeeded and another has failed. And the current organization is unlikely to represent a stable state: New organizers can challenge it. Therefore the empirical studies in this book exemplify and analyse processes—how markets become organized and reorganized. By studying processes, we can see changes over time in many respects: how constellations of active organizers change, for instance, because initiatives by some organizers activate other organizers to intervene. Further, we see changes in the kind and amount of organization used and the market aspects dealt with. And we see whether the effects of organization change over time. The following six criteria helped us in our selection of case studies. First, we have chosen markets outside formal organizations. Given our approach, markets within formal organizations such as exchanges of various sorts are less interesting because it is obvious that these markets can be fruitfully analysed using theories of organization. Furthermore, because markets 10

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outside organizations are far more common than markets within them, their organization is of greatest practical interest. Second, the cases represent a variety of markets, ranging through and beyond markets for computer software and financial instruments for pension savers, railway passenger transportation, public relation consultancy services, child insurance, and snow clearance. We thereby avoid the development of results based on studies of one type of market, thus averting the criticism that general conclusions about markets are often drawn from a significant overrepresentation of financial market studies (Aspers 2011). Third, at this stage of the research we gave priority to differences over similarities. The cases were chosen in order to illustrate a wide variety of organizers, problems, solutions, and processes. Fourth, whereas many of the studies cover longitudinal processes of contemporary market organization, some of the authors went further by taking a historical perspective. In the historical studies, so-called formative phases have been sought—phases of significant relevance to the characteristics of individual markets. The processes of market organization featured a great deal of action, with many changing conditions and reorganizations. Studying these processes with primarily qualitative methods allowed us to develop a nuanced understanding of the intriguing and often surprising aspects of organizing and reorganizing markets. Fifth, although we have included cases from other countries and from the international scene, most of our cases are taken from the Swedish context. This choice has methodological advantages. Sweden is known for its comprehensive welfare state, but it is perhaps less well known that it is a society with high tolerance and understanding of markets and market solutions, perhaps because of a combination of its high scores on individualism (Berggren and Trägårdh 2006) and the fact that the economy has been extremely dependent for centuries on international markets for its products. The ideas of marketization have been relatively easily and widely adopted, thus providing many cases of organization and reorganization of markets. Furthermore, Swedish organizations are generally easier to access than are organizations in many other countries, thus facilitating the kind of qualitative case studies that constitute our reports. We do not believe (although we cannot fully exclude the possibility) that there are Swedish idiosyncrasies with theoretical implications for the issues of interest to us. These concerns require more studies of the organization of markets than we can provide in this book, but hopefully we can inspire many future such studies. Finally, the changefulness of market organization and the changefulness and interrelatedness of products render it difficult to make a clear distinction between times when a market is first organized and when an existing market is being reorganized. We started this book project with an interest in 11

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reorganization, but later realized that whether we are talking about organizing or reorganizing is a matter of perspective—an issue that is less interesting from an analytical point of view than from an empirical one. Some organizers are anxious to broadcast the notion that they are organizing a new market (see Chapter 6 for an example). Others argue that they are reorganizing an existing market. We give examples of both cases, along with cases in which the organizers were unclear on this issue.

Overview of the Book In Chapter 2, Göran Ahrne, Patrik Aspers and Nils Brunsson describe the concept of organization and how it applies to markets both within and outside formal organizations. They describe why and how organization matters—how an organized order differs from orders produced by mutual adjustment or institutions. They argue that organization is likely to have a significant effect on the dynamics of markets. Many of the concepts presented in this chapter are used in the analyses throughout the book. In Chapter 3, ‘Creating a Market Bureaucracy: The Case of a Railway Market’, Daniel Castillo illustrates the complexity of market organization through the organizing of a market for railway traffic in Sweden. It was a process that took almost two decades and involved the creation of a large number of sellers and several side markets. All in all, it resulted in a ‘market bureaucracy’ involving more organization than the former state monopoly. The sharp distinction often made between markets and organizations typically refers to simple ideal types. In Chapter 4, ‘Primary Healthcare: What Type of Market and What Type of Organization?’, Anders Forssell and Lars Norén show that the distinction may be more difficult to uphold when analysing practical situations. They use established theory from the field of marketing to analyse a case of outsourcing that can be seen as the creation of both a new market and a new organization. In Chapter 5, ‘Experience-Based Learning and Market Change’, Mats Jutterström illustrates how the content of market organization may change significantly over time and discusses why such change occurs. He argues that the shifts from relatively little to much organization, eventually adopting more unorthodox forms in relation to the hegemonic ‘perfect’ market ideal, is an effect of levels of experience-based learning. The chapter is based on the study of a market for snow clearance. When sellers try to launch a product that they define as new, they face the task of creating and organizing a new market. In Chapter 6, ‘When Sellers Create Markets: Dilemmas in Markets for Professional Services’, Nils Brunsson and Anna Tyllström analyse a number of dilemmas and challenges that sellers 12

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of professional services face, using markets for public relations and coaching services as illustrations. Markets are intertwined. If a certain market is organized in a way that is inappropriate for adjacent markets, sellers or buyers in these markets may intervene. In Chapter 7, ‘ “The Most Regulated Deregulated Market in the World”?: Sellers Organizing across Markets’, Susanna Alexius describes how the taxi market in large Swedish cities has been organized by sellers in other markets, and how they have been able to enforce strong rules, monitoring, and sanctions directed at sellers of taxi services. In Chapter 8, ‘Markets as Open Systems: Organizing and Reorganizing a Financial Market’, Mats Jutterström analyses contextual drivers of market reorganization. The chapter highlights three generic drivers of reorganization that made the lives of the organizers both unpredictable and difficult: intrusive side markets, general market ideas diverging from practice, and new ideas of appropriate market characteristics. Moreover, the question of market reform frequency is addressed; the study illustrates how it may be propelled by contextual dynamics and unrealistic ideas still hoped for. In Chapter 9, ‘Markets, Trust, and the Construction of Macro-Organizations’, Nils Brunsson, Ingrid Gustafsson, and Kristina Tamm Hallström use an empirical case to describe how the problem of trust in markets has led to the creation of a ‘macro-organization’, an extremely complex system of interrelated new markets and new interrelated organizations organizing these markets and each other. The attempts to create trust by organization produced distrust that stimulated further organization. The complexity of the system makes it highly questionable whether it can fulfil its purpose. There is a long tradition of trying to influence markets via consumers, who have been the targets of education and information campaigns by many types of organizations. In Chapter 10, ‘Shaping the Consumer: A Century of Consumer Guidance’, Susanna Alexius and Leina Löwenberg illustrate how various goals and methods have been used in various periods—from attempts to reduce ‘unnecessary’ consumption at the end of the 19th century to the publishing of guides about guides: which guides to use when making purchase decisions. In Chapter 11, ‘When Market Organization Does Not Help: High Ambitions and Challenges in the Market for Eldercare’, Eva Hagbjer and Anna Krohwinkel discuss the limits for market organization. They draw from empirical cases of attempts to organize markets in a way that would make it possible for elderly people to make informed choices about care providers. Although this possibility was seen as a prerequisite for the market to function as planned, it turned out to be very difficult to achieve. In many markets, sellers want to know as much as possible about buyers, whereas buyers are far less inclined to share that information with sellers—not least for privacy reasons. In Chapter 12, ‘Dealing with Asymmetric Information: 13

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Organizing and Reorganizing a Market for Child Insurance’, Martin Gustavsson deals with the dilemma of buyer privacy versus seller information, and describes how market organization was used and changed in the processes of conflicting interests. International government organizations play a key role in the organization of markets in many countries. In Chapter 13, ‘Reform and Rescue: International Organizations and the Organization of Markets’, Matilda Dahl describes how the Baltic states were the object of much intervention by international organizations, both when they moved from socialism to capitalism and when the 2008 financial crisis struck them. International organizations not only offered advice, but also used membership in their organizations as a promise, and the lack of membership as a threat. In Chapter 14, ‘Organizing Marketplaces: The Constitution of Trade Shows in a Cutting-Edge Industry’, Patrik Aspers and Asaf Darr turn to the problem of potential buyers not knowing that a market exists. The solution they describe is a seller-organized travelling marketplace for computer software in the USA, nicknamed the ‘Travelling Circus’. Outcomes of this organization other than the intended ones surfaced, however, including seller collaboration and industrial espionage. In Chapter 15, ‘Handling Opposing Market Logics: Public Procurement in Practice’, Staffan Furusten describes the subtle ways in which buyers can avoid complying with market organization, using the case of the public procurement of management consulting services. Buyers and sellers generally favoured a market logic in conflict with the one inherent in the public procurement rules, and various forms of avoidance constituted a common way of dealing with the clash. In Chapter 16, ‘From a Free to a Pure Market: The History of Organizing the Swedish Pipe and Tube Market’, Kristoffer Strandqvist provides an historical analysis of the changing organization of a market. He describes how the market around 1900 was organized by sellers forming cartels as a way of avoiding the chaos of a ‘free’ market. Over time, representatives of the state looked upon these cartels with more and more suspicion and wanted to intervene with their own ideas about proper market organization. But the sellers and their cartels did not give in easily. In Chapter 17, ‘Multiplicity, Complexity, and Recurrent Change’, we use the studies presented in this book to characterize the various organizations involved in market organization and report on the elements and amount of organization used. We describe how organization was sometimes supported with information or artefacts. Moreover, the processes of market organization are analysed, highlighting both the causes and effects of organization. We describe how the content of market organization often changed significantly and discuss the reasons. 14

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Finally, in Chapter 18, ‘Organizing and Reorganizing Markets and Formal Organizations: A Comparison’, we return to the question of similarities and differences in the organization of markets and the organization of formal organizations. We argue that the similarities are great enough to usefully apply the same concepts for analysing the organizational aspects of both forms. Yet systematic research on the differences is promising for the development of a more general theory of organization than that based merely on the study of formal organizations.

References Arrow, Kenneth (1974), The Limits of Organization. New York: W.W. Norton & Company. Aspers, Patrik (2011), Markets. Cambridge: Polity Press. Berggren, Henrik and Trägårdh, Lars (2006), Är svensken människa?: gemenskap och oberoende i det moderna Sverige. Stockholm: Norstedt. Brunsson, Nils (2009), Reform as Routine: Organizational Change and Stability in the Modern World. Oxford: Oxford University Press. Brunsson, Nils and Sahlin-Andersson, Kerstin (2000), Constructing organizations: the example of public sector reform. Organization Studies, 21: 721–46. Coase, Ronald (1937), The nature of the firm. Economica (Blackwell Publishing), 4(16): 386–405. Czarniawska, Barbara (2008), A Theory of Organizing. Cheltenham: Edward Elgar. Djelic, Marie-Laure (2013), When limited liability was (still) an issue: Mobilization and politics of signification in 19th-century England. Organization Studies, 34(5–6): 683–703. Dobusch, Leonhard and Schoeneborn, Dennis (2015), Fluidity, identity, and organizationality: The communicative constitution of Anonymous. Journal of Management Studies, 52(8): 1005–35. Håkansson, Håkan (ed.) (2009), Business in Networks. Chichester: John Wiley. Håkansson, Håkan and Johanson, Jan (1993), Industrial Functions of Business Relationships. Uppsala: Uppsala University. Hayek, Friedrich v. (1973), Law, Legislation and Liberty: A New Statement of the Liberal Principles of Justice and Political Economy, Volume 1: Rules and Order. Chicago: The University of Chicago Press. Hayek, Friedrich v. (1988), The Collected Works of Friedrich August Hayek, Volume I: The Fatal Conceit, The Errors of Socialism. London: Routledge. Lindblom, Charles (2001), The Market System: What It Is, How It Works, and What to Make of It. New Haven, CT: Yale University Press. Luhmann, Niklas (1982), The Differentiation of Society. New York: Columbia University Press. Luhmann, Niklas (2000), Organisation und Entscheidung. Opladen: Westdeutscher Verlag.

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Nils Brunsson and Mats Jutterström March, James and Simon, Herbert (1958), Organizations. Cambridge, MA: Blackwell. Marshall, Alfred (1920), Industry and Trade: A Study of Industrial Technique and Business Organization; of Their Influences on the Conditions of Various Classes and Nations. London: Macmillan. Merton, Robert K. (1936), The unanticipated consequences of purposive social action. American Sociological Review, 1(6): 894–904. Meyer, John and Rowan, Brian (1977), Institutionalized organizations: Formal structure as myth and ceremony. American Journal of Sociology, 83(2): 340–63. Meyer, John W. and Bromley, Patricia (2013), The worldwide expansion of ‘organization’. Sociological Theory, 31(4): 366–89. Mises, Ludwig v. (1963), Human Action: A Treatise on Economics (3rd edition). Chicago: Henry Regnery Company. Powell, Walter W. (1990), Neither market nor hierarchy: Network forms of organization. Research in Organizational Behavior, 12: 295–336. Pressman, Jeffrey L. and Wildavsky, Aaron (1973), Implementation: How Great Expectations in Washington Are Dashed in Oakland; or, Why it’s Amazing that Federal Programs Work at All. Berkeley: University of California Press. Samuelson, P. (1969), Economics: An Introductory Analysis (6th edition). New York: McGraw-Hill. Selznick, Philip (1949), TVA and the Grass Roots: A Study in the Sociology of Formal Organization. Berkeley: University of California Press. Simon, Herbert A. (1991), Organizations and markets. The Journal of Economic Perspectives, 5(2): 25–44. Smith, Adam (1779/1981), An Inquiry into the Nature and Causes of the Wealth of Nations. Indianapolis: Liberty Press. Smith, Charles W. (2007), Markets as definitional practices. Canadian Journal of Sociology, 32(1): 1–39. Strang, David (2017), Max Weber and the Yellow Pages. Unpublished working paper, Cornell University. Taylor, James R. (2011), Organization as an (imbricated) configuring of transactions. Organization Studies, 32(9): 1273–94. Tirole, Jean (1988), The Theory of Industrial Organization. Cambridge, MA: MIT Press. Walras, Léon (1954), Elements of Pure Economics, or The Theory of Social Wealth. London: George Allen and Unwin Ltd. Walsh, K. (1995), Public Services and Market Mechanisms. Basingstoke: Macmillan. Weick, Karl E. (1979), The Social Psychology of Organizing (2nd edition). New York: McGraw Hill. White, Harrison C. (2008), Identity and Control: How Social Formations Emerge. Princeton, NJ: Princeton University Press. Williamson, Oliver (1975), Markets and Hierarchies. New York: The Free Press. Williamson, Oliver (1991), Comparative economic organization: The analysis of discrete structural alternatives. Administrative Science Quarterly, 36(2): 269–96.

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2 The Organization of Markets Göran Ahrne, Patrik Aspers, and Nils Brunsson

The concept of organization in relation to markets can be found in early economics. The extensive organization of stock exchanges was noted by Alfred Marshall nearly a hundred years ago; he argued that ‘the most highly organized exchanges are the Stock Exchanges’ (Marshall 1920, 256–7), an idea also expressed by Weber (2000, 326–7) and Walras (1954, 83–4), who spoke of exchanges as perfectly organized markets (Walker 1996, 79). Marshall’s and Walras’s studies of these highly organized markets provide the basis of contemporary market theory in economics (Aspers 2011). According to contemporary economists, exchanges also represent phenomena that come close to the ideal of perfectly competitive markets. Samuelson, for instance, has argued that textbook economic theory applies only ‘to a perfectly competitive market where some kind of standardised commodity such as wheat is being auctioned by an organized exchange’ (Samuelson 1969, 69). The literature on market regulation has some resemblance to an understanding of markets as organized. Polanyi used this concept when arguing that ‘Regulation and markets, in effect, grew up together’ (Polanyi 1957, 71). As indicated by the concept of regulation, the literature has a strong emphasis on rules, and it concentrates on states as the rule setters. Other organizers and other ways of organizing are kept in the background. The traditional assumption in the regulation literature is that markets fundamentally consist of spontaneous processes of mutual adjustment, but states sometimes play a central role, interfering in these processes by setting new rules for the actions and interactions of market actors, as in the case of ‘market failures’ (Boyer 1990, 2005; Streeck 2005). Fligstein insisted on the significance of states when analysing the way markets are established, but also emphasized the role of market actors. He stressed the fact that relationships ‘within and across firms and their more

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formal relations to the state are pivotal for the understanding of how stable markets emerge’ (Fligstein 2001, 68). According to Fligstein, the creation of markets should be considered a political process, although active fashioning need not involve states; other organizations can organize markets. Fligstein (2008) used the concept of organization frequently, presenting it as a decided order, which implies strategies, control, and rules (Fligstein 2001). Abolafia (1996) and Yakubovich et al. (2005) have also used the term ‘organization’ when discussing market fashioning. The literature on performativity (e.g. Callon 1998; MacKenzie 2006; MacKenzie and Millo 2003; MacKenzie et al. 2007) is specialized; it stresses the way a certain type of market—that of exchanges—is constructed, essentially with the neoclassical model as a blueprint. We take this to be a sign of the importance of the organization of markets, although it is not the focus of the performativity literature. Authors within that literature have failed to acknowledge that the neoclassical model was originally mapped on real, highly organized markets (Aspers 2007). Although some of these scholars have used the concept of organization in connection with market fashioning, it is not clear what they include in the concept. What is missing from the current literature is a more systematic analysis of the notion of organization. To pursue our approach, we must clarify the concept of organization. Only then can we begin to analyse organized aspects of markets and study how they are organized. We thereby add conceptual clarity and the distinct notion of agency (cf. Beckert 2010, 615) to an organizational approach to market fashioning. In doing so, we attain a way of understanding more of the dynamics of markets and market fashioning.

Organized Markets In organization studies and economics, the concept of organization is most often considered equivalent to formal organizations. The concept has also been used in its wider meaning to describe systematic order in general (cf. Parsons and Smelser 1956, 246), treated close to the general meaning of cooperation (Lindberg and Czarniawska 2006; Weick 1979) or used for describing systems for the division and integration of labour (Mintzberg 1999; Perrow 1986). These definitions of organization can serve as general descriptions of markets, for markets can certainly be seen as forms of systematic order (Callon 1998), cooperation (cf. Etzioni 1961; Mises 1963, 143), and divisions of labour (Durkheim 1984). The definitions are too broad to use as tools for analysing various forms of market organization, however. Instead, drawing on Ahrne and Brunsson (2011), we suggest a narrower definition, which is more precise and analytically sharper and therefore easier to operationalize. 18

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Organized Interaction: Elements of Organization In all types of social interactions, one can distinguish five fundamental elements required for the interaction to be continued or repeated—a focused interaction (Goffman 1972). First, those who interact need to know who is involved in the interaction. Second, they require some common notions about what they are doing and how to do it. Third, they need to be able to observe each other to know how to continue. Fourth, they must be able to take measures in order to make others do what they expect them to do. And fifth, they must understand who has the initiative and power. These five elements are commonly achieved through such mechanisms as cultural norms and traditions, social status, or charisma (Ahrne and Brunsson 2011). But they are sometimes achieved through decisions: communications to others about what they are expected to do or accept. Such decisions are characteristic of formal organizations. Organizations are expected to be able to decide on the five elements, and they regularly do. First, they decide who is a member and who is not. Second, organizations decide on rules for the actions of their members. Third, they decide on ways to monitor their members. Fourth, they decide about positive and negative sanctions. And fifth, organizations make decisions about hierarchy; they can decide which of their decisions are binding for their members or prospective members. Decisions about these elements are fundamental and constitutive for formal organizations. It is through the concomitant decisions, or at least the potential decisions, about all interaction elements that formal organizations are seen as social actors: autonomous actors with collective resources of their own and a unique and recognized identity in relation to other organizations. Decisions about the basic interaction elements can therefore be called elements of organization. Organizations often try to organize their environment by deciding about membership, rules, monitoring, sanctions, and hierarchy, without necessarily combining them in a formal organization. Even if only one or a few elements are decided upon, we define these decisions as organization, although the situation is really one of ‘partial’ organization (Ahrne and Brunsson 2011). As is the case with all decisions, it is far from certain that anyone will adapt to the decisions or be strongly affected by them; yet many such decisions have significant effects—not least in markets. Organization defined in this narrow way is far from covering everything that occurs in formal organizations or in markets. In markets, the five interaction elements are often achieved in ways other than by organization. As any economics textbook reveals, access to markets is limited not only because of decisions on limited membership, but also because not everyone has the resources to buy, manufacture, or sell. The non-organizational equivalent to 19

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rules is the norms that emerge in markets and that differ, to a large extent, among markets (Aspers 2011). Non-organized monitoring, for instance, consists of the consumers’ daily observations of goods and prices in various shops. And a non-organizational equivalent to sanctions in markets is the individual buyers’ refusal to buy from some sellers because their products or prices are not acceptable. Power and influence in markets is also achieved through means other than hierarchy—through strong oligopolistic positions, for example. Yet markets are also organized, and their functioning cannot be fully understood without considering their organization.

Markets within Formal Organizations The use of organization is easy to observe when markets are organized within formal organizations. Exchanges provide a case in point. Exchanges usually take the form of associations or firms. As formal organizations, they have access to all elements of organization. And they use them (cf. Abolafia 1996; Preda 2005). All traders who are allowed to deal on a stock exchange must be members of the exchange, and it is the exchange that decides on their membership. There is a hierarchy, in that decisions can be binding, and the possibility of making binding decisions is often used. Detailed rules are set for classifying goods in fixed and clearly separated groups, different types of securities, or different qualities of commodities. The rules normally include the way exchanges should be conducted and the way information should be distributed. An exchange is entitled to monitor some of its members’ activities, and it can issue negative sanctions such as fines, or even suspensions or expulsions. As in other organizations, however, not everything the members do is the object of organizational decisions. Members are allowed to decide for themselves when to be sellers and when to be buyers, how much to exchange (although there may be some restrictions), and the prices they are willing to accept. Exchanges are not the only type of formal organization that organizes markets within their boundaries. Other prominent examples are firms and states that arrange internal markets. Managers decide that units of their organization may exchange goods against payment from other units, a project that involves even more decisions than those required in exchanges (Ackoff 1993). Both sellers and buyers must be actively constructed. Managers must reconstruct various internal departments into market actors, providing them with some kind of ownership rights that are valid within the formal organization. These rights must be anchored in the rules of the organization; the organizers cannot rely on the general rules of a state and its laws. An accounting system must be constructed to determine the assets owned by each department and to measure the flow of resources among departments, 20

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and decision makers must be appointed to decide about purchases and sales. The management of the organization often sets prices in the form of so-called internal prices. Competition is guaranteed by allowing departments to buy from outside suppliers or from several suppliers within the organization (Althauser 1989; Halal 1994).

Organizing Markets Outside Organizations Markets within formal organizations are common, and some of them are highly visible, but they are still exceptions rather than the rule. Most markets exist outside formal organizations. This does not mean that markets outside organizations are not organized. Many organizations are engaged in organizing markets by using one or several organizational elements. They can direct organizational elements at the goods to be exchanged, to the activities or characteristics of the seller or buyer, to the ways in which exchanges should occur, or even to prices. The elements are used separately or in different combinations. Below we briefly illustrate how the organizational elements can be used for organizing markets.

Membership Membership may be used in markets to decide who may act as a seller or a buyer in that market. The use of decisions about seller membership has a long history. In the guild system, admittance as a seller was decided through membership (Commons 1909). A modern variant is the requirement in some countries or cities to belong to an organization in order to offer taxi services to the public. In most countries, sellers need a special permit, and buyers need a license, in order to deal in firearms. People who arrange space in a marketplace must usually decide who will be given access to the limited space, and the arranger may allow only sellers of particular goods or sellers with specific qualities. Membership can also be a means of strengthening sellers, even though it does not lead to direct exclusion of some potential sellers. Sellers may become members of trade associations, sometimes with the purpose of providing themselves with an identity of seriousness or reliability. The Swedish Parking Association (member of the European Parking Association) recruits only those parking firms that promise to comply with high ethical standards (Ahrne and Brunsson 2008). Membership may also involve more direct collaboration; airline alliances provide customers with greater possibilities for coordinating long-distance travel among airline companies that are members of the alliance. Through membership in a trade association, firms can also further their interests by trying to speak with one voice (Jutterström 2000, 2004). 21

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Buyers can be organized through membership as well. Employers form employers’ associations before they negotiate with unions. Dissatisfied train commuters create an association in which membership size provides an argument for better service or prices, and they complain collectively instead of individually by voicing their concerns or interest together. Weber showed how membership in religious sects was a form of social capital that facilitated exchange among members (Weber 1981).

Rules Rules are decisions about how certain others shall act in certain situations (March et al. 2000). In contrast to membership, rules can pertain to all aspects of markets. They may deal with the way products should be designed, how sellers or buyers should behave, the prices that should apply, or how the exchange should be made. States issue rules about all markets within their territories. But states also issue rules that are valid only for specific markets—rules that regulate the goods that may be sold on the pharmaceutical market, for instance, or the handling of food products. Trade associations can establish rules for the quality of goods or services and for the way they are to be measured. The guild of shoemakers set quality standards (cf. Commons 1909). Dealers in stocks create rules of conduct, including how to behave properly when interacting socially (Preda 2005). Many market rules are standards—nonbinding rules (Brunsson and Jacobsson 2000). In this case, the rule setter does not force the intended rule compliers to follow the rules, either because the rule setters do not wish to do so or because they are not entitled to do so. Some state laws are standards; the Sale of Goods Act, for instance, is optional in some countries. But most standards are set by organizations other than states. National and, increasingly, international standardizing organizations have set many thousands of standards for goods in the last hundred years. There are standards for clothing sizes, for screw dimensions, for computer and telephone components. In the past few decades, many voluntary associations have set standards in such areas as sustainability and social responsibility (Dubuisson-Quellier 2013; Jutterström 2013). Standards are used to categorize goods into those that comply with standards and those that do not. Standards for different qualities of a commodity, such as farming products, make it possible for sellers and buyers to interact independent of the commodity. In other cases, such as eco-labelling, the main effect of standards is on the buyers’ evaluation of the goods (Aspers 2006; Boström and Klintman 2008). Trade associations for sellers may also develop 22

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quality standards to make consumer choices easier, by introducing ‘judgement devices’ to evaluate goods and services, for instance. Standards can also be used for defining goods: so-called appellations (Karpik 2010, 45–6) serve as an example. Thus champagne must be produced exclusively in the district of the same name and by designated methods. Standards are also used to categorize sellers and buyers, especially if the sellers and buyers are firms. Accounting standards used to judge the economic strength of a firm belong in this category. Quality standards and standards for environmental work refer to internal structures and processes within organizations (Tamm Hallström 2004). Social responsibility standards governing administration of the internal workings of a selling firm as well as its market relations help to assure buyers that they are dealing with solid, reliable, and ethically acceptable sellers (Dubuisson-Quellier 2013).

Monitoring There are many organizations that monitor the actions of other organizations in the market, in order to publish the results and inform other sellers and buyers. Just like rules, monitoring can concern any aspect of markets. Many organizations, including non-governmental organizations (NGOs), monitor compliance with standards and other rules (Gourevitch et al. 2012; Micheletti 2003), for example the monitoring of such industries as rug production to verify that child labour is not being used. States monitor market transactions in order to collect taxes or to ensure that firms compete or that goods are not dangerous. Certification and accreditation activities are forms of monitoring that are becoming more and more common in contemporary markets. Companies may be certified as quality businesses or socially responsible businesses. Rating institutes such as Standard and Poor’s and Moody’s survey the creditworthiness of businesses (Kerwer 2002; Rona-Tas and Hiss 2011), and senior citizens’ organizations decide to survey the pricing of everyday commodities systematically. Newspapers and other media compare prices on consumer commodity markets or investigate the ethical behaviour of companies. Monitoring is often conducted against the will of those being monitored; in other cases, sellers or buyers initiate the monitoring by applying and paying for certification. Or sellers and buyers agree to install a monitoring system, as is the case in so-called timber measurement. Because of the difficulty of measuring wood exactly when trees are still standing in the forest, the two parties hire an independent timber measurer to estimate the amount of wood, its quality, and thus the price of the harvested wood when it is delivered to the buyer. 23

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Sanctions Sanctions are decisions about measures that prevent or encourage certain forms of behaviour and distribute rewards or penalties. Organizers can decide on sanctions without the use of any other element of organization—a boycott of certain goods or goods from certain sellers, for instance (Micheletti 2003). Organizers can award something that they deem worthy of encouragement, as when art directors distribute awards among themselves or awards are conferred in the book market or the film market. A prize demonstrates what is considered a meritorious achievement, awarded perhaps in the hope that an increase in output and demand for this quality of book or film will follow. In other cases, sanctions may be combined with organized monitoring. Certification of an enterprise can be seen as a positive sanction that follows after organized monitoring; refused certification can be seen as a negative sanction. Media monitoring of the ethical behaviour of companies can lead to rankings in which some firms are identified as particularly bad, thereby denigrating their brand. Losing a Michelin star can seriously hurt a restaurant; attaining a star could guarantee its success for a long time.

Hierarchy Markets contain many hierarchical elements. It is common to point to states in this context, for they can decide on membership, rules, monitoring, and sanctions that will be binding for actors in various markets. States can force sellers to sell to certain buyers; large producers or wholesalers cannot simply refuse to sell to certain retailers. But which state offers hierarchy is not always a given. In international trade, it is common for sellers and buyers to agree that disputes shall be settled through the use of hierarchy and where to find that hierarchical element, by indicating a certain court or other arbitral institute. This principle can be traced back hundreds of years to the development of Lex Mercatoria, principles for trade, which governed economic transactions even between merchants from different countries and without direct state intervention (Volckart and Mangels 1999). Not only states establish hierarchy on markets. Organizations for sellers or buyers may do so as well. In those organizations, hierarchy means that members have ceded to someone else the right to make decisions about some of their actions. Thus a trade association makes decisions about rules, monitoring, and sanctions that its members are forced to follow, as long as they wish to continue as members. The members of a trade association may be obliged to follow certain ethical rules and may be forced to permit monitoring and to

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accept sanctions to pay damages. Cartels, such as labour market cartels, may set binding rules about acceptable prices. A trade association can also use hierarchy for determining how competition should be arranged. The National Hockey League (NHL) in North America decides that teams that have done poorly in the previous season can choose their new players before the better teams in the post-season draft.

Varied Organization and Many Organizers In summary, our definition of organization makes it easy to see that there are many ways of organizing markets. There are 120 ways in which the five organizational elements can be combined, and an almost infinite number if we consider that the organization can be directed to various aspects of markets such as goods, sellers, buyers, exchanges, and prices. The elements of organization need not be combined. An organizer may use only one or a few of these elements, and other organizers may or may not add more elements. Traditional product standards issued by the International Organization for Standardization (ISO), for instance, are rules that are not combined with hierarchy (they are not binding) or with membership (they are available to anyone who wants to apply them) or any other element. On the other hand, some ISO standards such as ISO 9000 have attracted the interest of parties that combine them with monitoring and sanctions in the form of certifications. Although some organizing is directed to markets in general, most of it is specific. As with formal organizations, we could expect variation in the organization of individual markets—another reason why it is seldom useful to use the concept of ‘market’ in the singular. Unlike institutions, organization is tied to agency; it is individuals or organizations that organize. In practice, it is mainly organizations that have the capacity to organize markets. Unlike actors who mutually adjust their behaviour to each other, organizers actively try to change the behaviour of others. Various types of market organization have grown out of the active interventions of organizations, which have tried to organize or reorganize a market in order to reach certain ends. In our examples, we see many kinds of market organizers: international organizations, social movements, state authorities, trade associations, sellers, and buyers. Some, such as organizations for standardization, certification, or rating, are specialized in market organization. To understand why markets are organized in certain ways at certain times, it is crucial to understand who these market organizers are and why they intervene.

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Consequences of Market Organization Organization can be expected to have a deep impact on many markets. Membership in various organizations is a means of strengthening sellers or buyers—providing them with an identity of seriousness or reliability, for example. Membership often involves more direct collaboration, as is the case with cartels and airline alliances. Standardization reduces variation in goods and services offered and variation in the structure and characteristics of market sellers. Standards make choices easier. Monitoring increases transparency and attention in selected dimensions. Monitoring affects valuations; it can assure buyers that they are dealing with solid, reliable, and ethically acceptable sellers or that they are buying an environmentally sound product (Aspers 2006; Boström and Klintman 2008). The ranking of selling or buying firms in terms of such factors as quality influences how many are willing to trade with them (cf. Podolny 2005). Sanctions affect the status of actors and goods. A prize or award demonstrates meritorious achievement, sometimes creating increased demand for a product. Similar effects can arise from other market processes and phenomena such as mutual adjustment and institutions. The type of order matters, however. Organization implies a higher degree of visibility and contestation (cf. Stark 2009) and leads to specific dynamics (Ahrne and Brunsson 2011). The special effects of organization are rooted in the fact that organization is a decided order. First, decisions increase the visibility and transparency of an order. Decisions about membership give a clearer and more complete picture of the sellers or buyers in a market than do other entrance barriers. Decided rules provide more accessible information than norms do, and make it easier for new sellers or buyers to understand what it takes to enter into and act in the market. The certification of sellers provides more public information concerning the quality of goods and services than can be attained by asking neighbours or relatives for advice. Standardization makes it easier for buyers to compare prices. Second, there are specific restrictions on decisions. Social norms place restrictions on what can be decided. There are practices that cannot constitute the content of decisions, creating limits for organization and rendering some decisions more likely than others. It is seldom legitimate in a market context, for example, to decide to create a monopoly (Boltanski and Thévenot 2006). Third, specific individuals or organizations that make a decision become responsible for that decision and its consequences. There is someone to turn to if one is dissatisfied with a decision. For every element of organization, someone is responsible—an organizer such as a state, a trade association, or an environment association. Such concentrated responsibility stands in contrast to the

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responsibility dilution that appears if the order is perceived to be stemming from mutual adjustment or the development of an institution. Concrete objects for complaints are largely missing; it is more common to speak vaguely about ‘market forces’. Fourth, because decisions about the elements of organization concern what others shall do, there is a potential gap between the contents of the decision and what will actually occur; it is not certain that the decision will be complied with. When the norms for how to decide are somewhat unrealistic, implementation failures will be common. And although what happens in practice is sometimes relatively opaque, the visibility of decisions helps to make these failures known to many. One can expect reports on failed organization to be more common than reports about failed mutual adjustment or failed institutions. Fifth and last, decisions create specific types of dynamics. Mutual adjustment may produce tendencies towards equilibrium, and institutions represent stability. In contrast, an organized order always involves a fair degree of instability; it may change and change quickly. In a market context, for example, new rules for membership in a trade association may change the number of suppliers in a market faster than any mutual adjustment between sellers and buyers can. Decisions about new standards for a product quickly change the quality of products. When credit-rating institutes change their criteria or individual ratings, they immediately change the conditions for obtaining and giving loans. Prizes of high status or popular boycotts change the demand for products overnight. Organizers who try to create stability for their way of organizing a market cannot guarantee the result. And organization is not likely to produce states of equilibrium that guarantee stability. Organization also makes markets less predictable. An order that is subject to organization is difficult to predict because it is dependent upon the whim of decision makers and their power. And because their decisions are merely attempts, predictions must account for the uncertainty of implementation. Furthermore, even when decisions have been made and implemented, uncertainty about the duration of their validity remains. Although decisions are attempts to create stability and predictability, allowing the future to be stipulated, they simultaneously increase uncertainty (Brunsson 1985; Luhmann 2000). By virtue of the decision, one option has been selected over another, demonstrating that there are, in fact, options. How do we know that the option decided upon was the best one? The decision is open for questioning. Decisions are likely to be contested and stimulate new decisions to organize differently. Organization is likely to bring more radical uncertainty than what Knight (1921) identified as uncertainty and risk in markets, which presupposed that norms and rules were stable.

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Conclusion In summary, we have argued that it is fruitful to use the concept of organization in order to understand markets. By breaking down the concept of organization into its constitutive elements, we can produce a more detailed analysis of the organization of markets. Markets can be more or less organized and organized differently. They can exist within or outside formal organizations and be organized by different organizers, with few or many organizational elements, directed towards different aspects of markets. The organizational aspect of markets influences how and why markets change. The concept of market organization opens a whole new area of research for scholars interested in organization or markets. The difference between markets and formal organizations is not as dramatic as is suggested in much of the existing literature. During the last half-century or so, many scholars have addressed several fundamental questions about the organization and reorganization of formal organizations. Most of these questions can also be asked about markets, but, as we demonstrate in this book, they can yield answers that differ in some respects. Formal organizations and markets are the central forms of the economy, and it is critical to understand their differences and similarities. And the difference is not that one is organized and the other is not.

Acknowledgements This chapter is a shortened and edited version of Ahrne, Aspers, and Brunsson (2015).

References Abolafia, M. (1996), Making Markets. Cambridge, MA: Harvard University Press. Ackoff, R. L. (1993), Corporate perestroika: The internal market economy. Systems Practice, 6(3): 239–49. Ahrne, G. and Brunsson, N. (2008), Meta-Organizations. Cheltenham: Edward Elgar. Ahrne, G. and Brunsson, N. (2011), Organization outside organizations: The significance of partial organization. Organization, 18(1): 83–104. Ahrne, G., Aspers, P., and Brunsson, N. (2015), The organization of markets. Organization Studies, 36(1): 7–27. Althauser, R. (1989), Internal labor market. Annual Review of Sociology, 15: 143–61. Aspers, P. (2006), Ethics in global garment market chains. In N. Stehr, C. Henning, and B. Weiler (eds), The Moralization of the Markets (pp. 287–307). London: Transaction Press. Aspers, P. (2007), Theory, reality and performativity in markets. American Journal of Economics and Sociology, 66(2): 379–98.

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The Organization of Markets Aspers, P. (2011), Markets. Cambridge: Polity Press. Beckert, J. (2010), How do fields change? The interrelations of institutions, networks, and cognition in the dynamics of markets. Organization Studies, 31(5): 605–27. Boltanski, L. and Thévenot, L. (2006), On Justification: Economies of Worth. Princeton: Princeton University Press. Boström, M. and Klintman, M. (2008), Eco-standards, Product Labeling and Green Consumerism. Basingstoke: Palgrave Macmillan. Boyer, R. (1990), The Regulation School: A Critical Introduction. New York: Columbia University Press. Boyer, R. (2005), How and why capitalisms differ. Cologne: Max Planck Institute for the Study of Societies, Discussion Paper 05/4. Brunsson, N. (1985), The Irrational Organization. Chichester: Wiley. Brunsson, N. and Jacobsson, B. (eds) (2000), A World of Standards. Oxford: Oxford University Press. Callon, M. (ed.) (1998), The Laws of the Market. Oxford: Blackwell Publishers. Commons, J. (1909), American shoemakers, 1648–1895: A sketch of industrial evolution. Quarterly Journal of Economics, 24: 39–84. Dubuisson-Quellier, S. (2013), A market meditation strategy: How social movements seek to change firms’ practices by promoting new principles of product valuation. Organization Studies, 34(5–6): 683–703. Durkheim, É. (1984), The Division of Labour in Society. London: Macmillan. Etzioni, A. (1961), A Comparative Analysis of Complex Organizations: On Power, Involvement, and their Correlates. New York: The Free Press. Fligstein, N. (2001), The Architecture of Markets, An Economic Sociology for the Twenty-First Century Capitalist Societies. Princeton, NJ: Princeton University Press. Fligstein, N. (2008), Euroclash, The EU, European Identity, and the Future of Europe. Oxford: Oxford University Press. Goffman, E. (1972), Relations in Public. New York: Harper & Row. Gourevitch, P., Lake, D., and Stein, J. (2012), The Credibility of Transnational NGOs. Cambridge: Cambridge University Press. Halal, W. (1994), From hierarchy to enterprise: Internal markets are the new foundation of management. Academy of Management Executive, (8): 69–83. Jutterström, Mats (2000), A Business Dilemma in EU Lobbying—Horizontal Relations and Parallel Action. Stockholm. SCORE Report Series 2000:7. Jutterström, Mats (2004), Att påverka beslut, företag i EUs regelsättande (Influencing decisions—business firms in the rule-setting of the European Union). Dissertation. Stockholm. EFI. Jutterström, Mats (2013), Organizations that set CSR standards. In Mats Jutterström and Peter Norberg (eds), CSR as a Management Idea: Ethics in Action (pp. 52–74). Cheltenham: Edward Elgar. Karpik, L. (2010), Valuing the Unique: The Economics of Singularities. Princeton, NJ: Princeton University Press. Kerwer, D. (2002), Standardizing as governance: The case of credit rating agencies. In A. Héritier (ed.), Common Goods: Reinventing European and International Governance (pp. 293–315). Lanham, MD: Rowman & Littlefield.

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Göran Ahrne, Patrik Aspers, and Nils Brunsson Knight, F. (1921), Risk, Uncertainty and Profit. Boston, MA: Houghton Mifflin. Lindberg, K. and Czarniawska, B. (2006), Knotting the net of action, or organizing between organizations. Scandinavian Journal of Management, 22: 292–306. Luhmann, N. (2000), Organisation und Entscheidung. Opladen: Westdeutscher Verlag. MacKenzie, D. (2006), An Engine, Not a Camera: How Financial Models Shape Markets. Cambridge: Cambridge University Press. MacKenzie, D. and Millo, Y. (2003), Constructing a market, performing theory: The historical sociology of a financial derivatives exchange. American Journal of Sociology, 109(1): 107–45. MacKenzie, D., Muniesa, F., and Siu, L. (eds) (2007), Do Economists Make Markets? On the Performativity of Economics. Princeton, NJ: Princeton University Press. March, J., Schulz, M., and Xueguang, Z. (2000), The Dynamics of Rules: Change in Written Organizational Codes. Stanford, CA: Stanford University Press. March, J. and Simon, H. (1958), Organizations. Cambridge, MA: Blackwell. Marshall, A. (1920), Industry and Trade: A Study of Industrial Technique and Business Organization; of Their Influences on the Conditions of Various Classes and Nations. London: Macmillan. Micheletti, M. (2003), Political Virtue and Shopping: Individuals, Consumerism, and Collective Action. New York: Palgrave Macmillan. Mintzberg, H. (1999), The Structure in Five: Designing Effective Organizations. Englewood Cliffs, NJ: Prentice-Hall. Mises, L. v. (1963), Human Action: A Treatise on Economics (3rd edition). Chicago: Henry Regnery Company. Parsons, T. and Smelser, N. (1956), Economy and Society. Glencoe, IL: The Free Press. Perrow, C. (1986), Complex Organizations: A Critical Essay. New York: McGraw-Hill. Podolny, J. (2005), Status Signals: A Sociological Study of Market Competition. Princeton, NJ: Princeton University Press. Polanyi, K. (1957), The Great Transformation. Boston, MA: Beacon. Preda, A. (2005), Legitimacy and status groups in financial markets. British Journal of Sociology, 56(3): 451–7. Rona-Tas, A. and Hiss, S. (2011), Forecasting as valuation: The role of ratings and predictions in the subprime mortgage crisis in the United States. In J. Beckert and P. Aspers (eds), The Worth of Goods: Valuation and Pricing in the Economy (pp. 223–46). Oxford: Oxford University Press. Samuelson, P. (1969), Economics: An Introductory Analysis (6th edition). New York: McGraw-Hill. Stark, D. (2009), The Sense of Dissonance: Accounts of Worth in Economic Life. Princeton, NJ: Princeton University Press. Streeck, W. (2005), The sociology of labor markets and trade unions. In N. Smelser and R. Swedberg (eds), The Handbook of Economic Sociology (2nd edition) (pp. 254–83). Princeton, NJ: Princeton University Press. Tamm Hallström, K. (2004), Organizing International Standardization: ISO and the IASC in Quest of Authority. Cheltenham: Edward Elgar. Volckart, O. and Mangels, A. (1999), Are the roots of the modern lex mercatoria really medieval? Southern Economic Journal, 65: 427–50.

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The Organization of Markets Walker, D. (1996), Walras’ Market Models. Cambridge: Cambridge University Press. Walras, L. (1954), Elements of Pure Economics, or The Theory of Social Wealth. London: George Allen and Unwin. Weber, M. (1981), General Economic History. New Brunswick, NJ: Transaction Publishers. Weber, M. (2000), Stock and commodity exchanges. Theory and Society, 29(3): 305–38. Weick, K. (1979), The Social Psychology of Organizing. Reading, MA: Addison-Wesley. Yakubovich, V., Granovetter, M., and McGuire, P. (2005), Electric charges: The social construction of rate systems. Theory and Society, 34: 579–612.

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3 Creating a Market Bureaucracy: The Case of a Railway Market Daniel Castillo

A majority of passenger railway systems worldwide are organized and operated by state monopolies selling their services to the public without competition. Often considered a natural monopoly with such specific characteristics as economies of scale and declining average costs, competition in railway systems has traditionally been seen as a mechanism that is neither viable nor possible nor desirable (Helgesson et al. 2004, 58; Posner 1969, 548; Helgesson 1999). In the terms of this book, the lack of competition means that there has been exchange but no market. In recent decades, the EU has taken a different path. Instead of maintaining state monopolies in the railway industry, a process of marketization was introduced at the end of the 1990s, with the aim of increasing efficiency and benefits for society. The precursors in this process have been the UK and Sweden, although the EU has abandoned the UK model of outsourcing all railway activities to private firms. Instead of complete privatization, the Swedish position has been to retain state responsibility for the infrastructure over time and gradually create competition ‘on the tracks’ among various train operators. Competition on the tracks differs from the available forms of transport competition used in other countries, including public procurement systems or yardstick competition (Schleifer 1985). Procurement is a form of publicly organized purchases of goods and services in competition (Alexandersson et al. 1998). Competition is present only at the time of the short procurement process, however. Yardstick competition, as used in the Japanese railway system, is a benchmarking market system whereby firms compete with a ‘shadow firm’ to provide better incentives for efficient performance (Sobel 1999). The idea is to reward firms when performance improves and to insert penalties when it declines (Mizutani et al. 2009).

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Sweden took its first step in 1988, although not with the idea of creating a railway market. Political ambitions have changed over the years, often inspired by the market ideals of the New Public Management paradigm (see, e.g., Du Gay 2000; Sahlin-Andersson 2001; Hood 1995). The Swedish model also had a significant impact at the European level, and Sweden can be considered a pioneer in the construction of railway competition. There has been a shift of rhetoric from coordination within a state organization to market coordination of rail traffic in Sweden. These logics are often considered opposites. In the common conception, a state bureaucracy coordinates its operations and activities through public planning and central control (Weber 1978; Castillo 2009, 58), whereas market coordination is provided by the price mechanism, through mutual adjustments in actions of exchange— not through planning and central control (Lindblom 2003). In this view of markets, the economic system ‘works itself ’ (Coase 1937, 387). The case of railway reform did not confirm Coase’s description. Rather, the creation of the new market involved extensive organization. Leaning against the theory of partial organization (Ahrne and Brunsson 2011) as described in Chapter 2, in this chapter I primarily analyse the way market actors and competition are organized, shaped, and managed. I illustrate how the Swedish state has dominated the market organization, despite a long process of alleged ‘deregulation’ of the railway monopoly. I claim that the attempt to construct a market by adding competition to exchange tends to reinforce the necessity for organization, coordination efforts, and bureaucratic control of the market. Bureaucracy was a trait of the new market rather than of the former state monopoly. This chapter is based on interviews with 12 strategic informants from four state authorities (the Swedish Transport Administration, the Swedish Transport Agency, the Ministry of Enterprise, and the Swedish Competition Authority) and the trade association of operators (the Train Operators) combined with a study of numerous documents, including a number of official reports and some scientific literature about European and Swedish railway organization.

Introducing Competition in the Swedish Railway System Reforming ‘The Natural Monopoly’ In connection with the construction of the first railways in Sweden, the Swedish state established Statens Järnvägar in 1856 as a state-run company for railroad traffic on the main railway lines; private firms were expected to build and run other lines. A great number of private railways were established, but because each company had a separate railway, they seldom competed for 33

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passengers or freight. Profitability in private railway companies tended to be weak, and over time many of them experienced severe financial difficulties. By 1939 these problems had finally led to complete nationalization; the private lines were taken over by Statens Järnvägar, making it the only owner and operator of railways in Sweden. After WWII, Statens Järnvägar faced increasing competition from road traffic, and had problems attaining profitability. In the 1960s and 1970s the situation for Statens Järnvägar in particular and railway policy in general became a significant political issue, including discussions about lack of infrastructure investment, decreasing subsidies, and the closing of regional railways. The introduction of competition in the Swedish railway system has occurred in several steps, beginning in the late 1980s. A first and, as it would turn out, highly significant step was the 1988 decision to divide Statens Järnvägar into two separate organizations: SJ, with responsibility for traffic operations, and Banverket, with responsibility for the building and maintenance of railway tracks. The idea was that the infrastructure had certain characteristics similar to the idea of natural monopolies, but that railway operations could and should be exposed to competition (Alexandersson 2010, 38). SJ was a so-called ‘business authority’, the hybrid of a state-owned company and a state authority, whereas Banverket was designed as a standard state authority. Although not explicitly outlined in the Transport Policy Act of 1988, responsibility for regional railway services was delegated to regional governments, which made public procurement by competitive tendering possible on these lines (Alexandersson and Hultén 2010, 136). The possibilities for procurement enabled sellers other than SJ to enter the new regional procurement market. A number of new sellers obtained contracts, which gradually equipped them with experience, expertise, and access to vehicles. The official policy at that time, however, was not to introduce competition everywhere. Rather, the idea of competition on the main lines developed gradually over time—at least until 2007.

A Competitive Market Needs Actors The next step towards greater competition in the railway system was the decision in 2001 to incorporate SJ into SJ AB (Ltd.), a regular company, albeit fully owned by the state (Proposition 1999/2000:78). This decision made SJ more like other firms acting as railway operators on local and regional lines in Sweden or abroad. This move can be seen as an attempt to establish opportunities for new railway operators and to make everyone compete on more equal terms. But the idea of equal terms led to further reorganization. Because it was believed by the market organizers that other operators should have access to various functions and services that were then owned by SJ (Alexandersson and Hultén 2010, 137), SJ was split up. Former departments 34

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of SJ were turned into separate and autonomous companies with the right and interest to sell their services to other train operators. The property division, for example, was incorporated into a state-owned company called Jernhusen AB, responsible for the management of all premises connected to the rail infrastructure. The information technology (IT) department became Unigrid AB, the cleaning department TraffiCare AB, and the machine and maintenance department Euromaint AB, Swemaint AB, and TrainTech Engineering AB. All these new firms were initially state-owned, but many were later sold to private corporations. The splitting of the former railway monopoly organization gave rise to markets that were complementary to railway operations. SJ and other operators could now buy crucial services from other firms: station services from Jernhusen, maintenance from Euromaint, and cleaning from TraffiCare, for example. The degree of competition in these side markets varied: the market for IT services was highly competitive, whereas Jernhusen had a monopoly in running stations, and the market for train maintenance had extreme entry costs because maintenance required large premises in close connection with major railway hubs. The next major step in the introduction of competition was taken in 2007 when the government appointed a special investigator to propose measures for increased competition in the market for railway passenger services (SOU 2008, 92). The bottom line in the investigation report was gradual abolishment of the exclusive operating rights of SJ AB, thereby ending ‘an era of monopoly in the railway system’ (interview, Ministry of Enterprise). The decision makers had at least two options for increasing competition: they could establish a procurement market or they could create what they called a ‘regular’ market, which would function more like the market for air or car travel. As a senior adviser at the Ministry of Enterprise put it, ‘Our argument was that half of the railway market today is a procurement market, where regional transport authorities buy transport services from the market. We then thought that it would be better to do the opposite—to make a regular market. That was a cornerstone in our policy.’ Because of this political ambition, the exclusive rights for SJ to run the traffic on the main lines were slowly abolished, first by allowing other operators to use the tracks on weekends and then, in 2010, by allowing them full access to operate at any time. Few companies applied to obtain access at first, but in 2012 a total of 46 companies applied. Except for SJ, the successful applicants were those that had previously participated in the regional procurement market; included as well were subsidiaries of large railway companies that were owned by other European states, where they enjoyed a monopoly (Proposition 1995/96:92). By 2015, SJ was still benefiting from their dominant market position (Trafikanalys 2014, 14). 35

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Complex Coordination Calls for More Organization Finally the Swedish state had constructed a market by adding competition to the pre-existing exchange. The number of organizations involved increased in several ways: The state created new organizations (the splitting up of SJ), the market creation led to more firms being founded by others (new operators and new firms in the complementary side markets), and more existing firms became involved in the Swedish railway sector. The existence of all these organizations created coordination problems that forced the state to organize this new market carefully. In the former state monopoly, most coordination issues were managed inside the organization of SJ, but the new market situation demanded different approaches, as coordination involved external and autonomous organizations.

Organizing the Market In 2009, the state established the Swedish Transport Agency (STA)—a special state authority created through the merging of several transport authorities of land, sea, and air. It became a major organizer of the new market. One of its mandates was to ensure a safe and effective railway market with healthy competition and equal terms for all market actors, making the agency responsible for rule-setting, monitoring, licences, permits, and fees. Many of these tasks involved safety, an issue that earlier had been managed internally in a supervision department of SJ. The STA shaped and interfered (and still does) with several aspects of the railway market such as its actors, its products, processes of exchange and competition. The STA uses all the organization elements described in Chapter 2: membership, hierarchy, rules, monitoring, and sanctions. It decides on membership—on who can be a seller in the new market. The demands are stipulated in the Railway Bill, which is an amalgamation of various European Commission (EC) directives (Railway Bill 2004:519). According to this law, two permits are compulsory for operating traffic in Sweden: a licence and a safety permit. The licence can be granted to anyone considered suitable, who has the proper insurance and intends to operate railway traffic. The insurance demand was difficult to comply with initially, because few insurance companies had experience with railway traffic; the old state monopoly had never been insured. The operators have to comply with a set of safety rules in order to obtain a Safety Permit proving that the operator has an approved Safety Management System and that it complies with the line-specific requirements (Transportstyrelsen 2009). Because these requirements are country-specific, the company’s vehicles must be approved for use in Sweden or comply with the EC 36

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standard, Technical Specifications for Interoperability (TSI). The level of detail in the TSI standards is extremely high, for obvious reasons—to make traffic across borders not only possible, but easy. Besides setting all these detailed rules, the STA also monitors the sellers. The STA continually inspects various aspects of the market actors, from safety issues to economic questions. According to the Railway Bill, the agency has the right to call for and inspect all required documents (Railway Bill 2004:519, ch. 8, 2}) and the power to demand access to facilities, vehicles, premises, and personnel. When deviations are encountered in the monitoring of firms in the market, there is an escalating scale of sanctions that can be employed, ranging from elementary remarks to withdrawal of licences or permits. An operator not complying with the rules can be served with an injunction, which requires the operator to follow a programme for restoring its operations according to agency criteria. If the conditions for a given licence or permit cannot be met after completion of this programme (or at all) the agency can withdraw the licence or permit, which has actually happened in a few cases. Thus all these organizational elements are combined with hierarchy. The state can force sellers to comply with the Bill or forfeit the right of any infrastructure manager to operate on any track.

Sellers as Obstacles to Increased Competition The organizing efforts did not end there, however. Access to vehicles, maintenance, train stables, and depots provided strong barriers to market access and therefore to competition (Transportstyrelsen 2009). The main solution was to organize new side markets for these services in close proximity to the main railway market. Having vehicles available in a competitive neutral manner has been of great concern for the market organizers. SJ enjoyed the benefit of being a state-owned company from the onset, with access to approximately 150 sets of trains for passenger traffic. There is currently a shortage of vehicles, and delivery times are approximately two to four years. Furthermore, there is no world market for these vehicles, partly because the EC countries have differed historically in their technical specifications for both vehicles and infrastructure—different distances between tracks on double- or multi-track lines, for example. The EU has therefore engaged in harmonizing rules, a process far from finished at the time of this study. The policy directive behind the Swedish railway deregulation report from 2008 outlined a clear goal of creating a supply of vehicles to be rented by any train operator vehicle supply. Yet it was decided that SJ should keep its fleet, although the firm should declare the number of vehicles in use. But SJ was resisting a solution that would force it to sell some of its vehicles. Instead it 37

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dismantled a considerable part of its fleet to avoid creating a second-hand market and run the risk of creating opportunities for competition. The organizers met similar problems in stimulating competition for maintenance, depots, and train stables. The largest owner of these facilities was undoubtedly the newly created state-owned company, Jernhusen (Railway competition report 2008:92, 157). In the 2008 proposal, the intention was to promote competition regarding the use and lease of these facilities (Proposition 2008/09:176, 28). Jernhusen was given the primary role relative to other companies in ensuring competition and competitive neutrality when selling off workshops and depots. Yet problems of access have remained for other operators. One example is the long-term leasing agreement between SJ and Jernhusen, including access to tracks, railway infrastructure, and buildings for several years. According to the STA, this should not be possible, because it reduces access to the market during those years, which, in turn, has negative consequences for competition on the main market—the market for railway transport (Swedish Transport Agency, working material 2011/03/16). It seems that in this case Jernhusen obtained its own economic interests in its role as an autonomous market actor leading to the establishment of a monopoly position, which was not the intention of the market constructors. Two conflicting logics have clashed: Jernhusen as an actor with the usual mandate for any company—profitability and survival— versus the purpose of organizing the market for maintenance and, in turn, securing access for new entrants to the market. These examples illustrate unintended consequences and a dilemma for the market organizers. They had created new markets with autonomous sellers, but like many other sellers, these sellers were not interested in promoting competition in the market. They were interested in their own profitability and survival, which could mean that they tried to hinder competitors from entering the market. According to an informant at the Ministry of Enterprise, the political view was that state-owned companies should act autonomously in the market, which can explain why there were no political attempts to intervene.

Managing Competition through Organization It was one thing to establish a market and quite another to have it running on a daily basis—a task that requires extensive organizing. Although train operators were invited to compete on the tracks, the tracks remained the property of the state, controlled by a public authority: Swedish Transport Administration (SP). Train traffic must be tightly coordinated so the tracks are used efficiently, accidents are avoided, and operators do not interfere 38

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with each other. Coordination was especially tricky in this case because the capacity on many lines was limited compared to the demand for freight traffic and regional and national passenger traffic. The task of achieving coordination was given to SP. The coordination process followed the instructions of EC Directive 2001/14/EC, which states that national capacity on the tracks must be allocated one year at a time, with the possibility of change during the year. This system, the so-called annual Network Statement, requires operators to apply for time slots on the tracks in order to obtain rail capacity. Applying for and obtaining time slots became the only way for the operators to introduce their services in the market for passenger traffic. The SP spent a great deal of effort trying to design a neutral system that would not discriminate against any train operator.

In Search of a Market Mechanism In the capacity allocation process, time slots can be considered the essential product to be exchanged, sold by the infrastructure managers to the buyers competing for them. This was SP’s initial viewpoint. But how could time slots be priced? The authority was commissioned by the government to construct a side market for them. The idea was that market competition over time slots could increase competition in the railway market in a more profound and general sense. But creating this side market turned out to be an extremely difficult task. One proposal was to use an auction-based model. The idea was to introduce auctions when conflicts among various applications were expected and couldn’t be solved in other ways—when different train companies wanted to operate on the same track at the same time (Transportstyrelsen 2011, 8). This idea was soon abandoned, however (Trafikverket 2011a). Although attractive in principle, the decision makers did not believe that it could be fitted to practice; it was a theoretical model that did not account for the extreme complexity of the timetable. When the auction model failed, the Ministry of Enterprise still requested SP to use pricing by differentiating fees for time slots and developing other economic instruments over time. As expressed by one official at the Ministry of Enterprise: ‘If many people want to travel at 7 a.m., it should be more expensive to go at 7. Nothing creates as long queues as when the supply is free.’ There was a belief that underpricing leads to an excessive demand at the operator level, which, in turn, leads to an overuse of the infrastructure (Transportstyrelsen 2011, 6). In order to deal with this problem, an idea was discussed to introduce fees for each application, thereby decreasing the possibility of the operators applying for large capacities with the intention of operating only in the best slots. 39

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None of these solutions was implemented, however, most likely because there was no solid model to implement, and the idea of a side market was abandoned. Rather, the organizers returned to a formulation in the Railway Bill from 2004, in which it was explicitly stated that a time slot is not a product, because ‘anyone who has been assigned a time-slot cannot convey it’ (Railway Bill 2004:519, ch. 6, 19}). If this would happen, and here the legal sanction became clear, the operator could be denied greater capacity in the future. The original situation for the train system was a non-market situation, because there was exchange but no competition. For time slots the end solution became the reverse one—there was no market because there was no exchange although there was competition. Operators still competed to obtain the best and most profitable time slots. And competition had to be handled in some way. The solution was a combination of mutual adjustment and organization.

Combining Mutual Adaptation and Organization to Manage Competition The final solution to date for managing competing applications for capacity is based primarily on voluntary coordination among train operators (Proposition 2008/09:176, 26, Rail competition report) achieved by mutual adaptation among operators during the process that leads to the annual Network Statement. The Network Statement process consists of six phases, spread over the year, the goal of which is to meet all application demands. The SP therefore organizes a series of deliberative meetings in order to increase the number of voluntary agreements and solutions to expected capacity conflicts (Transportstyrelsen, 2009:020, 12). Capacity conflicts appear when various operator companies apply for and compete over the same time slots in the timetable. If conflicts still exist after these meetings, a process of conflict resolution commences (Trafikverket 2012, 8, Network Statement). In the definite Network Statement for 2014, for example, there were a total of ten requests for conflict resolution, involving intense discussions among competing operators under the supervision of SP (Trafikverket 2014). If conflicts cannot be solved, one turns from mutual adaptation to hierarchy. The SP makes the decision about who shall be assigned the slot. But that hierarchy is combined with rules—criteria determining which train category should be given priority. The basic principle for the priority criteria used by the SP is to solve conflicts in a way that maximizes socioeconomic efficiency. According to the Network Statement document, the ‘priority criteria is the only coercive rule an infrastructure manager can apply to impose a solution for conflicts of interest between operators with the purpose to establish the Network statement’ (Trafikverket 2012, 11). In other words, the rules restrict 40

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the SP’s discretionary scope of action. Hierarchy involves binding decisions rather than the right to make any decision. The priority criteria identify the most beneficial solution by using a computational model, based on several factors. The criteria, described in 17 pages, involve an extensive range of rules regarding the calculation of time slots or, more precisely, train routes (Trafikverket 2012, annex 4.2, 2). The train routes are computed using the 18 factors that directly or indirectly affect the calculations. They are divided into ten categories, which depend, for example, on factors taking time and type of passenger into account (Trafikverket 2012, annex 4.2, 14). Ten cost parameters are also used for calculating socioeconomic efficiency—a sort of cost–benefit analysis. The train operators must provide a great deal of information to SP in order for the computational model to be completed.

Emerging Forms of Market Organization Outside the State: The Train Operators’ Organization To this point, I have described how the government, the STA, SP, and other public organizations were involved in organizing the railway market. There was another organizer, however. In 1999, some of the train operators formed a trade association—Train Operators (TO)—an organization based on a revival of the Swedish Railroad Association (SRA), founded in 1876. Currently, this meta-organization (Ahrne and Brunsson 2008) includes 31 firms as members, 13 of which are operators of passenger traffic, and ten of which are associated members such as real estate firms, vehicle manufacturers, and maintenance firms. One of the mandates of TO is to work with external relations and lobbying, as, for example, monitoring and influencing public rules and policies in the area of rail transport, trying to influence the market organization via the state organizations. But the TO has also been an active organizer of the train market itself. It has solved the problem of insurance for the railway operators, for instance, creating a side market for insurance of railway companies in Sweden, complementary to the main railway transport market. The organization has also played a significant role in the capacity allocation process. Especially when conflicts have appeared, TO has served as an arena for discussion, coordination, and conflict resolution. In the Network for 2014, at least one of the capacity allocation conflicts was managed by the operators themselves when threatened by the time-consuming process of conflict resolution and risk for a onesided priority decision under the management of the STA (Vectura 2014; Fligstein 2001, 73). This is a clear example of the need for coordination in 41

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the market, and for operator companies to collaborate in order to handle the fact that they are competing. There was even discussion about assuming more of the state’s organizing efforts, although it was never implemented. The idea was that the TO would apply for capacity allocation from the transport administration and then manage the distribution and the priorities among its members internally. An outsourced application process in line with this proposal would then resemble the process within the former state monopoly, SJ, wherein this sole operator managed the timetables.

Conclusion: The Role of Organization in the Railway Market The creation of a railway market in Sweden was a highly complex and timeconsuming process involving the organization of a main market and several side markets. There was no long-term plan to be implemented, but the idea of organizing a market grew slowly from the formative moment of 1988 when SJ was turned into two organizations, separating operations from the owning, building, and maintaining of tracks. The process involved the stimulating of new competitors to enter the market and the creation of a large number of new organizations. Some of these autonomous organizations did not behave as expected, giving rise to unintended consequences and new problems. Other organizations, such as the trade association or firms offering to buy the newly created firms, entered the scene outside the control of the state organizers. The overall reaction was the addition of more organization. And the functioning of the market required ongoing management, an annual allocation of time slots, a continuous monitoring of the firms, and the consideration of new members and sanctions. Counterintuitive to common market ideals, this marketization resulted in more central planning, increased control, the use of distinctive rules, and further organization of vital market aspects by the state transport authorities— features usually associated with bureaucratic organizations. In Weberian theory, bureaucratic organization depends upon coordination through hierarchy, where rules ensure the uniformity in operation for the organization (Blau and Scott 2003, 32). Further, specialization is an element of bureaucratic organization, which is stronger in the new railway market than in the former monopoly firm; the division of labour is between different firms rather than within one firm. Organizational functions, performed earlier inside the boundaries of the former state-owned monopoly firm, were achievable after the market reforms only through continuous external communication and interaction with the 42

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market actors. Coordination of the operators involved a transformation of organizing from an intraorganizational activity to an interorganizational one, involving a plurality of relationships among the state administration and the operators: rules for entering the market, hierarchy-based decision making, membership-based market affiliation, monitoring of the performance of market actors, and the possibility of executing sanctions. As a part of a relationship, the rules for track access became more distinct and visible because they needed to be communicated to the external market actors. A similar observation applies to the capacity allocation process, being a detailed, complex, and onerous bureaucratic procedure in which detailed rules play a fundamental role (Johansson 1992). The use of different levels of conflict resolution and intricate and coercive rules for prioritizing among applications also emphasizes the importance and necessity of bureaucratic organization. It can therefore be argued that organization of the market is even more explicit and discernible than in most formal organizations. Inside formal organizations, decisions regarding day-to-day activities are likely to be coordinated in informal communication, often described as mutual adjustment, among people with the same organizational affiliation (Etzioni 1961). This form of coordination is considerably more difficult in a market, and sometimes undesirable from a competition perspective as well. Those to be organized were more distant and more autonomous, with their own interests and agendas. This situation calls for extensive and highly visible organization. The market required more bureaucracy than the former formal organization. The case presented in this chapter demonstrates the high level of complexity that market organizers may have to manage. It also shows that the intention to create competition reinforces the tendency towards more bureaucratic organization of the market. It may be argued that challenges for organizers were particularly great in this market, with its apparent tendencies towards natural monopoly. Yet the case sheds light on the profound efforts and work required to organize markets. At least it challenges the often ideologically driven view that markets tend, by definition, to decrease the need for organization and bureaucracy.

References Ahrne, Göran and Brunsson, Nils (2008), Meta-organizations. Cheltenham: Edward Elgar. Alexandersson, Gunnar (2010), The Accidental Deregulation: Essays on Reforms in the Swedish Bus and Railway Industries 1979–2009. Stockholm: EFI, Stockholm School of Economics.

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Daniel Castillo Ahrne, Göran and Brunsson, Nils (2011), Organization outside organizations: The significance of partial organization. Organization, 18(1): 83–104. Alexandersson, Gunnar and Hultén, Staffan (2010), The Swedish railway deregulation path. Review of Network Economics, 7(1): 18–36. Alexandersson, G., Hultén, S., and Fölster, S. (1998), The effects of competition in Swedish local bus services. Journal of Transport Economics and Policy 32(2): 203–19. Blau, Peter M. and Scott, W. Richard (2003), Formal Organizations. A Comparative Approach. Stanford: Stanford University Press. Castillo, Daniel (2009), Statens förändrade gränser. En studie om sponsring, korruption och relationen till marknaden (State Boundaries in Transition. A Study of Sponsoring, Corruption and Market Relations). Stockholm Studies in Sociology. N.S., Department of Sociology, Stockholm University. Coase, R. H. (1937), The nature of the firm. Economica, New Series, 4(16): 386–405. Du Gay, Paul (2000), In Praise of Bureaucracy: Weber—Organization—Ethics. London: SAGE. Etzioni, Amitai (1961), A Comparative Analysis of Complex Organizations: On Power, Involvement, and their Correlates. New York: Free Press. Fligstein, Neil (2001), The Architecture of Markets: An Economic Sociology of Twenty-First Century Capitalist Societies. Princeton: Princeton University Press. Helgesson, Claes-Fredrik (1999), Making a Natural Monopoly: The Configuration of a Techno-Economic Order in Swedish Telecommunications. Stockholm: EFI, Stockholm School of Economics. Helgesson, Claes-Fredrik, Kjellberg, Hans, and Liljenberg, Anders (2004), Den där marknaden: om utbyten, normer och bilder. Lund: Studentlitteratur. Hood, Christopher (1995), The New Public Management in the 1980s: Variations on a theme. Accounting, Organization and Society, 20(2–3): 93–109. Johansson, Roine (1992), Vid byråkratins gränser: om handlingsfrihetens organisatoriska begränsningar i klientrelaterat arbete. Lund: Arkiv förlag. Lindblom, Charles (2003), Marknad och samhälle. Stockholm: SNS Förlag. Mizutani, Fumitoshi, Kozumi, Hideo, and Matsushima, Noriaki (2009), Does yardstick regulation really work? Empirical evidence from Japan’s rail industry. Journal of Regulatory Economics, 36(3): 308–23. Posner, Richard A. (1969), Natural monopoly and its regulation. Stanford Law Review, 21(3): 548–643. Sahlin-Andersson, Kerstin (2001), National, international and transnational constructions of New Public Management. In Tom Christensen and Per Lægreid (eds), New Public Management: The Transformation of Ideas and Practice (pp. 43–72). Aldershot: Ashgate. Schleifer, Andrei (1985), A theory of yardstick competition. Rand Journal of Economics, 16(3): 319–27. Sobel, Joel (1999), A re-examination of yardstick competition. Journal of Economics & Management Strategy, 8(1): 33–60. Weber, Max (1978), Economy and Society: An Outline of Interpretive Sociology, Volume 1. Berkeley: University of California Press.

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Official documents Directive 2001/14/EC of the European Parliament and of the Council. Näringsdepartementet (Ministry of Enterprise). Available at: http://www.regeringen.se (accessed 6 October 2010). Regeringens proposition 1995/96:92: Nya förutsättningar för järnvägstrafiken. Regeringens proposition 1999/2000:78: Ändrad verksamhetsform för SJ m.m. Regeringens proposition 2008/09:176: Konkurrens på spåret. SOU 2008:92, Railway Competition Report [Konkurrens på spåret]. Svensk författningssamling: Railway Bill [Järnvägslag] 2004:519. Swedtrain. Available at: http://www.swedtrain.org. Trafikanalys (2014), ‘Utveckling av utbudet för järnväg och regional kollektivtrafik’, rapport 2014:14. Trafikverket (2011), ‘Avvikelsemeddelande 1 till Järnvägsnätsbeskrivning 2011’, dnr: F09-3438/TR00. Trafikverket (2012), ‘Network Statement [Järnvägsnätsbeskrivning] JNB’ 2012. Trafikverket (2014), ‘Fastställd tågplan 2014’. TRV2012/46558. Transportstyrelsen (2011), ‘Arbetsmaterial (working material)’, 16 Mars 2011. Transportstyrelsen (2009), ‘Vägledning: tillstånd i form av säkerhetsintyg del A och del B’, TS JV 2009:016. Transportstyrelsen (2009), ‘Branschanalys av järnvägsföretag 2008–2009’. Transportstyrelsen (2009), ‘Vägledning för att ta fram en järnvägsnätsbeskrivning’, TS JV 2009:020. Transportstyrelsen (2011), ‘Beslut avslut av revision Trafikverkets järnvägsnätsbeskrivning 2011’, TSJ 2010–392. Vectura (2014), ‘Tilldelning av kapacitet på Västra stambanan. Utvärdering av genomförd tågplaneprocess till tågplan 2014’. Objnr: 114844.

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4 Primary Healthcare What Type of Market and What Level of Organization? Anders Forssell and Lars Norén

In recent decades a wave of reforms, often summarized under the concept of New Public Management (NPM), has swept through the public sector, especially in the Western world. One significant part of these reforms has been the creation of markets whereby services that used to be more or less solely provided ‘in-house’ by public sector organizations came to be outsourced to competing private providers. Examples of these ‘marketization’ reforms can be found in some segments of infrastructure, such as railways, electricity, and waste collection and, increasingly, in welfare services—social services, education, and healthcare, for example (see e.g. Donahue 1989; Walsh et al. 1997; Bryntse 1996; OECD 2005; Forssell and Norén 2007). Many of the ideas of these reforms fit well with a model of governance that Johan P. Olsen called ‘the supermarket state’, in which the main role of the state is to provide services to its inhabitants and taxpayers, who are seen, not mainly as citizens, but as consumers and users (Olsen 1988). During the 1990s, researchers began to engage in what was sometimes a lively debate over ways to characterize and evaluate these reforms and the resulting markets (see e.g. Bartlett et al. 1994; Ferlie 1994; Walsh 1995; Boston 1995; Christensen and Lægreid 2001, 2007; Donahue and Nye 2002; le Grand 2007; Hartmann 2011). Some scholars dubbed these markets ‘quasi-markets’, thereby emphasizing the fact that funding still remained with the public sector, although actual provision was outsourced to external providers (see e.g. le Grand 1991).

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Much of the debate centres on ideas and theories from political science, public administration, and, not least, economics. In this chapter, however, we take mainstream marketing theory as the starting point, as we analyse one specific type of market that was created as part of the NPM wave of reforms. In marketing theory as presented in textbooks in the field of marketing and studied by millions of students in business schools the world over, markets are often taken as a given. Therefore mainstream marketing theory seldom has an elaborated view on markets per se. Rather, starting from implicit assumptions about the way in which markets work, it focuses on the way markets shape the behaviour of organizations and individuals acting in markets. Here it provides a rich account of market practices, particularly practices in consumer markets: markets in which organizations sell products and services to individual consumers. Marketing theory normally takes the perspective of the marketing firm and provides it with advice, tools, and recipes for ways to win customers in markets characterized by competition among sellers—tools that are actually used on a broad scale in existing consumer markets. The marketing literature also describes the ways in which sellers and buyers can change their circumstances by forming alliances, chains, cooperatives, or other associations—or even by merging with each other. This part of marketing theory points clearly towards the organizational aspects of markets and, in particular, to the way market actors—buyers, sellers, or both—sometimes cooperate and collaborate. We use marketing theory in this chapter to analyse the practices and organization of a market for primary healthcare created by Sweden’s 2009 marketization reform. We demonstrate that this market, when analysed through the lens of mainstream marketing theory, can be characterized both as organization and market; rather than analysing it in terms of market or organization, or as a ‘hybrid’ such as ‘quasi-market’, we believe it is more fruitful to analyse it as a market with a certain level and kind of organization.

Data Collected Most of the data for this study were collected from written documents from three Swedish regions: the small counties of Uppsala and Halland and the large region of Västra Götaland. This information was supplemented by interviews with people in Halland and Västra Götaland who were involved in the processes of marketization: two politicians and eight key officials from the two county councils, the managers of six healthcare centres (HCC), and three representatives of different patient associations.

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Organizing a Market for Primary Healthcare Sweden’s regional governments—the 21 county councils, all of which have their own politically elected councils and their own power of taxation—are responsible for most of the healthcare system. Hospitals provide the more specialized, resource-demanding medical treatment, whereas primary healthcare focuses on the needs for ‘such basic medical treatment, caregiving, preventive work, and rehabilitation that do not require the medical and technical resources of hospitals or any other particular competence’ (SFS 1982:763, §5). At the beginning of the 1970s, healthcare in Sweden began to be organized into HCCs run by the county councils (Hjortsberg and Ghatnekar 2001; Saltman 1994; Swartling 2006), a solution also chosen in Finland and, to some extent, in Great Britain. An HCC typically comprises a number of general practitioners, nurses (who often specialize in specific diagnoses, such as diabetes), physiotherapists, biomedical analysts, and other specialists. HCCs are intended to be the first link in the care chain. They are supposed to serve as gatekeepers for the more specialized and expensive healthcare services provided by hospitals by receiving all patients in need of help, with the exception of emergency patients, and by referring to hospital only those patients in need of specialized care. Healthcare is financed mainly by taxes, but patients pay a nominal fixed fee for visits to an HCC, with a maximum sum for any 12-month period (‘high-cost protection’). Prior to the recent market reform analysed in this chapter, HCCs were based on a community model by which care centres were responsible for geographical districts, and almost all HCCs were owned and run by the county councils. This system started to change during the 1990s when some county councils began contracting out a number of HCCs to private operators. Then, beginning in the early 2000s, some county councils started to introduce choice models similar to those already used for schools. In 2009, general rules for this model were set in the national legislation by Lag Om Valfrihetssystem (LOV: Act on System of Choice in the Public Sector; SFS 2008:962; see also Anell 2011). According to LOV, the market for primary healthcare is designed as a voucher market. The person in need of healthcare acts as a buyer and can choose from a number of sellers of healthcare. Except for paying the nominal fee, the buyer is supplied with a fictional voucher that the seller can exchange for money at the public organization responsible for funding the services in question (in this case, the county council). The county councils decide all matters of membership, rules, and monitoring in the primary health market. In making these decisions, however, councils must comply with some general rules in the LOV law, according to which the markets concerned are basically open to all prospective sellers once they 48

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agree to follow the rules established by the county councils. When setting the rules, the county councils must consider the general principles for systems of choice (nondiscrimination, equal treatment, proportionality, transparency, and mutual recognition (SFS 2008:962)), but they are free to decide the other specific requirements that healthcare centres should meet. After a seller is accepted, a contract is initiated between the county council and the seller, and from that date on, the seller is free to sell its services on the market. The county councils have published rulebooks—the written documents that comprise the primary source of data for our analyses. Rulebooks contain the requirements or specifications placed on the HCCs, and are central to the organization of a consumer market for primary healthcare. The rulebooks contain the drawings for this market, through which the leading roles are assigned to the main actors (i.e. the patients, the county councils, and, in particular, the HCCs).

The Rulebooks The following brief account serves only to exemplify the content of the rulebooks and how they describe the organization of the market.1 The actual rules consist of many pages and great detail. The text of rulebooks is structured differently in different counties, but they all deal with four aspects of the market: the specification of the product of the HCCs the specification of the patients’ rights to choose the specification of the principles of payment the specification of a system for followup and evaluation of quality. THE SPECIFICATION OF THE PRODUCT OF THE HCCs

This part of the rulebook specifies the tasks of the HCC and emphasizes that the HCCs should work according to the relevant legislation. The document then goes on to prescribe how the HCCs should cooperate with the rest of the healthcare system and with society in general. More detailed and specific demands follow. In Halland, for example, an HCC should offer certain medical specialities such as child healthcare and rehabilitation, but aside from that, it is free to determine the medical services to be offered. In Västra Götaland, the demands are more detailed for specific groups of patients and for the medical specialties that must be available. HCCs should command certain basic resources. In Västra Götaland, for instance, the HCCs should have access to nurses specializing in diabetes, asthma, and hypertonia. In Halland, the 1

A more detailed version of the empirical study is presented in Forssell and Norén 2012.

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requirements for an HCC include a specialist in general medicine and a district nurse—traditional HCC requirements. It is not necessary for all resources to be offered in-house; it is possible to hire external specialists, enabling an HCC to offer all the specialties and services associated with a full-service HCC. THE SPECIFICATION OF THE PATIENTS’ RIGHT TO CHOOSE

In this section, the rules state the patients’ right to choose. In some counties, patients can choose and change between HCCs as often as they want; in other counties, this right is limited to a certain number of changes per year. The documents also state that an HCC cannot deny a person the right to receive healthcare. This means that the HCC is not allowed to select and limit its stock of patients. Patients do not have to make an active registration; if they don’t, they will be automatically registered with the nearest HCC. THE SPECIFICATION OF THE PRINCIPLES OF PAYMENT

The rulebook also contains a section on the principles of payment. The basic principle is that payment follows the patient, and a capitation system is used in both counties, whereby every registered patient brings a certain amount of money. In Halland, a fixed, age-weighted sum comes to the HCC with the registered patient. Västra Götaland has a similar model, but it also has a socioeconomic dimension. In addition to these models, some limited payment is tied to the achievement of certain targets. In Västra Götaland, for example, quality targets such as reception of patients at the clinic are considered, and payment for meeting such targets can add up to 3–5 per cent of the total budget for primary healthcare. Halland, on the other hand, makes a deduction if certain quality targets are not met. THE SPECIFICATION OF A MONITORING SYSTEM

The rulebooks specify the type of annual statistical and other information that the HCC should deliver to the county council. The rules also specify a number of indicators intended to serve as the basis for an evaluation of the quality of services provided by a particular HCC. These indicators and targets are based on a model for quality systems and patient security released by the National Board of Health and Welfare (Socialstyrelsen 2005). Medical indicators may tell how internal processes should be executed; HCCs in Halland, for instance, must participate in the national diabetes register. Organizational indicators may outline issues such as how HCCs should cooperate with other parts of the healthcare sector. Patient-centred indicators measure how patients are received and if and how they are participating in treatment. The results from these reports are used to evaluate the work of HCCs, and they serve as a basis for discussions between the individual HCCs and the officers from the county councils about results and outcomes. 50

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HCCs are expected to make patient-centred indicators accessible to patients when they are choosing among HCCs. In summary, we find all the organizational elements presented in the introductory chapter—membership, rules, monitoring, sanctions, and hierarchy—in the market for primary healthcare as designed by the rulebooks. The contract between an HCC and the county council can be compared to a membership, because it gives access to the market for the HCC, the rulebooks contain the rules, and there are monitoring and sanctions if a seller should fail to meet the rules. And because the county councils alone decide on the rules that the members must obey, there is clearly a hierarchy. Explicitly, the rulebooks deal mostly with the HCCs, which are the sellers in this market, and the patients, who are the buyers of primary healthcare. But implicitly, they also say a great deal about the county councils; the councils write the rules, pay for the services provided, and provide many of the services through their ownership and operation of many HCCs.

Primary Healthcare as a Consumer Market In this section we contrast and compare the ideas in the rulebooks with the theories on marketing regarding the market roles of buyers and, in particular, sellers. We base our comparison on two widely used textbooks that we consider representative of mainstream marketing theory. Two European authors, David Jobber and John Fahy (2009), wrote the first one, and the second is a Swedish edition of a textbook by two American authors, who for their latest version have added a European co-author (Kotler et al. 2013). We contrast what the textbooks say with what the rulebooks say.

The County Councils The county councils play multiple roles in the market for primary healthcare. They play the role of seller, because many—sometimes most—HCCs are still owned and run by councils. They act as payers of healthcare services. The role of payer, however, is seldom discussed in the textbooks, and, in practice, a county council’s role as payer is a passive one—the decision to buy is taken by the patients, and once a patient uses the services of an approved HCC, the county council must pay. Although their role is underdeveloped in the mainstream marketing literature, county councils do, of course, play a major role as market organizers. Yet Kotler et al. (2013, 76, 89) mention only briefly that authorities are one of several stakeholders in the macro-environment, and Jobber and Fahy (2009, 39) give a similarly brief discussion. Thus we confine our discussion to the two 51

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basic market roles—the buyer and the seller—and here we count the county councils among the sellers.

The Buyers The idea of the rational buyer is inherent in most theories on consumer markets and is emphasized in the mainstream textbooks on consumer behaviour. There the basic decision model is always one of rational decision making, whereby the customer becomes aware of a need, looks for information, and evaluates the options before taking the decision (see e.g. Jobber and Fahy 2009, 59 ff.; Kotler et al. 2013, 150ff.). It is clear that the seller should provide the necessary information for consumers to make informed decisions, which follows from consumer legislation and from industry standards of corporate social responsibility. The rulebooks explicitly state that payment follows the patients, which signifies that the patients are authoritative and qualified buyers. Implicitly, the rulebooks also portray patients as rational buyers who are capable of choosing among a range of sellers and who will change to a competing seller if dissatisfied with their first choice. For a buyer to be able to choose rationally, it is necessary to have access to relevant information on sellers. On this point, the rulebooks state that some of the information provided by the followup and evaluation of the quality of the HCCs should be available to patients, particularly information regarding the patient-centred indicators of the quality evaluations. The rulebooks also consider that some patients are unwilling to assume the role of rational buyer. For these unwilling buyers, the rules state that they will be registered with the nearest HCC. For the sellers, this is a source of uncertainty and risk: passive patients suddenly can turn into active buyers who decide to switch away from an HCC. According to the textbooks, the whole idea of the marketing process is basically to convert unwilling buyers into willing ones. In particular, this is the function of promotion—to convince and persuade consumers to become actual customers and buyers. Furthermore, any seller always runs the risk of losing customers, and the textbooks present many tips and tricks on ways to bind customers closer—by creating loyalty through strong brands, for example, or through customer clubs that offer certain advantages.

The Sellers In the textbooks, consumers and their behaviour are the starting point for the whole marketing process. It is consumer behaviour that informs and determines the marketing activities of a seller. Moreover, marketing activities build 52

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on an understanding of consumer behaviour and, fundamentally, of the needs and wishes of the consumers. The most basic task of the seller is to satisfy the needs of the customer, as stated in textbooks in sentences such as ‘company activities should be focused on providing customer satisfaction’ (Jobber and Fahy 2009, 3) or ‘Today marketing is about much more than about selling—it is about satisfying the needs of customers’ (Kotler et al. 2013, 11). The principle of payment following the individual patient, as stated in the rulebooks, is intended to give the HCCs a strong incentive to convince people to register with them. And because patients are allowed to change from one HCC to another, and are, in fact, encouraged to do so if dissatisfied, the HCCs have an even stronger incentive to keep the buyer satisfied. Thus the principle of payment following the patient aims at encouraging the HCCs to focus on the needs and wishes of the customers being satisfied. According to the textbooks, the most fundamental marketing activities can be summarized as the STP process: segmenting, targeting, positioning. The first step, segmenting, involves an analysis of the market and its division into sections or segments of consumers with some important characteristic(s) in common: age, gender, geography (location), or lifestyle, for instance. The next step is to target one or several of these segments, and the third step is to create a competitive position for the seller within the targeted segment(s). The position is achieved by differentiating the seller and its product from its competitors by using the ‘marketing mix’. In its basic version, the mix comprises four tools: product, price, place, and promotion. The previous system for primary healthcare was built on a division of the county region into districts, and each district was served by one HCC. According to the rulebooks, HCCs are not allowed, under the voucher system, to select their patients, for instance (in spite of the textbook advice) to segment the market and then target the most profitable segment (Jobber and Fahy 2009, ch. 5; Kotler et al. 2013, 57). The main restriction is the fixed price; it impedes the HCCs from using price as a means of competition, as recommended in the textbooks’ marketing mix model (Jobber and Fahy 2009, ch. 8; Kotler et al. 2013, 58ff.). Yet, depending on the system of payment used, an HCC may, by choosing an appropriate location, target a market segment that earns it more money than another. When pay is based largely on capitation, for instance, an HCC has an incentive to target a geographic area inhabited primarily by young, healthy patients who are seldom ill, and when they are ill, present with minor complaints such as colds—rather than an area with older patients who come often, present with more severe and difficult symptoms, and consume more care-provider time. Therefore, although their price is fixed, there is a possibility for HCCs to affect their revenues by choosing the right location and thus, in practice, 53

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targeting a select segment. In other words, another of the tools of the marketing mix—place—can be used. And if we interpret this tool broadly to include opening hours, place is probably the most important competitive tool in this healthcare market. Another tool of the marketing mix—promotion—is more or less absent from the rulebooks. The rulebooks state, however, that some of the evaluations of HCCs should be available to patients. This information may well serve as promotion for a successful HCC, drawing attention to it and thus convincing people to register with it. The absence of other means of promotion in the documents does not mean that they are not allowed. And there are signs that they may become more widely used in the future. We know that this occurs in countries such as the USA, where markets for primary healthcare have existed longer. Furthermore, if we look at Sweden’s school market, in which a voucher model has been prevalent for longer than it has in the primary health market, we observe that all sorts of common promotion tools—advertisements, exhibitions, events, social media, for instance—are used to attract customers. And it is reasonable to expect that HCCs will increasingly employ the promotion element of the marketing mix. The rulebooks concentrate on the services that HCCs must offer to patients. This ‘product’—to use textbook terminology (Jobber and Fahy 2009, 133f.; Kotler et al. 2013, 267ff.)—is highly standardized in the documents, but the requirements define a minimum level. Nothing prevents HCCs from adding services—such as a gym—to the core product of the rulebooks. According to the textbooks, the analysis of competitors is always a critical part of a company’s strategy, and textbooks emphasize that ‘the key to superior performance is to gain and hold a competitive advantage’ ( Jobber and Fahy 2009, 323). The word ‘competition’ is seldom used in the rulebooks, but because patients can change HCCs and are, in fact, encouraged to do so if dissatisfied, the existence of competition between HCCs is certainly implied as a taken-for-granted cornerstone. The mechanism of competition is supposed to improve the work of the HCCs, providing patients with a reason to prefer one HCC to another or one HCC to the emergency units of the hospitals. Although not explicitly articulated, a conclusion exists between the lines: if an HCC fails in the competition arena, it will not be able to stay in business. This is very much in line with textbook messages, although they also avoid explicitly stating this conclusion.

What Type of Consumer Market Is Primary Healthcare? In conclusion, the primary health market works largely the same way as consumer markets described in marketing theory do. There are a few deviations, 54

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Primary Healthcare Table 4.1. The marketing process and tools according to the textbooks contrasted with what the rulebooks say. Differences in italics Textbooks

Rulebooks

Buyers: Choose and change among sellers

Buyers (patients): Some choose and change among sellers, others do not

Pay Sellers/sellers: Should segment the market and target segment(s)

Do not pay Sellers/sellers (HCCs): Are not allowed to select patients, and therefore not allowed to segment market and target segment(s)

Should position itself by using marketing mix

Should position itself by using a limited marketing mix

Product is decided by seller Price is decided by seller Place/availability is decided by seller Promotion is decided by seller

Product is fixed, services can be added Price is fixed Place/availability is decided by seller Promotion is decided by seller; some information is mandatory and reported

however, due to the special way of organizing this healthcare market, as summarized in Table 4.1. The patients who do not choose among competing HCCs must still be registered with one. This is a key difference from most consumer markets, where unwilling buyers simply are left out. HCCs are clearly supposed to act as competitors—increased competition is, after all, the main idea of the reform—and there are signs that they also see themselves in this role. Some unintended consequences of the healthcare market reform have emerged, for example the documented tendency for HCCs to target selected customer groups (Riksrevisionen 2014). This selective focus should come as no surprise, because competing sellers normally place their own interests first. Thus, in this way, the HCCs act like ‘normal’ market actors. The HCCs can freely follow only some of the basic textbook prescriptions: the marketing-mix tools of place and promotion. They are much more restricted in using the marketing-mix tools of product and price, because these tools are usually fixed by the county councils.

Primary Healthcare as Formal Organization The primary healthcare market deviated from the markets described in marketing theory because it was organized differently and was more highly organized. We can find organization aspects in the primary healthcare market in the same way that we can find market aspects in it. But if there is a high level 55

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of organization in a market, an alternative approach is to see it as a formal organization rather than a market. In this section, we change perspective: instead of viewing primary healthcare as a consumer market, we now view it as a form of organization. We turn again to the marketing literature, where we find that business chains and franchise systems are discussed, and that they are applicable to our primary health case. The marketing textbooks have sections on chains and franchises, but here we base our discussion on Bradach’s (1998) large study of American chains and franchise systems. A chain is a business that owns and runs several units that operate under the same name but in different locations. The largest chains are transnational companies such as McDonald’s, Zara, and IKEA. Some companies, for example the multinationals Pizza Hut, 7-Eleven, and several international hotels chains such as Holiday Inn, use a franchising system. Franchisees typically own their businesses but operate under the brand name of a chain. This arrangement provides certain benefits regarding marketing, administration, purchases, and other activities, and involves the pooling of resources, which creates economies of scale. From a marketing point of view, it is important that all operators look alike and behave in a uniform fashion. Consequently, in order to be accepted as a franchisee, an operator must agree to follow more or less detailed rules regarding operations and to pay a fee for using the brand name and the pooled resources (Bradach 1998, 3f.). Although legally not a formal organization, the franchise has a clear identity and hierarchy that fit common definitions of formal organization. Some chains run only their own operational units, others run only franchise operations, and yet others have both types of operations within the same chain. Bradach called this latter form the plural form (Bradach 1998, 9f.); it constitutes the dominant form among restaurant chains, but is also common among hotel chains. Although there are business chains in many industries— in the distribution of goods such as cars or clothes, for example—it is the chains involved in personal services, such as restaurants and hotels, that are most similar to HCCs, because they provide more or less standardized personal services to individuals. According to Bradach (1998, ch. 2), the first significant management challenge associated with chains and franchises is the addition of units. Because the optimum size of a unit is small, the only way to grow and increase revenue is by adding new units. Imagine concentrating all McDonald’s restaurants in a city into one giant McDonald’s restaurant. It contradicts the very essence of the business format: fast-food restaurants should be situated in many locations in order to be easily accessible for customers whenever they get hungry. The next challenge is maintaining uniformity among units, including the entire product offering—the facilities and the delivery process—not merely 56

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the core services such as food in the case of a restaurant. A third challenge concerns the ability to provide local responsiveness. Because circumstances differ among areas and customer groups, it is critical that units be able to respond to local demands, without abandoning the basic concept. A fourth big management challenge is readiness for system-wide adaption when needed. This challenge arises from external changes in the market, for instance, or in the broader political, social, cultural, and economic environment. These marketing textbook descriptions of chains and franchise systems show clear similarities with the healthcare system discussed in this chapter. If we assign the county councils the role of proprietor of the brand name, ‘healthcare centre’, the rulebooks can be compared to the operation rules of a chain. Those rules serve to maintain the quality of operations, and because the rules are the same for all units, they serve to maintain uniformity among all HCCs. There is, however, some room for variation—in facilities and extended services, for instance. Because there are both HCCs that are owned and run by the county councils and HCCs that have other owners, this system resembles what Bradach called the plural form. The rules are flexible enough to uphold a degree of variation among units, which allows them to be responsive to local conditions. The HCCs are able to decide on location, on opening hours, and on services in addition to the standardized assortment. As for the fourth management challenge, systemwide adaption, the county councils must have the capacity to respond to any new directives from the National Board of Health and Welfare and other government organizations, but also to take initiatives on their own. The primary healthcare system resembles a chain in other ways: the county councils specify the services that the HCCs must provide and the type of professional specialists who should be providing the services, HCCs must collaborate when the councils monitor them, and there are rules for payments and customer rights. The rulebooks also state that the HCCs must cooperate with the rest of the healthcare system, including hospitals and parts of the healthcare system that are not involved in primary healthcare. On issues such as these, there are strong and even binding recommendations and restrictions for the HCCs. Overall, the county councils function as the mother organization of a chain and the HCCs as units of that chain. When it comes to the addition of new units, primary healthcare differs from Bradach’s model. Because all HCCs that comply with the requirements are given contracts, the county councils cannot really determine the number of HCCs; nor can they decide on the location of HCCs, except for those units that they own and run themselves.2 The units of the chains that Bradach 2 It is essential for a clinic to obtain a contract as an HCC, otherwise it will not have access to public funding. The clinics that choose not to seek a contract are extremely few.

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Anders Forssell and Lars Norén Table 4.2. A comparison between franchises and chains according to Bradach (1998) and the county councils as the ‘mother’ of a chain of HCCs. Differences marked in italics Franchises and chains

The county councils

Decide on the addition of units

Decide only marginally on the addition of units and not at all on location

Control the uniformity among units Give room for local responsiveness Responsible for system-wide adaption

Control the uniformity among units Give room for local responsiveness Responsible for system-wide adaption

studied considered other chains to be their main competitors, although a small amount of competition within units of the chain could not be ignored.

What Type of Organization Is Primary Healthcare? In Table 4.2, we outline the four management challenges that Bradach (1998) considered characteristic of chains and compare them with the relationships between the county councils and the HCCs. It is only on one of these characteristics—the addition and localization of units—that the relationships between the county councils and the HCCs differ from the franchise chain. On the other three characteristics, the county councils act similarly to the mother company of a franchise chain. Thus we have good reason to conclude that primary healthcare is designed as an organization and, more specifically, as a chain of the plural form (Bradach 1998, 9f.). Primary healthcare faces no serious competition from other ‘chains’, yet it is hardly a monopoly. There are substitutes for HCCs in the form of hospital emergency units, and some patients turn to them for their healthcare needs. Importantly, one purpose of reforming primary healthcare was to attract patients—buyers—from the emergency units of hospitals to the HCCs, because that would be a less costly option for the counties. One can say that competition exists between HCCs and the hospital emergency units in the same area, therefore, although hospital emergency units are unwilling competitors.

Market or Organization? Or Market and Organization? Did the organizers of primary healthcare create a market? Our answer is ‘yes’, because the healthcare now contains not only exchange between buyers and sellers, but also competition among the sellers. Did they create an organization? Our answer is also ‘yes’. Primary healthcare can be characterized as an organization of the plural chain type. Is this a contradiction? Well, if we consider 58

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markets and organizations as constituting a true dichotomy, as Coase (1937) and Williamson (1973) did, then it seems to be one. In recent decades, however, after having observed trends of vertical disintegration (outsourcing) and new forms of collaboration among business firms, and marketization reforms in the public sector, a debate has begun. It has focused on discrete structural alternatives to the dichotomous pair of market and organization (Williamson 1991), and forms such as strategic alliances, joint ventures, supply chains, networks, and contracting out have been described and analysed (see e.g. Child 2005; Gadde and Håkansson 2001). In the politically initiated markets of the type discussed in this chapter, the concept of quasi-market (see e.g. le Grand 1991; Ferlie 1994; or Bartlett et al. 1994) or even quasi-organization (Walsh 1995) has emerged. Le Grand (1991) and Ferlie (1994) used the concept of quasi-market to describe markets in which consumers pay nothing or pay only marginally for services, such as in the primary care case we described. This is not an uncommon form of market. Consider the so-called ‘buying centre’ perspective; Wind and Webster (1972) and Spekman and Grønhaug (1986) noted that when organizations are involved in buying, the actual user or consumer is often separated from the buyer, and even from the people who make the purchase decision and pay. An employee in need of a new computer, for instance, neither decides on the procurement nor pays for it—a situation that is characteristic of a large chunk of the computer market. The market for children’s clothing serves as a similar example: When parents buy clothing for their children, the payer is not the consumer. Walsh went even further in defining a quasi-market: The distinction between organisations and markets has become less valid as markets come to be structured in a way that makes them resemble organisations and organisations come to be structured in a way that makes them resemble markets. Just as within organisations we can now conceive of various forms of quasi-markets operating, for example through the use of internal trading processes, so the market can be understood as quasi-organisation. Market and organisation are then seen as being the ends of a continuum rather than binary opposites. (Walsh 1995, 45–6)

Unlike writers such as le Grand (1991) and Ferlie (1994), Walsh used the term ‘quasi-organisation’ and reserved the term ‘quasi-markets’ for those organizational arrangements that introduced internal trade among various parts of the organization (see Figure 4.1). Although Walsh was studying changes in the public sector, his continuum model is not confined to public organizations. This is logical, because the term originated with Child and others, who used the ‘quasi’ prefix to characterize several forms of interorganizational relations that they found among companies across many sectors, such as the building 59

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Quasi-market

Quasi-organization

Market

Authority

Authority and Exchange

Exchange and Authority

Exchange

Figure 4.1. The organization–market continuum. Source: Walsh 1995: 46.

industry. And quasi-organization applies to the semi-hierarchical forms they found within companies (see Walsh 1995, 45). One problem with this terminology arises from the use of the prefix ‘quasi’. According to the Longman dictionary of contemporary English (2012), ‘quasi’ means: ‘like something else or trying to be something else’. A quasi-market is therefore something that tries to be a market, which implies that there are ‘true’ markets in contrast to ‘quasi’ or trying-to-be markets, and ‘true’ organizations in contrast to ‘quasi’ organizations. This leads us back to the dichotomy of two true forms in opposition to quasi forms. One way of solving this issue would be to treat both market and organization as ideal types, and then analyse existing markets (and organizations) according to the extent to which they exhibit elements of the ideal types. This is basically what Walsh did, although it is not clear to us whether he saw the two extremes as ideal types or as types that actually existed. And this question (Are we talking about ideal types or reality?) could be extended to any analysis of markets and organizations in dichotomous terms—that is, as market or organization. In real life, we can find formal organizations without internal markets, but it is difficult to find any market that is completely without organization; all markets are more or less organized. This is as true for financial markets, such as exchanges, as it is for the consumer markets of retailing, for the big trade fairs, or for all other markets that we know from real life (and discuss in this volume). But it seems awkward and confusing to call all existing markets ‘quasi-markets’ and reserve the term ‘market’ for something that exists only as an ideal. Instead of favouring this model of binary opposites, as Coase originally stated, or choosing a continuum model with the organization and market as the end points, as Walsh proposed, we propose a model that does not go from market to organization; instead we understand and characterize a market in relation to its level of organization, a continuum from high to low (see Figure 4.2). The market for primary healthcare discussed in this chapter is clearly of the highly organized type. To illustrate the other extreme—a market with a low level of organization—we could take the market on the bulletin board in a 60

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Primary Healthcare High level of organization Feature all or many organizational elements (membership, rules, monitoring and sanctions, hierarchy)

Low level of organization Feature few or no organizational elements

Figure 4.2. Market continuum: High to low level of organization.

neighbourhood grocery store where neighbours advertise, sell, and buy such items as used children’s winter gear. If we use the organization elements— membership, rules, monitoring, sanctions, and hierarchy—as analytical tools to analyse these two markets, we end up with Table 4.3.

Table 4.3. Two examples of market organization Market

Primary healthcare

Neighbourhood sales

Membership Rules Monitoring Sanctions Hierarchy

Strict demands on participation Written rules Rule setter monitors Strong, according to rules Politicians’ decisions are binding for all HCCs

Anyone is allowed to participate Conventions on sales None besides buyer and seller Weak, if dispute legal process None

These two markets clearly differ in their level of organization; primary healthcare is positive on all criteria; neighbourhood sales are weak or negative on all criteria. Therefore primary healthcare is obviously more organized than is the market for neighbourhood sales. This market is of small economic importance, however. The markets that most of us deal with in everyday life, as individual or organizational buyers and sellers, are almost all organized, and often highly organized. To be specific, the highly organized market for primary healthcare provides a crucial service for everyone in Sweden, whereas the neighbourhood market with a low level of organization does not. The market for primary healthcare is probably unique in many ways, but not due to the fact that it is highly organized, as other chapters in this volume amply illustrate. Rather, it is more difficult to find markets with a low level of organization. Most important markets are organized, and rather more than less so. Thus the dichotomy between market and organization leads us in the wrong direction. Instead of being a matter of market or organization, it is a question of the type of market and the level of organization. 61

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References Anell, A. (2011), Choice and privatisation in Swedish primary care. Health Economics, Policy and Law, 6(4): 549–69. Bartlett, W., Propper, C., Wilson, D., and le Grand, J. (eds) (1994), Quasi-Markets in the Welfare State: The Emerging Findings. Bristol: SAUS. Boston, J. (ed.) (1995), The State under Contract. Wellington: Bridget Williams Books. Bradach, J. L. (1998), Franchise Organizations. Boston, MA: Harvard Business Press. Bryntse, K. (1996), The purchasing of public services. Exploring the purchasing function in a service context. European Journal of Purchasing & Supply Management, 2(4): 193–201. Child, J. (2005), Organization: Contemporary Principles and Practice. Oxford: Blackwell Publishing. Christensen, T. and Lægreid, P. (eds) (2001), New Public Management: The Transformation of Ideas and Practices. London: Ashgate. Christensen, T. and Lægreid, P. (eds) (2007), Transcending New Public Management. The Transformation of Public Sector Reforms. London: Ashgate. Coase, R. (1937), The nature of the firm. Economica, 4(16): 386–405. Donahue, J. D. (1989), The privatization Decision: Public Ends, Private Means. New York: Basic Books. Donahue, J. D. and Nye, J. S. Jr (eds) (2002), Market-Based Governance: Supply Side, Demand Side, Upside, and Downside. Washington, DC: Brookings Institution Press. Ferlie, E. (1994), The creation and evolution of quasi-markets in the public sector: Early evidence from the National Health Service. Policy & Politics, 22(2): 105–12. Forssell, A. and Norén, L. (2007), (The difficult art of) outsourcing welfare services: Experiences from Sweden and New Zealand. In T. Christensen and P. Lægreid (eds), Transcending New Public Management: The Transformation of Public Sector Reforms (pp. 203–20). London: Ashgate. Forssell, A. and Norén, L. (2012), Kunden i kundvalsmodellen. Om konstitueringen av en kund i primärvården. Offentlig förvaltning—Scandinavian Journal of Public Administration, 16(2): 25–43. Gadde, L.-E. and Håkansson, H. (2001), Supply Network Strategies. Chichester: Wiley. Hartmann, L. (ed.) (2011), Konkurrensens konsekvenser. Vad händer med svensk välfärd? Stockholm: SNS Förlag. Hjortsberg, C. and Ghatnekar, O. (2001), Health Care Systems in Transition: Sweden. Brussels: The European Observatory on Health Care Systems. Jobber, D. and Fahy, J. (2009), Foundations of Marketing. London: McGraw-Hill. Kotler, P., Armstrong, G., and Parment, A. (2013), Marknadsföring: teori, strategi och praktik. Harlow: Pearson. Le Grand, J. (1991), Quasi-markets and social policy. The Economic Journal, 101(408): 1256–67. Le Grand, J. (2007), The Other Invisible Hand: Delivering Public Services through Choice and Competition. Princeton, NJ: Princeton University Press. OECD (2005), Modernising Government: The Way Forward. Paris: OECD Publishing.

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Primary Healthcare Olsen, J. P. (1988), Administrative reform and theories of organization. In C. Campbell and G. Peters (eds), Organizing Governance: Governing Organizations (pp. 233–54). Pittsburgh, PA: University of Pittsburgh Press. Riksrevisionen (2014), Primärvårdens styrning—efter behov eller efterfrågan? Stockholm: Riksdagens interntryckeri. Saltman, R. (1994), Patient choice and patient empowerment in Northern European health systems: A conceptual framework. International Journal of Health Services, 24(2): 201–29. Socialstyrelsen (2005), Modell för utveckling av kvalitetsindikatorer. (Rapport från Info VU-projektets nätverk för kvalitetsindikatorer.) Stockholm: Socialstyrelsen. Spekman, R. and Grønhaug, K. (1986), Conceptual and methodological issues in buying centre research. European Journal of Marketing, 20(7): 50–63. Svensk Författningssamling (SFS), 1982:763 (1982), Hälso- och sjukvårdslag. Stockholm: Riksdagen. Svensk Författningssamling (SFS), 2008:962 (2008), Lag om valfrihetssystem. Stockholm: Riksdagen. Swartling, P. G. (2006), Den svenska allmänmedicinens historia. Läkartidningen, 103(24–25): 1950–3. Walsh, K. (1995), Public Services and Market Mechanisms. Basingstoke: Macmillan Press. Walsh, K., Deakin, N., Smith, P., Spurgeon, P., and Thomas, N. (1997), Contracting for Change. Contracts in Health, Social Care, and Other Local Government Services. Oxford: Oxford University Press. Williamson, O. E. (1973), Markets and hierarchies: Some elementary considerations. American Economic Review, 63(2): 316–25. Williamson, O. E. (1991), Comparative economic organization: The analysis of discrete structural alternatives. Administrative Science Quarterly, 36(2): 269–96. Wind, Y. and Webster, F. E. (1972), On the study of industrial buying behaviour: Current practices and future trends. Industrial Marketing Management, 1(4): 411–16.

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5 Experience-Based Learning and Market Change Mats Jutterström

This chapter focuses on the content and change of market organization. Specifically, I address the questions of why the organization of individual markets may change more radically, and what kind of shifts such change implies? From the perspective of the ‘perfect’ market model, deeply rooted in neoclassical economics, and its often-claimed normative power over individual markets (Callon 1998; Czarniawska 2004; MacKenzie 2006; MacKenzie et al. 2007), one would suspect that market forms would not change. Markets would remain relatively stable, with minimal organization in the form of rules, hierarchy, membership, monitoring, and sanctions. The market for snow clearance within Stockholm Municipality,1 however, is an example of the opposite. Here, the type and amount of market organization changed significantly over time. The study reported in this chapter demonstrates how Stockholm Municipality went from sole producer to buyer by outsourcing the specific service—with a general expectation that the market would automatically work according to the ‘perfect’ market model. When it did not, the market organization changed from relatively little initial organization to, eventually, a somewhat bureaucratized market. Attempts at increasing the number of suppliers in earlier reorganizational phases of the time span studied shifted to extensive monitoring of contracted sellers in later phases, partly through the use of sophisticated technology. This overall shift implied a gradual step away from the ‘perfect’ market ideal as a blueprint for reorganization. The reason proposed for the substantial organizational changes, as developed at the

1 Stockholm Municipality comprises several districts, including the inner City of Stockholm. Greater Stockholm consists of Stockholm Municipality and other surrounding municipalities.

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end of this chapter, is one of experience-based learning. The market model lost some of its performative power over the individual market organization through higher levels of experience-based learning, opening it up for more unorthodox solutions.

The Particular Market Failure The perceived problem that drove much of the reorganization in this empirical study was the small number of sellers. This market problem can be derived from the ‘perfect’ market ideal of neoclassical economics. According to this model, competition is built on the assumption that buyers can choose among numerous sellers. When individual markets deviate from the model in this respect, they are often described as suffering from ‘market failure’. The number of sellers (or buyers) in an individual market and their respective shares of total production are typically referred to with the concept ‘market concentration’ (Bain 1956; cf. Tirole 1988). A high concentration implies few sellers—or one to a few sellers in a dominant position. In the economics literature, this market failure is described as elemental. Williamson (1975), for example, argues that markets fail under one or more conditions: information asymmetries, opportunistic behaviour due to the small number of buyers or sellers, or bounded rationality due to an environment characterized by high levels of uncertainty or complexity. The empirical study presented in this chapter is an example of how deviations between ideal and practice are generally perceived as defects in local practice—not in the hegemonic ‘map’ of mainstream neoclassical economics. As argued in the chapter, however, there are factors in the local setting that diminish the impact of general ideas on individual markets, paving the way for change and more diverse market organizational forms. Subsequent to the empirical longitudinal study presented in this chapter, I turn to the analysis of why, and also how, market organization may change significantly. The chapter ends with a short discussion of the results. Empirical data comprise three normative written analyses of the specific market and of other related written material. Data also consist of articles on the subject, published between 1990 and 2012 in the Swedish mass media, obtained from the database Affärsdata. Additional data comprise nine in-depth interviews with various market stakeholders: contracted entrepreneurs, auditors for Stockholm Municipality, and civil servants in the Stockholm Traffic Administration (Trafikkontoret) and in various municipal districts. Interviews, which were usually approximately one hour, were conducted and recorded between February 2010 and January 2013 and transcribed. 65

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Organizing and Reorganizing a Snow Clearance Market From Organization to Market The history of organizing snow clearance of roads, streets, and bridges in Sweden goes back many centuries.2 In 1734, in one of the first national directives regarding the issue, instructions read: After a heavy snow, county people and citizens are to clear the roads and streets from snow without delay, so that travellers may pass comfortably. Mayors in the cities and leading civil servants in the countryside are to check carefully that this task is not neglected. (Swedish Transport Administration 2017, my translation)

At the beginning of the 21st century, snow clearance plays an even more crucial function in Sweden, under the responsibility of each municipality. When this service does not work, as has been the case several times in recent decades, the Swedish media generally pictures society as paralysed; people cannot get to their jobs, emergency transportations cannot operate properly, and the number of personal injuries from slipping increases radically. As the quality of the snow clearing service has significant effects on society, its organization becomes relevant to many people. Unlike the 1734 directive forcing citizens to clear the snow, Stockholm Municipality conducted this service in 1992, just before the marketization began. Subcontractors were sometimes used, but the operations were mainly planned and executed by municipal employees, thereby organizing snow clearance within a formal organization. In 1993, however, the first significant step from organization to market was implemented. From that year onward, snow clearance was divided into two separate organizational units with an exchange relationship: one part planning and buying, still within Stockholm Municipality’s administration; and the other selling and delivering the service. This separation represents a key element of what has been referred to as New Public Management (NPM)—a widely diffused managerial concept at the time in Sweden and many other countries (Christensen and Lægreid 2001, 2007). The selling and performing organization was called Stockholm Entreprenad (SEAB). All personnel, equipment, and real estate related to the performance of snow clearance were transferred to this new organization. SEAB was fully owned by the municipality, but was now to be exposed to competition from other firms. Many politicians behind the decision believed that the overall service would automatically be more efficiently run in this way. In order to adapt to the new market conditions, SEAB recruited a CEO from the business

2

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I am grateful to Erik Wikberg, PhD, for his help in providing background data for the study.

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sector. The new organization also established a marketing function, but its board members were still politicians. The civil servants involved with this issue described the internal transformation of SEAB as a significant challenge. Employees were accustomed to working with snow clearance under non-market conditions, meaning that ‘they had a professional pride in doing a good job’, as one of the respondents described it. With the new market logic, however, the concept of quality now implied that what was paid for, as budgeted by the buyer, must be delivered— that and nothing more. Spending more resources than were paid for directly affected the economic results, now under a required rate of return. Changing this professional culture within the newly founded SEAB into a marketoriented culture was described as a huge managerial problem. SEAB managers had to put in a great deal of effort over a long period in order to explain what was now to be seen as the ‘right’ quality.

Few Tenders and Suppliers A main idea behind the reform was to put the earlier, publicly operated snow clearance under pressure from competing firms. But instead of a supply side characterized by plurality, with many firms competing for the contracts, in most cases there were only one or two tenders offered. At the time, snow clearance in Stockholm Municipality was divided into some 20 geographical districts, and SEAB received the contracts for almost all of them. To most politicians and civil servants involved in the matter, the number of tenders was surprisingly and disturbingly few. The new market did not work as expected. Some of the few other companies that received contracts during the first few years were described as opportunists by buyers interviewed for this study. Sellbergs, for example, won the contract for Södermalm—a large island in central Stockholm with approximately 100,000 inhabitants at the time. Snow clearance in the inner city of Stockholm is a more demanding task than in the peripheral areas of the municipality, partly because most central streets must be cleared much faster, if the transport system is not to collapse. Sellbergs specialized primarily in waste disposal, and had little experience in snow clearance. As described by buyers, they won the contract by dumping prices in order to get into the market. During the winter, however, they were unable to live up to their snow clearance contract, and SEAB had to take over.

The Idea of Market Failure Strengthens As the number of tenders and suppliers did not increase in the following years, this strongly affected how the civil servants responsible for park and street maintenance in the municipal districts perceived the market. The general 67

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opinion was that there was no well functioning or ‘real’ market for street and park maintenance, due mainly to high market concentration. This problem was also related to the growing suspicion among involved civil servants that sellers were dividing the larger market geographically (Skoog 2001). Furthermore, the few tenders created an increased risk of higher prices, according to respondents in the buying districts. During the interviews, respondents mentioned negative effects of a high market concentration other than the risk of paying too much. In a market with few suppliers, fewer ideas about the service and its development are generated. Furthermore, buyers become heavily dependent on the dominant supplier in this market situation, and, accordingly, more sensitive to problems in the seller organization. Yet civil servant respondents also mentioned that a long-term relationship with a large supplier was easier to administer than were ever changing exchanges with many suppliers. That is, market ideas other than those inherent in mainstream neoclassical economics emerged in the local setting. In contrast to ideas of atomistic actors and non-relational markets, positive effects of markets characterized by long-term relationships between buyers and sellers have been argued (e.g. Gadde and Håkansson 1993; Anderson et al. 1995): mainly that such markets increase buyer–seller coordination, decrease transaction costs (the costs for search, comparison, contracting, for example), and promote mutual innovation. Although SEAB was still responsible for most of the snow clearance within Stockholm Municipality, profits were poor. SEAB’s managers reacted by using their new marketing unit to compete for contracts in nearby municipalities. In 1995, SEAB won several contracts for snow clearance in Botkyrka and Järfälla, a move that was not appreciated by other firms operating in these two municipalities. The same year, The Swedish Association of Road Transport Companies (Sveriges Åkeriföretag) and the Swedish Federation of Business Owners (Företagarnas Riksorganisation) accused SEAB of violating rules, saying that firms owned by the municipalities are not to do business outside their own municipality. After several discussions, some of which were conducted in the mass media, SEAB withdrew from its contracts outside Stockholm Municipality. Largely because of the problems of few tenders and suppliers, municipal politicians decided to sell SEAB in 2000, as illustrated by the citation from an auditor within Stockholm Municipality: They [the politicians] did not think that there was any functioning market, and the solution to the problems was to privatize Stockholm Entreprenad [SEAB].

The idea was also that the privatization of SEAB would take care of two other problems: the geographical competition restrictions and SEAB’s low profitability and even losses. A privately owned SEAB would not be restricted to competition within Stockholm Municipality, and the level of profitability would 68

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Experience-Based Learning and Market Change Table 5.1. Number of companies in the market in 2001 Contractor:

SEAB

Skanska

Björns Entreprenad

Samhall

Ströms Trädgård

Number of districts: Market value: (in million EUR) Market share:

16 20.63 83%

1 1.87 7%

2 1.14 5%

1 0.92 4%

1 0.22 1%

(Source: Brandén, 2004)

no longer be of concern to politicians. The buyer was Peab—one of the larger construction companies in Sweden—a firm that had been buying many public service organizations from Swedish municipalities. All of SEAB’s resources were included in the deal, including the land and buildings within Stockholm— storage locations that were used for keeping vehicles and other snow clearance equipment when not in operation. Although the privatization of SEAB eliminated the problems of competition restrictions and profitability concerns for politicians, the problem of relatively few suppliers and tenders remained. In most cases, there were still only one or two tenders when snow clearing contracts were offered within Stockholm Municipality. SEAB also continued to be the dominant supplier. Table 5.1 outlines the overall market situation in 2001 for street and park maintenance within Stockholm Municipality.

From One to Many Buyers In January 1997, the procurement of most of the services in Stockholm Municipality—including snow clearance—were transferred from one main organization to what were, at the time, 24 municipal district committees (stadsdelsnämnder).3 The centralized planning was seen as a remnant from the pre-market period, too far from the individual users, and the reorganization implied a major market change. From having been a one-buyer market, a monopsony, it turned into a market with numerous buyers—many more buyers than sellers. The persistent situation of few sellers and tenders led to further attempts at reorganizing the market. Some of the municipal districts, such as Hässelby, started to divide their contracts into smaller ones, making it easier for smaller firms to enter the market. The large size of the contracts was seen as a barrier to market entry, as smaller firms would have had to make heavy equipment investments in order to bid on large contracts, without knowing if they 3 Some districts—various districts in Södermalm, for instance—purchased their snow clearance together.

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would receive repeat business. Partly because of this change, one smaller firm won a contract from Hässelby to care for a larger park, including its snow clearance. Contract periods were also prolonged in many districts, as a way of decreasing sellers’ risk of investing in costly equipment. Furthermore, buyers made the contracts less complicated, in order to attract more business firms into the market. The idea was that simplified contracts would render the tendering process less resource demanding for both sellers and buyers. Some firms did not deliver the service according to contracts. As their failure generated attention and critique in local mass media, the demands on Stockholm Municipality to take responsibility and action increased. Politicians behind the reform appealed through the mass media to entrepreneurs to assume their share of the responsibility. But more monitoring was also decided. The districts of Stockholm Municipality normally had from one to three inspectors each. In part, the inspectors used a system of self-monitoring, meaning that the entrepreneurs had to fill in standard documents outlining which roads they had cleared and when and submit them to the buyer. In the early market period, self-monitoring had been the main system, but due to the problems inspectors increased their own random samples of the actual snow clearance over time. SEAB and other entrepreneurs used subcontractors to some degree, as the municipality had done before the 1993 marketization. Over time the district officials learnt that improved monitoring of subcontractors was critical: The quality of subcontractors’ services often fell below the rules outlined in the contract, and the entrepreneurs did not monitor their subcontractors properly. The monitoring was linked to sanctions when considerable differences emerged between contracts and delivered services. The Municipal District of Hässelby included a clause in its contracts that allowed for reduced payment if a supplier failed to deliver because of capacity problems or cheated to save money—a situation that occurred several times. In the winter of 2001/2002, for instance, inferior quality was reported in 13 of the 18 municipal districts, and sellers were required to repay a total sum of SEK 4 million ((EUR approx. 0.4 million); Tidningarnas Telegrambyrå, 10 April 2002). In severe cases, sellers may also lose their contracts—as was the case for Sellbergs. Buyer respondents described their larger sellers in the snow clearing market as generally more trustworthy than their smaller sellers. Because of discontent with the current market situation—including the quality of the distributed services and a heavy administrative burden—there were also suggestions in some districts of shifting back to formal organization. In 2004, the District of Skärholmen and two other relatively small districts considered operating the snow and park maintenance within their organization instead of buying it on the market. The project was never realized, however, partly because of problems in obtaining the financial resources required for machinery and equipment investments. In Skärholmen, one 70

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respondent reported, the officials also sensed some ideological resistance to shifting from market to organization. In reaction to the considerations of some districts to leave the market solution, the Stockholm Traffic Administration evaluated the pros and cons of returning to a municipal organization for snow clearance and concluded that the financial risks seemed too high (Gatu- och Fastighetskontoret, 21 September 2004).

Market Concentration—Two Critical Reports In 2008, a study of public procurements in the Stockholm Traffic Administration was published by the Royal Institute of Technology, Stockholm (Noroozian 2008). The author collected data from reports and compiled opinions about current market situations through interviews with 26 people involved in park and street maintenance. The report influenced many market stakeholders, not least the municipality auditors, and their subsequent attempts to reorganize the market. The main problem stated in the report was the one shared by most stakeholders of the specific market for more than a decade: the small number of tenders and suppliers was seen as a threat to competition. In the report, Porter’s (1980) five forces model was used to analyse the barriers to market entry for potential competitors. The report was based on a central assumption: that many business firms would be interested in competing for the contracts if they could enter the market without facing risks that were too high. Similar to what was described in Skoog’s (2001) earlier study of this snow clearing market, interviewees generally stated that competition did not work and that SEAB’s position was too dominant. They believed that this market situation created the risk of paying too much for the services. In Noroozian’s report (2008), an overall result of the analysis was that barriers to entry were high, explaining the small number of tenders and sellers. Noroozian made several suggestions in his report to increase overall competition, mainly the following: 1. The duration of the contracts should be longer, thereby decreasing the financial risk of investing in vehicles and other machinery for snow clearance. 2. The buyer should promote a standardization of the procurement process, in order to decrease both uncertainty and transaction costs. 3. Contract size should increase. The report thereby questioned the method of splitting up contracts in order to attract smaller firms, as it increased buyers’ administrative costs. Rather, it was argued, an increased contract size would help attract larger firms within the construction and maintenance sector—organizations not presently in the market except for Peab (the owner of SEAB). 71

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4. The buyer should provide storage locations for vehicles and equipment—a key barrier to entry, and therefore a significant problem. The storage locations used by Stockholm Municipality until 1993 had been included in the sale of SEAB in 2000 and were now private property. It was suggested that the municipality should establish new places and rent them to the contractors, as had been done in Oslo, Norway. 5. Fewer procurements should be released at the same time, making it easier for entrepreneurs to participate in different public procurements, and thereby increasing the number of tenders. In late autumn of 2008—the same year as Noroozian’s report was published— Stockholm Municipality’s auditors published a report of their investigation of the park and street maintenance (Stadsrevisionen 10 November 2008), which attracted attention in the Swedish mass media (Dagens Nyheter 18 November 2008). The auditing report stated that competition was weak, and the auditors were highly critical of the small number of tenders and of SEAB’s domination on the market supply side: One firm [SEAB] has been close to monopoly since it was sold by the city . . . It cannot be excluded that this situation affects the costs and quality of street maintenance. (Stadsrevisionen 2009, 12, author’s translation)

The auditors presented their critique to the civil servants responsible within Stockholm Municipality. The main problem they stressed was SEAB’s ownership of the storage locations, and that other such central locations for potential competitors were difficult to find. Other entrepreneurs would have to locate their equipment far from the site where they were to operate—a significant disadvantage. Although some officials had questioned this part of the deal before the municipality sold SEAB in 2000, the storage locations had been included in the sale. In the auditing report, the main solution to this barrier to entry was the same as one of the solutions presented in Noroozian’s report (2008): to look for new storage locations. This advice was also followed by the Stockholm Traffic Administration and supported by municipal politicians. An investigation of possibly suitable underground garages in central Stockholm was begun, but no new storage locations had yet been established by 2013.

Buyer Concentration Again In the municipal districts of Stockholm, the decentralization of public procurement was appreciated for several reasons. It encouraged a closer relationship with the citizens and a better understanding of local conditions when planning for and buying snow clearance and other public services (see also 72

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Skoog 2001). The reorganization had also brought less positive effects with it, according to the interviewees—three in particular: 1. The quality of snow clearance within Stockholm Municipality varied considerably among districts, due to the decentralization—a situation that was perceived as unfair by citizens and organizations, given that they paid tax according to the same rates. 2. The procurement of the complex yet vital service was extremely demanding for the smaller districts, which sometimes lacked sufficient experience and knowledge to administer snow clearance. Moreover, the districts reported the figures differently. Some civil servants and politicians argued that a centralized department for this public procurement would increase the competence, the efficiency, and the comparability. 3. A centralized department would facilitate the coordination of snow clearance between districts situated close to each other. If, for example, one district urgently needed help, a central department could more easily determine which other district would be best suited to provide that help. In 2007, the purchasing function was centralized again. The Stockholm Traffic Administration was given the responsibility of acting as sole buyer, in order to solve all three issues. Due to the shift from many buyers to one, public procurement of snow clearance in Stockholm became more standardized.

Towards More Monitoring—Using GPS Although many stakeholders had considered the market concentration disturbingly low for more than a decade, and although this market problem had generated reform ideas and efforts to change the market, SEAB’s highly dominant market position still remained. In 2008, SEAB held 20 of the 26 contracts in Stockholm Municipality. The number of tenders also remained low. Along with this established problem among politicians and civil servants came increased suspicions about overpayments for snow clearance and related services. When ‘real’ competition seemed so hard to establish, how should this market be managed in order to decrease the risk of an unfavourable mix of quality and price? Centralizing the purchasing function to the Stockholm Traffic Administration cleared the way for an alternative solution to attempts to increase the number of suppliers and tenders: more and new forms of monitoring. As the centralization reform concentrated resources, there were increased possibilities for developing new ways of improving overall market conditions. As buyers generally experienced a need for increased monitoring of snow 73

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clearance, some departments within Stockholm Municipality had already experimented with new technologies. Global positioning systems (GPS) and geographical information systems (GIS) had become more advanced and less expensive during the first decade of the new millennium, and the Stockholm Traffic Administration began to examine their possible use in order to improve the overall market situation. The Stockholm Traffic Administration began developing a system of GPS transmitters to attach to all the entrepreneurs’ vehicles used for snow clearance and related services. This would allow traffic administration employees to monitor where and when contractors’ vehicles were operating, whether their ploughs were up or down, and if their sand-spreading equipment was on or off. Eventually the contractors’ subcontractors would also be monitored with this new system. Data from previous snow clearance, sand spreading, or sand removal in springtime could also be used for comparisons. Market organizers in the study mentioned several advantages of the system under development: 1. The system would eliminate the self-monitoring work for entrepreneurs, who would not have to fill in the many forms describing their work and hand them in to the traffic administration inspectors. 2. Because traffic administration employees could see where vehicles currently operated, it would be easier to predict when snow removal would be accomplished, and citizens and organizations requesting that information could receive more accurate responses. 3. The system would increase the buyers’ knowledge about how much the entrepreneurs were really working in relation to the time they charged, thereby decreasing the huge information asymmetry between buyers and sellers. Although the civil servants involved were quite enthusiastic about the new project, sellers were not. They showed little interest in helping to develop the project. An auditor in Stockholm Municipality reported in an interview that the contracts contained rules stating that sellers should contribute to rationalizations and development of the overall service, but that this had not been done. Neither did sellers tend to inform the buyer about potential or actual rationalizations in their operations. One official in the Stockholm Traffic Administration described that this experience of disinterest would be a common characteristic of markets: It is also in their nature to . . . [pause] . . . when it comes to rationalizations, entrepreneurs are not as interested in informing the buyer about them as they are to inform the buyer about increased costs.

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In the summer of 2010, the Stockholm Traffic Administration had written an indicative plan for the GPS system in order to apply for money from Stockholm Municipality. A first specification plan for the project was estimated at between EUR 0.2 to 0.3 million. Within the traffic administration, a common platform was developed to handle various computerized applications for specific services—the GPS application for snow clearance, for example. At the beginning of 2012, six civil servants worked approximately half time per person developing the project. In addition, a consultancy firm was hired, mainly to develop the computerized information technology. Great effort was expended in developing and testing the system, and contact was made with a smaller town in northern Sweden—Sundsvall—that had already implemented GPS technology to monitor snow clearance providers. In March 2012, the Stockholm Traffic Administration estimated that the new monitoring system would be up and running in 2013—a reorganization that was expected to improve the market for buyers and citizens.

How and Why Did the Market Organization Change? As presented in the empirical study, many stakeholders did not think that the market worked properly, or even that it was a real market. Market reorganizations implied a substantial response to perceived problems, considerably changing the content of the individual market organization over time. In accordance with the question raised initially, I now deal with how and why the content of market organization changed.

The Reforming Market Organization: From ‘Ad Hoc’ to ‘Pure’ to ‘Unorthodox’ Regarding the question of how the market organization changed, the basic answer is that it shifted to substantially more monitoring, rules, centralized decision making, and hierarchy during the time span studied—also assuming new proportions and forms of the elements it contained. The initial market organization involved relatively little organization compared to its later developments. Monitoring, for example, was mainly a question of sellers’ self-evaluation the first years after snow clearance was opened to competition, and there were significantly fewer rules and hierarchical ingredients than there were later. I refer to this initial market organization form as an adhocracy—a form with little organization in terms of rules, hierarchy, membership, monitoring, and sanctions (cf. Mintzberg 1979). This market organization reflects the general idea of the ‘free’ market—that a market automatically works well with no or insignificant organization (see 75

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Figure 5.1). As argued in this book, individual markets without organization seem to be difficult to find (see, e.g., Chapter 4). The idea of the ‘free’ market would find its closest organizational depiction in the adhocracy/‘ad hoc’ market form. The often favoured ad hoc market form, however, may also serve parties with fewer interests in achieving a ‘perfect’ market in practice. The lack of substantial organization may facilitate the avoidance of competition, for example. After the initial phase, the small number of suppliers and tenders of the individual market came as a negative surprise to politicians, civil servants, and others. The perceived problems were met with reorganizations, leading to more and different market organization. This chapter has described how rules were created and elaborated upon, how membership issues were dealt with to decrease barriers to entry, and how monitoring became more important. The ad hoc market form was gradually replaced with a ‘pure’ market organization—with an expanded amount of organization aimed at decreasing the deviations between the ‘perfect’ market ideal and practice. The means changed considerably, while the preferred end remained the same. As the many attempts at decreasing market concentration did not succeed, market organizers shifted to another generic way of dealing with the problem: GPS monitoring. The decision to develop and use a surveillance system based on GPS and GIS devices implied a massive expansion of monitoring in new forms. A satisfying price–quality ratio was to be achieved through means other than increased competition. Sellers were required to comply, demonstrating the hierarchical element in the relationship between the buyer and the sellers. The market organization also shifted to a centralization of demand-side decision making in the later phase of the time span studied. The early decentralization of responsibility to the 24 municipal districts meant ‘more market’ from the perspective of the ‘perfect’ market model, as it created a plurality of buyers. This change, in turn, led to increased variation in the way snow clearance was bought, monitored, and sanctioned, and such issues as what was bought. As described, however, the variation and lack of buyer coordination became a growing problem for many stakeholders. The eventual solution was to centralize decision making and responsibility, moving from a plurality of buyers to one. In the wake of this centralization, coordination increased—as did standardization in the market in the sense that snow clearance in Stockholm became purchased, administrated, and monitored in a similar way. Central functions in the one-buyer organization now developed the forms of buying behaviour, reporting, and monitoring of sellers, implying additional technostructure (Mintzberg 1979). Centralization also facilitated the GPS-monitoring reform, which would have been more difficult to accomplish within the earlier decentralized system, due to scattered resources and varying interests. Furthermore, centralization implied more hierarchy, with 76

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Experience-Based Learning and Market Change Decisions’ correspondence with the ‘perfect’ market model High Adhocracy

Pure bureaucracy

Unorthodox bureaucracy

Low

Low

High

Degree of market organization

Figure 5.1. Market organization forms.

more decision making and managerial tasks conducted ‘above’ the earlier, relatively autonomous municipality districts. Taken together, the amount of organization not only increased further in the later phases of the study. The characteristics of the market organization— buyer centralization, advanced monitoring systems, and less interest in supply-side plurality—also implied a significant step away from the hegemonic ‘perfect’ market ideal as a blueprint for its design. Accordingly, I refer to this form as an unorthodox market organization. Although both the pure and the unorthodox market forms can be described as bureaucratic in the sense of their extensive amount of organization, the unorthodox bureaucracy differs from the pure bureaucracy in its more relaxed relation to the ‘perfect’ market model.

Experience-Based Learning and Market Organization Change How, then, can the described longitudinal change of market organization be explained? In organizational literature, the subject of how taken-for-granted ideas affect and change organizations has attracted significant attention (Selznick 1949; Meyer and Rowan 1977; DiMaggio and Powell 1983; Czarniawska and Sevòn 1996). Many widely diffused organizational recipes have the characteristics of fashions. After a rapid rise to popularity, they generally begin to be perceived as passé and are replaced by new ones (Abrahamson 1996; Røvik 1996). In the case of markets, too, institutionalized ideas of what a market is and how it should function affect individual market characteristics (Hernes 1978; Brunsson and Hägg 1992; Callon 1998; MacKenzie 2006; MacKenzie et al. 2007). In retrospect, however, these ideas have been much more stable than most recipes for organizations. As argued initially in this chapter, the hegemonic 77

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idea of the ‘perfect’ market, deeply rooted in neoclassical economics, would provide for stability rather than change. However, individual market organization could still change significantly, as illustrated in this chapter, calling for a search for other explanations. In the empirical study, many influential market organizers were also buyers in the same market. Due to their participation in and close proximity to market practice, they gradually learned its specific prerequisites and how it worked. In short, they learned from experience. As proposed here, levels of experience-based learning represent an explanation for significant market organization change. A higher level of experience-based learning enabled an increasing deviation from the ‘perfect’ model of what a market is and should be. Put differently, it made this market model lose some of its performative power over the individual market. In theories about experience-based learning, four phases are often mentioned: concrete experience; reflection; abstract conceptualization; and framing of new actions that, in turn, lead to new experience (Kolb 1984; March and Olsen 1976; Hoover et al. 2012). When learning from experience, different levels of learning may occur (Bateson 1972). Developing this concept, Argyris and Schön (1978) proposed two levels of learning that may be derived from experience with local practice: single-loop learning and double-loop learning. Single-loop learning implies (1) monitoring the environment and gathering data, (2) comparing the data against objectives, and (3) modifying activities to attain the objectives. In this case, single-loop learning captures the early attempts to deal with the perceived market failure of a high market concentration. Municipal civil servants were working in close connection to the daily market practice, acting as buyers and administrators. This close link to the individual market led to increased knowledge about market practice among organizers. The information was compared with the hegemonic ideal of what a ‘good’ or ‘real’ market should look like. Establishing supply-side plurality, an elemental part of the ‘perfect’ market model, became a goal for market reorganizations. As the high market concentration nevertheless remained, new attempts and propositions of ways to decrease market concentration emerged—providing for and administrating storage locations for the supply side, for example. Single-loop learning led to a shift in the market organization form—from an adhocracy to a pure bureaucracy. Once the initial shift from organization to market had been made, the general belief was that the managerial phase was now over, and the market would be up and running by itself. The initial conception of little or no market organization, administration, and reorganization reflects the common idea of markets as relatively ‘free’—well functioning without any substantial elements of organization. Single-loop learning implied that organizers still believed in the ‘perfect’ market model, but now saw it more as a norm of what a market ought to be rather than a conception of 78

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how markets function. This learning process led to extensive attempts to transform the individual market by the use of organization. The recurrent failures at reform eventually led to elements of the second learning level (Argyris and Schön 1978): double-loop learning. In this form of learning, rather than the learner applying the same type of solution over and over again, the underlying assumptions and premises are questioned. The expansion—and the new forms—of monitoring the sellers represented a significantly different way of reducing the risk of an unfavourable mix of price and quality. Furthermore, market reorganizations now imposed more centralized decision making, standardized behaviour, and hierarchy—not least by going from a plurality of buyers to one. Whereas the single-loop attempts promoted the ‘perfect’ market model, later attempts did not. The elemental part of this model—seller and buyer multiplicity—was largely abandoned. Market organization increased further, now permitting more unorthodox market organizational solutions. This unorthodox market organization may stem from the influence of other ideas—respondents in this study mentioned elements of the market-asnetworks idea—but also from more pragmatic ways of organizing markets, as has been a main argument developed here. There are substantial similarities between the bureaucratized form of many organizations and the unorthodox market organization form described in this study. This individual market organization developed into a form relatively close to its own pre-market organization—the very form the initial marketization set out to replace. All in all, the organizers’ increasing experience of individual market practice eventually had market organizers thinking out of the box, developing solutions that significantly deviated from the ‘perfect’ market model.

Discussion This chapter has illustrated how the organization of individual markets may change significantly over time and has suggested an explanation for why such change occurs. The levels of experience-based learning identified here derived from the market organizers’ close connection to, and their role as part of, daily market practice. Following this argument, the individual market organization would not have changed accordingly without such a close connection to market practice, a prerequisite for the described learning processes. Chapter 15 in this book—on the public procurement act vis-à-vis market practices—describes a situation in which formal market organizers were more disconnected from market practice, the performative powers of neoclassical economics on market organization remained at a high level, and the market organization was relatively stable over time. Further research and 79

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comparisons may help us develop our understanding of why some market organizations remain stable while others are subject to significant change, as has been the case here.

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Experience-Based Learning and Market Change Kolb, David (1984), Experiential Learning: Experience as the Source of Learning and Development. Englewood Cliffs, NJ: Prentice Hall. MacKenzie, Donald (2006), An Engine, Not a Camera: How Financial Models Shape Markets. Cambridge, MA: MIT Press. MacKenzie, Donald, Munieza, Fabian, and Siu, Lucia (2007), Do Economists Make Markets? On the Performativity of Economics. Princeton, NJ: Princeton University Press. March, James and Olsen, Johan (1976), Ambiguity and Choice in Organizations. Oslo: Universitetsforlaget. Meyer, John and Rowan, Brian (1977), Institutionalized organizations: Formal structure as myth and ceremony. American Journal of Sociology, 83(2): 340–63. Mintzberg, Henry (1979), The Structuring of Organizations: A Synthesis of the Research. Englewood Cliffs, NJ: Prentice-Hall. Noroozian, Hamid (2008), Competition problems and market entry barriers for Swedish and international actors: A study of public procurement in the city of Stockholm Traffic administration. Master of Science thesis no. 438. Royal Institute of Technology (KTH). Porter, Michael E. (1980), Competitive Strategy: Techniques for Analyzing Industries and Competitors. New York: Free Press. Røvik, Kjell-Arne (1996), Deinstitutionalization and the logic of fashion. In Barbara Czarniawska and Sevón Guje (eds), Translating Organizational Change (pp. 139–71). Berlin: Walter de Gruyter. Selznick, Philip (1949), TVA and the Grass Roots: A Study in the Sociology of Formal Organization. Berkeley: University of California Press. Skoog, Matti (2001), SDN-reformen I Stockholm Stad—en studie av gaturenhållningen och Parkskötseln. Stockholm: IKE, Stockholms Universitet. Stadsrevisionen (Stockholm Municipality Auditing) (2008), Styrning och kontroll av trafik- och renhållningsnämndens gatudrift. 2008:10. Stadsrevisionen (2009), Revisorernas årsöversikt 2008—en sammanfattning av stadsrevisionens granskning av stadens verksamhet 2008. DNR 310-40/2009. Stockholm: Stadsrevisionen. Swedish Transport Administration (Trafikverket) [online: www.trafikverket.se], Vinterväghållning. Available at: https://www.trafikverket.se/jarnvagsmuseum/samlingarkunskap/vagsamlingar/historia/Vaghistora/Vintervaghallning// (accessed 9 October 2017). Tidningarnas Telegrambyrå (10 April 2002), Stockholm ersätts för dålig snöröjning. Stockholm: TT Nyhetsbyrån. Tirole, Jean (1988), The Theory of Industrial Organization. Cambridge, MA: MIT Press. Williamson, Oliver (1975), Markets and Hierarchies. New York: Free Press.

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6 When Sellers Create Markets Dilemmas and Challenges in Markets for Professional Services Nils Brunsson and Anna Tyllström

It is commonly assumed that sellers create markets. By the force of diligent work around a new innovation, entrepreneurs follow a prescribed path to find buyers for their products. They subcontract production, arrange logistics with intermediaries, bargain with retailers for their share, and market their goods to individuals or organizations, which eventually buy the delivered products. Such is the Schumpeterian ‘creation myth’ of markets, and countless are the marketing textbooks written on this topic. But market creation is not always as easy as the creation myth would predict; nor are the sellers’ tasks as few. The purpose of this chapter is to nuance the prevailing view on sellers’ market creation, to identify the challenges and dilemmas involved, and to relate them to the theme of market organization. We do so in an economic domain in which such challenges are especially visible: that of professional services. Much, if not most, of the literature on the sellers’ market creation focuses on physical products—on products that can be touched. Yet intangible products represent the largest and fastest-growing sector of modern societies. In 1970, 55 per cent of the British economy’s output consisted of services; in 2010, the same share was 78 per cent. In the USA, the corresponding figures rose from 61 per cent to 79 per cent, and in Sweden from 57 per cent to 72 per cent of GDP. Compared to their significance, service markets seem to be too little studied and analysed. Furthermore, in the case of professional services— knowledge-intensive services sold and delivered by professionals—many new markets are in fact seller-driven (Tyllström 2013). As such, professional

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service markets constitute especially relevant phenomena to scholars interested in seller-created markets. We have therefore chosen to analyse the creation of professional service markets. We begin by briefly listing some basic components that must be in place in any market—tasks that must be fulfilled in order to create any type of market and that sellers have to fulfil if others have not. We go on to describe our two illustrative empirical cases: the formation of markets for coaching and public relations (PR) consultancy services in Sweden. We let these two cases illustrate the dilemmas that sellers may face in establishing basic market components and how these dilemmas can be handled. Based on our findings, we formulate a number of propositions for the ways in which the creation of markets for professional services differs from that of markets for goods.

Creating Market Components In order to create a market, five components must be put in place: a product must be created and defined, there must be buyers, others must be convinced that the product should and can be exchanged in a market, there must be sellers, and there must be a delivery system. The seller cannot simply assume that these components will arise unbidden, or that someone else will create them. Sometimes the seller must create them. Below, we elaborate on each of these components. First, a product must be created and defined, in the form of a physical good, a service, or some combination. In order to be considered a new market, a product must be perceived as fundamentally different from products for which markets already exist; it cannot be regarded merely as a variant of existing products. In principle, almost all products can be perceived as either novelties or variants of an existing product category, and any organization intent on creating a market must persuade others to accept its interpretation of uniqueness. Second, there must be buyers—people or organizations willing and able to buy the product. The ideal buyers have ample resources and come to believe that they need the product. Finding new buyers and, most importantly, influencing their preferences is perhaps the most thoroughly explored component of market formation. Sellers, especially, are often expected to focus on this component. Marketing departments are oriented towards persuading buyers to flock to the market they are trying to form. Third, others must be persuaded that the new product is really a product that is suitable for market exchange. Certain things may be preferably provided within the confines of such systems as families or social networks; or within the confines of organizations, including states. Or perhaps they should not be provided at all. That which is thought suitable for market exchange varies 83

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with time and space (Kopytoff 1986). Trade in human beings, for example, was accepted across much of the Western world a few hundred years ago, yet slavery now violates both norms and laws. Healthcare may be a service offered in a market or provided for free by a welfare state. Sellers who aim to form a market must persuade not only presumptive customers that the product can and should be traded in a market; they must also persuade others upon whom they or the customers are dependent—states in the form of legislative bodies, for example, or concerned professions. Fourth, there must be sellers. Sellers are often presumed to want few or no competitors (Chamberlin 1933). By trying to differentiate their products from those of other sellers, they try to create unique variants for which they have a monopoly. A monopoly may seem like a dream situation to sellers. But if the strategy of product differentiation were to succeed fully, it would be a problem for the seller, because markets are fundamentally legitimized, or even defined, by the existence of competition (Aspers 2009; Swedberg 1994). Firms that are seen to be operating as monopolies meet demands that differ from and are tougher than those faced by firms in competitive situations. Their legitimacy can always be questioned. States often try to stimulate competition and prevent monopolies. Any seller setting out to form a market, therefore, has an incentive to stimulate the creation of more sellers. On the other hand, sellers have an interest in influencing these competitors and their products. Fifth and last, the exchange itself must be managed. Prices must, of course, be agreed upon, but conditions for exchange should be established as well. When the product is a physical one, transport, import licences, and retailing contracts are necessary in order for the transaction to proceed. But when the product is a service, the seller and the buyer produce the final outcome jointly (Furusten and Garsten 2005; Grönroos 2007). For professional services, the product tends to be even closer to its sellers and the competencies they possess (Alvesson and Willmott 2002; Suddaby and Greenwood 2001). When a new professional service market is created, there is no pre-existing script for who plays what part in the exchange. Therefore, a common understanding of the proper role of each party must be developed. Assembling these five components is not an easy task. Sellers wanting to create markets face many challenges and dilemmas. In order to understand market creation, it is important to investigate the nature of these challenges and dilemmas and examine how they are handled. Discussions about markets are often highly stylized, and conclusions are derived from assumptions about ‘the market’. In this chapter we adopt a more empirical approach, discussing the challenges that sellers actually meet in practice in their attempts to create markets. 84

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Two New Markets Markets differ. A basic distinction is the one between goods and services. Goods can be loosely defined as physical products: books, pens, hats, and salt. Services, on the other hand, are broadly defined as intangible products, often provided by a person: a hairdresser, cleaner, lawyer, consultant, or physician. Services are produced even as they are being consumed (Grönroos 2007). Professional services—consisting of the seller’s intellectual expertise rather than a concrete handicraft—belong to a category of increasingly common products (Abbott 1988; Brint 1994). In areas such as law, accounting, medical, or architectural services, offerings have evolved over time and have become intertwined with strong professional organizations and supported by law. But during the last few decades, ‘neo-professional’ or ‘semi-professional’ services have mushroomed, and are now delivered by less homogeneous expert collectives than the traditional professions (Brint 1994; Furusten 1995). Management consultancy is the often-cited example, but other types of consultancy also represent this shift—consultancies within public relations, human relations, and information technology, for instance. Such new types of professional service markets have a documented affinity for ambiguity, populated as they are by sellers that elude clear identities (Alvesson 2004; Alexius 2007), and are often characterized by discursive struggles over product content and professional boundaries (Abbott 1988; Suddaby and Greenwood 2005). We use two empirical cases to examine how market components are created by sellers in professional service markets: the markets for coaching services and PR consultancy in Sweden. These markets are particularly useful examples from both a methodological and a theoretical point of view. They are markets that provide good vantage points for the study of market creation; the market creation processes are fairly recent and the people and organizations involved still exist. Furthermore, the products are illustrative, in the sense that they represent extreme examples of professional services: In many ways they constitute antonyms of commodities; their sellers must not only describe their product, but must convince us that there is one, and show the world what it encompasses. In the next three paragraphs, we provide brief introductions to the cases. The Swedish coaching market has developed since 2000. The term ‘coach’, once used mainly in sports contexts to denote a trainer of athletes, has been ascribed new meaning by those who have tried to develop the new market. They argue that a coach in their sense of the term provides support to individuals in their private or professional lives. This type of coach is described as using particular methods: posing questions rather than giving answers and thereby helping individuals to make their own life choices. There are 85

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models described by several international industry associations for coaching, some of which provide certification. Private ‘colleges’ have been created in Sweden for training coaches. Most firms selling coaching are still small, and a large proportion of them comprise one-person firms. In the early years, growth was slow: annual revenues in 2008 were estimated at SEK 200 million (EUR 21 million). In 2009, however, the industry experienced a major upturn, as the Swedish government decided to procure extensive job-coaching services within the public employment service. This step led to commercial orders from this one customer that amounted to almost EUR 300 million. A few years later the revenues were back to more normal levels, but according to experts the market has grown again in recent years, although more slowly. The government’s procurement of job coaching sparked a political debate that resulted in scrutinization of the coaching concept and the nature of coaches’ work. Data on the formation and development of the coaching industry have been collected through extensive interviews with nine pioneers in the industry and through studies of publicly available written material produced by these pioneers and their organizations (Wikberg 2010). The PR consultancy market was established in the early 1990s. Since then annual revenues have grown nearly tenfold, from SEK 170 million (EUR 17.5 million) to more than SEK 1.5 billion (EUR 154 million) in 2015. Two industry associations have been formed: one for large firms and one for smaller firms. Together, they have approximately 70 member firms, employing more than 1,500 consultants. In parallel with the increase in firms and sale of services, the range of services has widened. Firms have expanded their offerings from press-related support to include political lobbying campaigns, strategic branding, the writing of annual reports, and training for interactions with journalists. The industry is still growing, but, like many other consultancy industries, it has proved to be sensitive to the economic cycle. The material used in this chapter is based on a longitudinal study of 340 business press articles between 1981 and 2009, 23 semi-structured interviews with sellers, clients, journalists, and regulators, and ethnographic field studies of PR consultancy practice.

Dilemmas in Market Creation We now turn to these cases to illustrate the tasks and dilemmas for sellers creating markets and how they can be handled. For each of the five market components listed above, there are specific dilemmas that arise. In the following, we elaborate on the most apparent ones, and the strategies employed by actors in our case markets.

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Defining the Product: Novel Category or Variant of Old? A seller who introduces a product to the market can choose between two definitions: a new version of an existing product, and thus part of an established market, or a completely novel product, thus trying to create a new market. It may be tempting to present it as novel, especially from the competition angle; the seller will then have a head start over potential future competitors. But there are drawbacks. Creating a new product category is far from a trivial task. The seller must itself perform all the tasks of market formation (Aldrich and Fiol 1994; Santos and Eisenhardt 2009). If the product is unknown, the seller must devote more energy to explaining what it is (in the case of a variant, one has to explain the variation, but not the basis) and how it relates to existing products. A whole new product category must be created. And these categories cannot benefit from the ‘economies of memory’ (Starr 1992) that are attached to established products and that reduce information costs (Becker 1983; Rosa et al. 1999). The risk is also that the new category is perceived as fuzzy or lacking clarity, which may give rise to so-called ‘illegitimacy discounts’ (Zuckerman 1999; Hsu 2006). The seller launching a new product needs to explain, without the help of other sellers, why anyone would benefit from the product—a process already completed in an established market. And the seller is alone in motivating potential customers to buy this product. The seller must persuade others that the novel product is suitable for exchange in a market and that the market functions legitimately. In the light of all these challenges, it is by no means certain that the seller will try to define its product as fundamentally novel. The sellers in both of our case study markets chose to define their product as novel rather than as a variant of something old (a definition that included them in the study). This was a decision with ambiguous implications, however, and the choice to establish their product as novel was not as clear-cut as one might believe. The sellers tried both to create something new and to build on the old. Sellers of coaching services argued vehemently that their service was genuinely novel and not a new version of an old product category. They saw a potential threat that coaching would be defined as a variant of established psychology, because coaching could be defined as one of many therapeutic methods used by psychologists in their efforts to help people. There was already a well-established market for such therapies, to which sellers’ access was severely constrained by requirements for accreditation and professional membership, open only to people who had completed a lengthy, specific academic education. The sellers asserted that coaching was unique, and that it differed from established psychological services.

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On the other hand, the sellers had chosen a name for their service that implied that it was nothing new. Because coaching was a well established concept in the sports world, choosing that name was facilitative; most people would recognize the term, the content of which was at least vaguely understood, and which probably had positive or at least neutral connotations. The drawback was that the term could lead to dissipation of the novelty value. The sellers tried to prevent this from happening by drawing a boundary against the sports field, where the activity was now termed sports coaching. Coaching had some similarities to sports coaching, but was still essentially different. As one of our respondents said: ‘As a personal sports coach you simply help people to train . . . You set up a training programme . . . Within coaching you ask the questions and try to make your client discover the answers’ (Interview with coach educator). Sports coaching was also different because it was seldom a product in a market, but rather an intraorganizational service performed by employees of sport clubs. It would therefore be difficult to claim that the new coaching services were only a variant of something already available in the market. One way to establish this novel service, then, was to associate it with established categories, while emphasizing that it was still new. Another way was to describe the content of the service, showing that it involved something novel. Once again a dilemma arose here: The sellers had to walk a fine line between describing too little and too much. If their descriptions of the coaching services were too scanty, buyers would have too little product knowledge and might refrain from purchasing: To hear just that ‘within coaching you ask the questions’ may not be too convincing. If, on the other hand, they described their services in too much detail (e.g. exactly how a coach asks questions) the risk was that the interested organization would insource the concept and have one of its employees act as a coach rather than buying the service from the outside. The solution was to link the definition of the product to the individual through market organization. Special training and certification programmes were installed, and a rule was established that only certified coaches could provide coaching. The sellers or their employees became a significant part of the product to be sold, allowing the sellers to describe themselves rather than the details of the coaching service when trying to persuade potential buyers. And if the sellers could generate confidence in the training and certification process, they could also generate confidence in the service. The PR consultancy market is more than a decade older than the coaching market, but it offered a similar picture. In the early years, there was little general knowledge among the media or prospective clients about the content of PR or what comprised the services. Much of sellers’ time was devoted to

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explaining the nature of the product and why the activities performed by sellers were not to be categorized as traditional advertising. Here as well, sellers were struggling with the dilemma of describing their product as entirely novel, even as they needed to define their new activities semantically in relation to existing, more established practices. In the nascent years, the term was in flux and many different words were used for the service: ‘conceptual advertising’, ‘public information’, or ‘information consulting’, for instance. The industry association attempted to associate the new profession with more established advisory professions and explain what one was by saying what one was not. As our respondents told us, ‘We are like management consultants, but within communication’, or ‘We are like coolly impartial lawyers: We provide objective rather than emotional advice.’ The boundary between describing the product as novel or as a variant of something old was a thin one. A noteworthy aspect of this seemingly contradictory strategy in the PR consultancy market is that, at the time of this writing, there is still no complete consensus about what these services should be called. The largest consultancy firms categorically refused to call themselves PR consultancies (PR-konsultbyråer). In their view, the imported prefix, ‘PR’, had negative connotations in Swedish. The term sounds disparaging, they argued; it appears to allude to the events industry, or such simple work as drafting press releases. Instead, they preferred to label themselves ‘communication consultants’—something that has not gained acceptance among wider circles of customers or the media. These tendencies were not unanimous, however: other sellers said they were proud to call themselves PR consultants. This was particularly the case within firms specializing in market PR or corporate PR—activities that are closer to traditional advertising than other main PR offerings, such as political opinion and lobbying (public affairs), or economic information (investor relations). Disputed within and outside the sellers’ collective, the term is not yet a solid, taken-for-granted category.

Creating Buyers: Type of Influence, Type of Buyer, and Width of Attention Creating buyers is a classic marketing problem and fundamental to market making. Here, we address three dilemmas, actualized by our cases: the extent to which sellers should target prospective buyers directly or indirectly, whether sellers should identify organizations or people as their buyers, and the problem that the product may receive too much or too little attention. DIRECT OR INDIRECT INFLUENCE?

Sellers can create buyers either directly or indirectly. Sellers can try to persuade others that they need a certain product. Or, more indirectly, they may create preconditions that will hopefully make others want their product and, as a

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second step, become buyers (cf. Emerson 1962). Given finite resources, sellers must sometimes choose between these strategies or at least weigh them differently. This dilemma can be illustrated by the PR case. PR consultancy firms created buyers on multiple planes. They fostered them in the new market for PR consultancy by pitching different PR projects that they thought would be suitable for the buyers. But PR firms also worked on a more ideological, long-term level to sustain and expand their client base by establishing favourable market conditions. One obvious example was the high number of PR consultancies active in lobbying for privatization in large societal sectors in healthcare, infrastructure, and the media in the early 1990s. By pitching and delivering projects aimed at privatization to corporate clients, the consultancies also helped in creating buyers beyond the active current relationship; once privatizations were a fact, whole new markets with ample business opportunities for the PR industries opened up. At a later stage, they also helped to organize these markets. Properly organized markets in these areas would produce many new sellers there, and these sellers would hopefully be interested in buying the expertise of PR consultants. A leading Swedish PR agency prepared rules in the form of law texts for the liberalization of the Swedish broadcast media monopoly years in advance, for example, so they would be ready when the issue was raised on the political agenda. Another large consultancy sold a monitoring device in the form of a Healthcare Guide—a sort of telephone directory covering private and public healthcare providers in Stockholm, as a market information guide to patients, or ‘healthcare consumers’. BUSINESSES OR INDIVIDUALS AS BUYERS?

The selling firms in our two markets tried to establish business-to-business (B2B) markets in which they sold their services to other organizations. In the coaching case, the motive may have been the vast differences in average wealth between Swedish organizations and individuals. At the same time, the sellers were interacting with individual organization members and strongly dependent on the individuals that actually used and had an interest in continuing to use their service. The dilemma was to provide a personalized service but to ensure that an organization continued to pay for it. There was a threat, however, that the coaching market would evolve into a business-to-individual (B2I) market. The services are so personal and individually oriented that it is difficult for management to justify why the organization rather than individual employees should buy them. After all, the organization has paid their employees’ salaries to do their job. This tendency was not as strong in the PR case; consultancy services were targeted at the organization rather than the individual, and few employees would be tempted to pay for their own media training. Here, the risk was more closely 90

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connected to the B2B market evolving into an individual-to-business (I2B) market, in which individual sellers enjoyed greater credibility than the organizations employing them (see the section on Creating Sellers in this chapter). TOO MUCH OR TOO LITTLE ATTENTION?

Our cases remind us of a further dilemma in establishing buyers, related to the need for creating attention and arguments for the new product among prospective buyers. To do so, there must be people who notice that the product exists. But prospective buyers must also have good arguments for buying the product once they have noticed it. This is particularly true for organizations that buy. A corporate buyer must be prepared to justify decisions to employees, or even to external stakeholders such as owners, legislators, the media, and the general public. Market creators had better help buyers by providing the arguments. Our cases illustrate the fact that attention and the chances of justification may be contradictory processes. Both PR consultancy and coaching received a great deal of media attention at certain times—attention that generated more audiences requiring justification from the buyers. These audiences were highly critical of the products and of anyone buying them and brought in new criteria. The services were more widely recognized than they had been but were cast in a dubious light, rendering them more difficult to defend. In the PR consultancy market, critical scrutiny did not begin to burgeon until the market had accumulated a critical mass of buyers and sellers. But as the market grew, journalists and politicians repeatedly voiced criticism of the political portion of PR consultancy firms’ commissions, an area they called Public Affairs. These critics questioned the fairness of rich firms having the ability to buy political influence with the costly help of PR consultants, and argued that democratic systems should ultimately be able to resist such tendencies to commodify opinions. A lively debate ensued on the ethical dimensions of PR consultancy services and how this market should be organized. Should lobbyists be registered? Should one reveal the client’s identity in contacts with a third party? The subject is still being contested. In an analogous stream of events, the sellers in the coaching market also experienced growing pains. The industry met with sudden and huge success when the Swedish government decided on a budgetary allocation to the Swedish Public Employment Service to procure coaching services for the unemployed on a massive scale. This allocation was followed by unexpected complications, however. It led to a political debate in which the general public became increasingly aware of coaching services, exposing them to more critique and causing their antagonists to question the evidence of documented benefit. The coaching market came to resemble a controversial consumer 91

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market, in that many people and organizations joined in debating the value of the service. The sellers of coaching services were faced with the task of persuading a much wider group than the actual buyers, and this occurred at a sensitive point, when the new market was far from consolidated. There was a risk that buyers would hesitate to buy a service that had been heaped with criticism. In an established market, one can expect long-time buyers to have an interest in defending their previous purchases and thus the product. There were few such buyers in this case. Politicians from the government side defended their decision to buy, but to date they have not submitted a new order. In addition, the sellers’ attempts to solidify the product using certifications (see the section on Creating Sellers in this chapter) had not made much progress. If the state’s massive purchase had come later in the development of the market, it would probably have been more positive for the sellers. In summary, market growth tends to be combined with both stabilization and destabilization factors. More buyers means more committed organizations ready to defend their buying decisions, but more buyers also involves an increased probability of increased attention. And widespread attention is not necessarily good, because it demands more and more heterogeneous justifications. If the market creators can influence these processes at all, they must weigh the positive characteristics of attention against the negative and try to generate attention at the right times.

Motivating a Market: Why Not within Organizations? A third challenge for those who would create a market is to persuade others that the product is even appropriate for market exchange. Our cases are illustrative in this respect as well. One does not immediately associate either coaching or PR with market exchange; rather they contain components that can be—and often are—performed within organizations. Sports coaching, for instance, has occurred almost entirely within organizations, so one might think that coaching employees is a job for their managers or the human resources (HR) department. The service is also closely related to a type of assistance that family members, friends, or coworkers often provide: helping people to analyse their personal situations. Many PR activities are performed within organizations, and budgets and the size of communication departments in Sweden’s largest organizations have grown steadily and exponentially since the 1980s. Sellers in the coaching market dismissed coaching done by family, friends, colleagues, managers, or even HR departments with the argument that coaching requires specific training. It was more difficult for them to dismiss coaching provided by trained coaches employed in-house, however. To do so, they 92

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argued that ‘true’ coaching could not be performed by someone employed in the same firm as the person coached because that would conflict with the fundamental precept of the coach’s independence vis-à-vis the coachee—the implicit assumption being that a market relationship would create less dependence than would a relationship between employees of the same organization. The argument was not entirely successful, however. There were people who called themselves coaches and worked with employees in their own organizations, although the majority of coaches were contracted via market relationships. Just like for coaching firms, the solution for PR sellers was to emphasize the unique aspects of the market solution and the advantages that an ‘independent’ party brings to a project. Sellers’ arguments focused on the superior ability of PR consultancies to see the overall picture. As they worked with many types of client organizations, consultants argued, they were exposed to new ideas and impulses that were difficult to gain within the boundaries of one organization. The main value, they claimed, was found in a second opinion— a person from the outside who could play devil’s advocate. PR firms also provide news evaluation services, and the consultants also argued that they could provide economies of scale by keeping abreast of the news on behalf of several clients at once. (The economies of scale were also providing the consultants with a highly profitable service, if they could charge multiple clients for the same work.) These qualities of PR consultancy as a source of an ‘external perspective’ to the corporation does not mean, however, that their purchase was a case of outsourcing—of replacing the internal production of the same activities. On the contrary, the organizations with the largest in-house PR departments were the most frequent buyers of PR consultancy services (Sveriges Informationsförening and PRECIS 2012). It seems that in-house PR experts were able to convince their organizations of the need for more PR. Rather, the field of corporate communications as a whole, both in-house and consultancy activities, seemed to form part of a widening spiral, where greater demand caused greater supply and vice versa (cf. Asp 1986).

Creating Sellers: Constrain or Stimulate Competition? As we mentioned, sellers face the dilemma of having both to stimulate and constrain competition. The pioneer sellers of coaching introduced education programmes and certifications for defining who could be a seller in the coaching market. Demands for training and certification are sometimes described as attempts to restrict the number of sellers, but they could also be described as the opposite. On the one hand, the demand for training or certification limited the number of competitors to those who were willing and able to comply. 93

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A five-year university degree in psychology did not allow the graduate to become a true coach. On the other hand, this way of organizing the market made it possible for more people convincingly to present themselves as coaches and to work as coaches, thus stimulating competition. Furthermore, several competing training programmes and certification systems were founded. An alternative development would have been for all firms to define and present their own profiles without using such instruments. Thus the concept of coaching could have assumed such breadth of meaning that it would not be perceived as one product, and would not have given rise to one competitive market. Each seller would have to explain its own concept to the buyers without the support of the others. Within the coaching industry, the certification programmes concerned individual coaches rather than the firms where they were employed. The firms could instead become trustworthy through membership in industry associations, several of which were international. In the PR industry, the situation was more difficult. Both customers and consultancy managers were sceptical about too much theoretical education in PR and communication studies. Instead it was seen as favourable if consultants came into PR with personal specialist knowledge and experience from other areas such as politics, social movements, statistics, fashion, or the biomedical industry. ‘We buy individuals, not consultants’, is a typical statement from corporate buyers of PR services. The major effort in supporting sellers was, rather, the formation of two industry associations. But although membership in an industry organization was to become common practice, it was by no means compulsory; some of the most successful PR firms did not belong. Nor were the rules established by the industry associations mandatory for their members. BUSINESSES OR INDIVIDUALS AS SELLERS?

Above, we saw how the B2B markets for coaching resembled the B2I market in certain respects, in that the users were individuals, even though the buyers were organizations. Especially in the case of PR, yet another mechanism was deferring roles away from the B2B concept; selling firms constantly met the threat of the market developing into an I2B market, in which individual consultants would leave the consultancy firm, taking their clients with them. The individual employee in the selling situation—rather than the selling firm—was seen as the key factor. Many consultancies were contracted because one of their employees was sought after. This situation points to a further difficulty related to the creation of sellers. Analogous to the case of creating buyers, where buyers differed from users, we see here how sellers—firms—might differ from the individual consultants performing the services. The emphasis in the coaching industry on the training and certification of individual coaches ran the risk of 94

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creating an I2B market. The emphasis on the individual coaches rendered their membership in a specific firm less crucial. In this situation, the selling firms run the risk of being marginalized, and their employees become the sellers of the services. This situation resembles the one that prevails in the only significant I2B market: the labour market. Moreover, if the emphasis is on individual sellers and their individual properties in these markets, there is a risk that the markets will dissolve— the product being some general advice, rather than separate and specific products—coaching or PR consultancy. If dissolution were to occur, a variety of market-building actions would be taken in vain, and sellers would have to start over—but this time with a much more general, less distinguishable, product. When individuals become more important than organizations on both sides of the market transaction, the market may even evolve into one that can be described as more individual-to-individual, I2I, rather than B2B. Talented consultants and coaches can still make money in a market such as this, but if their ambition had been to create a B2B market, the result is still failure.

Managing Exchange: How Much Should Be Delivered, by Whom, and When? In order to create a market, sellers must also ensure that exchange actually occurs and set the conditions for and around that exchange. In the case of such professional services as coaching and PR, this process differs radically from that of other products. Delivery is not the process of bringing one thing from point A to point B. A good service is exchanged not only between the right people, but also in the right form, at the right time, and in an adequate quantity in relation to an expected ‘standard delivery’, which also becomes the defining characteristic of the product. The exchange of knowledge-intensive services happens simultaneously between buyers and sellers; it is in the relationship between them that the service arises (cf. Furusten and Werr 2005). The co-production aspect also makes it difficult to evaluate the service. Sellers can always blame a vague customer if a commission does not turn out well: ‘They had no idea what they wanted, hence the failure.’ Moreover, to set prices in relation to how much service is delivered is a delicate task. And the fact that the product can be evaluated only ex post facto contributes to the problem of setting a price. 95

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Sellers of coaching defined a fairly easy task for themselves: they delivered a more standardized product—a certain period of coaching—and the client rather than the coach was held responsible for the result. But for PR managers the co-production produced an ongoing dilemma. For every option or level of co-production, sellers must strike a balance between satisfying the client and not ‘overdelivering’. Employed consultants should work neither too little nor too much for their clients. Or as one PR consultancy CEO put it: ‘This is just built-in with certain people. Others acquire the skill after a while, but some never figure out what makes for a good delivery.’ This gut feeling or ‘rhythm’, together with the capacity to deliver precisely the right amount, was framed as a personality trait, sought after in recruitment. This modus operandi of ‘just enough’ seemed to be typical of the whole market and of many other professional service markets. It is reminiscent of the art of improvisation that many management consultants must display (Furusten 2009).

Conclusions Using two cases of new markets of professional services, we have described a number of challenges and dilemmas that sellers creating such markets are likely to face. They must define the product and cast it as either entirely novel or as a variant of something old. They must create buyers, identify organizations or individuals as their buyers, choose whether to influence the needs of their buyers directly or indirectly, and whether to attract media attention or go more silently about their new business. If sellers target organizations as buyers, they must justify why the new product is to be sold in a market and not produced by the buyers themselves. They must ensure that they, rather than their employees, remain the sellers. And they must decide on the extent to which they should stimulate competition—a strategy that legitimates a nascent market—or constrain competition, potentially creating an advantageous monopoly-like situation for themselves. Finally, sellers must manage the delivery of the services and determine how much should be delivered of what, by whom, and when. In the two cases we observed, sellers handled these dilemmas and challenges in different ways. To a great extent, their efforts consisted of information and argumentation for their ideas—about the product definition, for instance, about why it should be a product for market exchange, or about the type of delivery that could be expected. But the sellers also used organization as an instrument. Some of the PR consultancy firms worked actively in organizing other markets in order to create future buyers. The creation of meta-organizations in the form of industry associations helped to create and spread information—about the appropriateness of selling the services in a market, 96

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for instance. Furthermore, the formation of meta-organizations for sellers of certain products can be seen as attempts at defining and stabilizing the definition of the products. It can also be seen as an attempt at establishing firms rather than individuals as sellers and as an attempt to influence the number and character of the firms acting as sellers, by deciding on membership. That effect was also achieved through education and certification schemes, although that strategy was riskier if the goal was for the firm rather than individual consultants to be the seller.

The Peculiarity of Professional Service Markets All sellers face the same fundamental tasks of market creation, and many sellers are likely to face the dilemmas and challenges that we have described. But markets differ, and the challenges and dilemmas cannot be expected to be identical for all market creation. They differed somewhat even between the two professional service markets of PR and coaching. On a more general level, however, we expect that markets for physical products and markets for professional services produce different challenges for sellers acting as market creators. And although we are far from developing a full theory of these differences and their impact, we use insights from our empirical cases to present five general propositions on the way markets of professional services may differ from other markets. We propose that sellers of many professional services find it easier than do sellers of physical products to control whether their products are considered novel. When sellers try to form a market for a physical good, others can inspect it and decide if it is a new product and therefore a new market. The same is true for standard services such as haircuts, which are delivered in the same way on repeated occasions and have clear results. For professional services that vary greatly, are seldom delivered, and have no clear results, it is more difficult for anyone other than the sellers to judge whether they are new or merely a variation of an existing product—thus providing greater leeway for sellers to convince others of their own definition. We propose that the probability of sellers describing themselves as part of their offering is particularly high in professional services. Most services can probably be professionalized—described as a task for specialists with a specific background or education, and eliminating people without either of those qualifications. Manufacturers of physical products regularly make similar attempts by ‘branding’, by trying to convince buyers that they should consider not only the physical product but also the seller, its good qualities (e.g. fair and environmentally friendly production methods), its trustworthiness, and its record of excellent products. But they also face the difficulty that buyers are likely to make an independent evaluation of the quality of their product. Yet the 97

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product is less clear in professional services, and buyers are more dependent on their evaluation of the provider’s competence. We propose that the risk of a product becoming insourced into an organization is higher for professional services than for goods. Most firms—a producer of food or cars, for example—would not start producing their own pens, even if the cost of pens became very high. But for pure services, the investment consists of hiring the right kind of people. And if the organization’s management is cautious, it can start on a small scale. The coaching firms in this study did not find it easy to prevent firms from hiring their own coaches. But the game is not necessarily zero-sum. In the PR case, there was an increased demand for professional services both in the market and internally, and the fact that firms hired more and more PR officers did not prevent them from buying more and more PR consultancy services. Internal PR officers were likely to initiate purchases of more services within their area of expertise. We propose that markets for professional services are less stable than are markets for products regarding the issue of whether the sellers are organizations or individuals. The likelihood of a B2B situation turning into an I2B situation is high for pure services delivered by experts. The expert may derive little benefit from belonging to a firm with similar experts. This situation differs from the production of most goods, particularly those that are not possible to produce without complex and organized cooperation among many people, typically arranged within a formal organization. On a more speculative note, we propose that the selling of professional services is not hampered by fuzziness to the same extent that the selling of goods is. Previous research has shown that lack of clarity or ‘fuzziness’ around the nature of a product category gives rise to so-called ‘illegitimacy discounts’ (Zuckerman 1999). If a movie does not fit clearly into a traditional category such as ‘comedy’ or ‘drama’, it will generally attract a smaller audience (Hsu 2006). But professional service markets seem to be less sensitive to category fuzziness: both PR and coaching markets continued to grow and expand even though the service content remained unclear. Professional service firms are ‘ambiguity-intensive organizations’, in which ‘abilities to deal with rhetoric, regulate images and manage relationships and interactions with clients [are] central’ (Alvesson 2001, 883). In the case of PR services, for instance, the effective management of service exchange presupposed that both the content and the timing of the service delivery could remain fuzzy and be altered during delivery. Furthermore, the difficulty in evaluating the service ex ante, and the element of co-production between seller and buyer, renders product comparability and standardization difficult. Although it may be an impediment to full category clarity and market success in some markets (Zuckerman 2017), we suggest that ambiguity may actually be an asset in professional service

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markets. The relationship between product characteristics and an audience’s need for product clarity could be favourably explored in further studies. In conclusion, professional service markets deserve more attention not only from scholars interested in the organizing and reorganizing of markets, but also from scholars interested in the daily functioning of those markets.

References Abbott, A. (1988), The System of Professions: An Essay on the Division of Expert Labor. Chicago: University of Chicago Press. Aldrich, H. and Fiol, C. M. (1994), Fools rush in? The institutional context of industry creation. Academy of Management Review, 19(4): 645–70. Alexius, S. (2007), Regelmotståndarna: Om konsten att undkomma regler. Stockholm, EFI. Alvesson, M. (2001), Knowledge work: Ambiguity, image and identity. Human Relations, 54, 863–86. Alvesson, M. (2004), Knowledge Work and Knowledge-Intensive Firms. Oxford: Oxford University Press. Alvesson, M. and Willmott, H. (2002), Identity regulation as organizational control: Producing the appropriate individual. Journal of Management Studies, 39: 619–44. Asp, K. (1986), Mäktiga massmedier: Studier i politisk opinionsbildning. Stockholm: Akademilitteratur. Aspers, P. (2009), How are Markets Made? MPIfG Working Papers. M.P.I.f. Gesellschaftsforschung. Cologne, MPIfG working paper. Becker, G. S. (1983), A theory of competition among pressure groups for political influence. The Quarterly Journal of Economics, 98(3): 371–400. Brint, S. G. (1994), In an Age of Experts: The Changing Role of Professionals in Politics and Public Life. Princeton, NJ: Princeton University Press. Chamberlin, E. (1933), Monopolistic Competition. Cambridge, MA: Harvard University Press. Emerson, R. M. (1962), Power-dependence relations. American Sociological Review, 27(1): 31–41. Furusten, S. (1995), The Managerial Discourse. A Study of the Creation and Diffusion of Popular Management Knowledge. PhD Thesis, Department of Business Studies, Uppsala University. Furusten, S. (2009), Management consultants as improvising agents of stability. Scandinavian Journal of Management, 25(3): 264–74. Furusten, S. and Garsten, C. (2005), ‘New’ professionalism: Conditions for expertise in management consulting and temporary administrative staffing. In S. Furusten and A. Werr (eds), Dealing with Confidence: The Construction of Need and Trust in Management Advisory Services (pp. 19–34). Copenhagen: Copenhagen Business School Press. Furusten, Staffan and Werr, Andreas (2005), Dealing with Confidence: The Construction of Need and Trust in Management Advisory Services. Copenhagen: Copenhagen Business School Press.

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Nils Brunsson and Anna Tyllström Grönroos, C. (2007), Service Management and Marketing: Customer Management in Service Competition. Chichester: John Wiley & Sons. Hsu, G. (2006), Jacks of all trades and masters of none: Audiences’ reactions to spanning genres in feature film production. Administrative Science Quarterly, 51: 420–50. Kopytoff, I. (1986), The cultural biography of things: Commoditization as process. In A. Appadurai (ed.), The Social Life of Things: Commodities in Cultural Perspective (pp. 64–91). New York: Cambridge University Press. Rosa, J. A., Porac, J. F., Runser-Spanjol, J., and Saxon, M. S. (1999), Sociocognitive dynamics in a product market. Journal of Marketing, 63: 64–77. Santos, F. M. and Eisenhardt, K. M. (2009), Constructing markets and shaping boundaries: Entrepreneurial power in nascent fields. Academy of Management Journal, 52(4): 643–71. Starr, P. (1992), Social categories and claims in the liberal state. Social Research, 59: 263–95. Suddaby, R. and Greenwood, R. (2001), Colonizing knowledge: Commodification as a dynamic of jurisdictional expansion in professional service firms. Human Relations, 54: 933–53. Suddaby, R. and Greenwood, R. (2005), Rhetorical strategies of legitimacy. Administrative Science Quarterly, 50(1): 35–67. Sveriges Informationsförening & Precis 2012. Informationsindex 2011. Swedberg, R. (1994), Markets as social structures. In N. J. Smelser and R. Swedberg (eds), The Handbook of Economic Sociology (pp. 255–82). Princeton, NJ: Princeton University Press. Tyllström, A. (2013), Legitimacy for Sale: Constructing a Market for PR Consultancy. PhD Thesis No. 162, Department of Business Studies, Uppsala University. Wikberg, E. (2010), Organisering av en ny marknad: En studie av den svenska coachningmarknaden. Score report 2010:7. Stockholm: Stockholm Centre for Organizational Research. Zuckerman, E. W. (1999), The categorical imperative: Securities analysts and the illegitimacy discount. American Journal of Sociology, 104(5): 1398–438. Zuckerman, E. W. (2017), The categorical imperative revisited: Implications of categorization as a theoretical tool. In R. Durand, N. Granqvist, and A. Tyllström (eds), Research in the Sociology of Organizations 51 (pp. 31–68). Bingley: Emerald Insight.

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7 ‘The Most Regulated Deregulated Market in the World’? Sellers Organizing across Markets Susanna Alexius

Markets are intertwined. If a certain market is perceived as being unorganized or inappropriately organized for neighbouring markets, sellers or buyers in those adjacent markets may step in as organizers. In this chapter, I use the case of the Swedish taxi market as it developed from around 1990 until 2015 to demonstrate how hotel companies and owners of travel terminals have assumed organizer roles in the taxi transport market. This account is based on a qualitative analysis of three cases of participant observation and eight interviews with key stakeholders. The interviews and the first two observations were conducted in the autumn of 2013, and one additional observation was conducted in the spring of 2015. In addition, the chapter is informed by a broad base of documents: previous research, industry reports and company policies, newspaper articles, and public reports.

A Major Reorganization Taxi markets around the world tend to be highly organized by public authorities (Häckner and Nyberg 1995; Dempsey 1996), and prior to 1990 Sweden was no exception. At that time, every taxi company in the country was required to belong to a central dispatch, and only one such centre was permitted per municipality. This situation meant that it was impossible, in principle, for the consumer to choose a specific taxi company, and the various companies had no way of profiling themselves by developing their service offerings. The government authority—The Swedish Transport Council—set

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the prices (taxi fares), and the county government boards decided on market membership for the sellers through its licensing of taxi companies. They also decided on marketplaces and market supply by determining specific sites where taxicabs were to be available in certain numbers at certain hours (Danielsson 1998). Municipalities and county government boards, which were big customers in the market, had some influence on the decisions, whereas private customers had practically none. This way of organizing the market was controversial. Despite wait times of up to eight years for a taxi permit, the county government boards, the Swedish Transport Workers’ Union, and the industry association of the taxi firms—the Taxi Association—all argued that there were too many permits. At the same time, the Taxi Association was complaining about poor profitability and demanding higher fares (Danielsson 1998). Consumers and analysts raised other criticisms, arguing that what they called the dispatch monopoly led to inadequate customer service, inefficient use of resources, and unnecessarily high prices (Danielsson 1998). ‘Taxi. Please hold!’ became the typical reply to customers calling the municipality dispatch for a cab, and a standing joke among taxi users. From the mid-1980s onward, a growing number of government investigators and experts recommended that the existing market organization should be dismantled in the interests of the customer. The market failure must be remedied at once, they claimed—and not with more organization, but with less. In January 1987, for example, an influential report from the National Price and Cartel Office was advanced, arguing for drastic deregulation of the taxi market (National Price and Cartel Office 1987). In the introduction to the report, a list noting the ‘negative effects of regulations’ included, as if self-evident, that ‘regulations’ in general lead to inefficiency, inertia, an orientation towards the producers, and control over prices by the producers; that these factors stifle creativity; and that government authorities tend to spend too much time interpreting the rules (National Price and Cartel Office 1987, 4–5). Because public authorities were buying about 50 per cent of all taxi trips in Sweden in the form of school transports and other public transportation services, advocates of the 1990 reorganization saw possibilities for ‘market efficiencies’—the official justification for hopes of public savings. In June of the same year, the Ministry of Transport presented a reform proposal, upon which a decision was taken the following year. Its main justification was an outspoken ambition to place greater emphasis on the principles of freedom to establish taxi firms and hire drivers and to allow ‘free’ competition among them (DsK 1987:8). The so-called ‘deregulation reform’ involved major reorganization. The right to market membership was open to every taxi licensee and the requirement that taxi companies belong to a central dispatch centre was removed. Remaining, however, was the—now somewhat stricter—suitability testing of drivers and 102

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special rules with respect to metres, receipts, and information on pricing that the taxi firms were required to follow. For instance, information about prices was to be displayed with bright yellow price decals covering several square decimetres of the back windows. And perhaps the most radical of all was the change from strictly enforced prices to a new pricing rule that allowed taxi firms to set their own fares—fares that were clearly displayed. If prices were set freely, if the producers’ suitability was controlled, and if consumers were able to inform themselves, not least about prices, everything would work out—or so the investigators and politicians reasoned (DsK 1987:8; Danielsson 1998).

In the Wake of Reorganization: Calls for ‘Proper’ Market Monitoring Immediately following the reorganization in 1990, a plethora of organizations and individuals in and around the market—the Transport Workers’ Union, the Taxi Association, researchers, public investigators, and journalists—all engaged in market monitoring to evaluate the effects of the reform, which was considered drastic by international standards. A lot of criticism was aired in the public debate. Free price setting had led to tourists being charged extreme fares by unscrupulous taxi drivers. Supply had increased to the extent that many taxi drivers did not find enough customers to earn a decent income without working extremely long hours. The many critical accounts published throughout the 1990s and the early 2000s all spoke with one voice about the perceived problem of a lack of market monitoring. These many highly engaged market monitors may not have perceived their own monitoring as ‘proper’ market monitoring, as they specifically called for public authorities, particularly county government boards, to step in. As summarized in a public commission from 1999: The supervision of the taxi industry is criticized from all sides—even by the regulators themselves—and this has been the case virtually ever since the deregulation was implemented. Monitoring matters have been treated on several occasions in reports and statements [ . . . ] Yet many argue that monitoring still has flaws. (SOU 1999:60, 116)

As noted by the same public commission, however, the public authorities proved somewhat reluctant to live up to these expectations: The public expects the authorities to have some control over the market actors’ behaviour, so that they do not misbehave. However, government resources are limited. One must therefore try to improve the ability to control in other ways. (SOU 1999:60, 120)

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Although this reluctance was officially described as a function of budgetary constraints, the dominant political agenda of ‘deregulation’ was obviously not a good match with suggestions for increased state involvement in the taxi market—potential rules about a mandatory dispatch centre affiliation for all taxi firms, as suggested in SOU 1999:60, for example. Until the mid-1980s, there had been an emphasis on market order through state intervention, whereas the post-1990 reforms’ liberal tones favoured order through freedom from state intervention. No wonder the public commission encouraged ‘trying to improve the ability to control in other ways’ (SOU 1999:60, 120).

Emphasizing Information A belief in market information especially dominated the taxi market discourse. In the decades following the 1990 reorganization, particular stress was given to the right and responsibility of customers to use their own money as they choose, or—optimally—in a rational manner (Ritzén 2012). A number of ambitious information campaigns were launched from the late 1990s onwards. One such example was a large information campaign on ‘free price setting’, conducted in 2012 in a cooperative effort between the taxi, hotel, and tourism trade associations on the one hand and the associated authorities on the other (Swedish Taxi Association 2013, 11). A great deal of information has been aimed at raising interest and awareness among consumers, particularly addressing the issue of the yellow price decals on taxi windows. Despite hopes for and trust in information, these initiatives have made limited contributions to order in the market. A poll performed in 2013 by the information intelligence company TNS SIFO on behalf of the Swedish Transport Agency found that a mere 15 per cent of people interviewed in person and 13 per cent of those interviewed over the telephone said that they read the yellow price signs posted on the side windows of the taxi cabs, and even fewer said that the information influenced their consumption choices (SIFO 2013, 33). The same report indicated that politicians overestimated the ability of consumers to influence the market. The vast majority of the consumers interviewed (86 per cent in person and 68 per cent by telephone) stated that they did not ask cab drivers how much their taxi rides would cost (SIFO 2013). In fact, according to SIFO’s study, most of the people interviewed stated that they thought taxi prices were reasonable and only about 1 per cent felt they had ever been cheated. The cost of taking a taxi rose, however. The average annual price increase during the period 1990–2007 was close to 4 per cent, compared with consumer price indices that grew only 2 per cent annually (SIFO 2013; Höjer 2013). In a report from the Transport Workers’ Union, the authors found that public sector organizations—the major customers—had benefited from the deregulation, as: 104

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There were indications that the reorganization had increased supply. According to a 2005 report from the regulatory reform commission (SOU 2005:4) and a series of other evaluations with generally similar findings (see Swedish Competition Authority 2012), the 1990 reorganization of the Swedish taxi market did help to increase the availability of taxis. Between 1990 and 2007, the number of taxicabs per inhabitant rose by approximately 22 per cent as the meaning of a taxi queue changed from ‘a line of customers waiting for a cab’ to ‘a line of cabs waiting for a customer’ (Swedish Competition Authority 2012, 25–6).

New Taxi Organizers Stepped In In the autumn of 2009, the managing director of a major deluxe hotel, the Grand Hôtel in Stockholm, explained to a journalist from a Swedish daily paper why the hotel had established its own exclusive limousine service: We want to prevent a situation in which our guests are overpaying. If they climb into a taxi outside our hotel and have to pay SEK 2,000 [EUR 200] to go to the airport, it creates a lot of badwill towards us here at the hotel. (Wågström 2009)

When it was discovered that guests did not actively choose taxi firms on their own, Grand Hôtel entered the taxi market and expanded its offerings to include taxi service as a means of protecting its guests, and ultimately the goodwill of the Grand Hôtel. The hotel management believed that from the customer’s perspective, hotels and taxis may be seen as parts of the same value chain—the same travel and tourism service—and, as the saying goes, ‘a chain is only as strong as its weakest link’. Perhaps the tourists see themselves as purchasing a weekend in Stockholm and expect a seamless flow from one market transaction to the next, as if the holiday were one long transaction. If the taxi transaction is troublesome, then, dissatisfaction may simply spill over onto the traveller’s whole experience, which, by extension, affects other sellers in the value chain. The Sheraton Stockholm numbered among the hotel companies that chose another route to solving the same problem: it began to organize the part of the taxi market that it could influence. Through the addition of more and more organizational elements, the Sheraton attempted to create greater order in the taxi market in its immediate neighbourhood. It began by rule setting: by changing the signage outside the hotel, removing the taxi stand, and turning 105

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it into a no-parking zone, among other things. The hotel then hired a security company to drive away the unwanted cabs of smaller firms that the hotel management did not trust. Finally, the Sheraton came up with the idea of a ‘preferred supplier’: the city’s largest and most influential taxi company—Taxi Stockholm—to be stationed outside the hotel every morning to serve the Sheraton’s guests (Wågström 2009). Other new taxi organizers were the airport operator, Swedavia, and the railway station operator, Jernhusen. These firms owned land outside their terminals where they organized transfer sites between their mode of transportation and the taxis. Swedavia appointed a transfer manager and justified the company’s role as organizer of taxi transfer sites by referring to the company’s mission and the airports’ physical ability to act as a bridge between the taxi market and the market for air transportation. Swedavia also referred to two goals: to ensure satisfied customers (as there had been low scores for taxi transfer in earlier customer surveys) and to meet environmental goals and owner directives (whereby measures that increased the number of airport trips in environmentally friendly cabs were presented as an example of performance that would please the owner—the Swedish state). Most important, Swedavia was able to organize local transfer sites at the Arlanda and Bromma airports, thanks to its ownership of the land that surrounds the airports. Similarly, Jernhusen organized transfer sites outside main railway stations in Stockholm, Göteborg, and Malmö; and several ports in Stockholm did the same outside their terminals. All these organizers are publicly owned companies, rather than government authorities, as is the case in many other countries. (Swedavia and Jernhusen are state owned, whereas the ports are owned by the municipality.) As a Swedavia transfer manager explained in an interview: We got to a point where it just wasn’t working with the deregulated market any longer. And because neither the politicians nor the authorities were lifting a finger, we were forced to intervene.

One of the managers from Jernhusen agreed: Anyone could see that it was the Wild West out there. Something had to be done. We need order in the market.

Back in 1995, the government asked SJ (Statens Järnvägar—the Swedish national railway company) to establish an orderly taxi transfer point at the central station in Stockholm. Since then SJ, and later Jernhusen, have been experimenting with different ‘systems’ and ‘solutions’, as explained by their managers (personal communication, 29 October 2013). In the mid-2000s, it was time for another go. In 2006, Jernhusen opened a taxi transfer site at Göteborg’s central station; in 2009, a similar site was opened at Stockholm Central Station, and two years later, yet another in Malmö. 106

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The organization at the transfer sites is mainly in the interest of market membership for taxi firms. Any company can apply for access to the site, but few are allowed in, as there is a list of ‘basic requirements’ and ‘promises to the customer’ that the operator’s executives have set in consultation with a few established taxi companies. In order to qualify as a seller in the transfer-site system, a company must meet the necessary requirements for availability of taxis, access to its own dispatch, clean and safe cabs, and well-groomed and properly trained drivers. And the prices cannot be ‘unreasonably high’ (Jernhusen 2013).

A Closer Look at the Jernhusen and Swedavia Transfer Sites It was a grey, overcast September morning in Sweden’s capital city. At Centralplan, the central square outside Central Station just off the downtown city street Vasagatan, commerce was in full swing as always. Included in this commercial exchange were taxi services. Buyers and sellers streamed into Centralplan, met, negotiated, and having reached agreement, drove off together. If anyone thought for a moment that these meetings, these business dealings, came about through the providence of some invisible hand, one needed only to point to the taxi concierges, three of whom were on duty that morning. Sporting neon-yellow vests, they waved customers and cabs forward so they could meet and do business. One could also note the equally obvious boom gates barring the entrance to the transfer site to all but the cabs of the five approved firms. The head of the concierges explained the situation. He was a veteran of the industry, with many years’ experience as a taxi driver, and had served as a board member and board chair of Taxi Stockholm. The first lane inside the gate, the closest to the customer queue, is reserved exclusively for Taxi Stockholm cabs, as is lane number four most of the time.

The remaining two lanes were shared by cabs from Taxi Kurir, Taxi 020, Sverigetaxi, and (on rare occasions) Top Cab. The taxi companies licensed to serve this site qualify for the lanes available, and other taxi drivers need not trouble themselves trying to find business here at the Centralplan taxi transfer site. The taxi concierges and the physical hindrances see to that. The boom gates can be passed only with the use of a special transponder, to which only the approved firms have access. Jernhusen, the operator of the transfer site, could assume this role by virtue of owning the land at Centralplan. Establishing the transfer site required investments—building sidewalks, adding the gates and a transponder system—in addition to ongoing operational costs, including the concierges. To finance the system, the so-called ‘Taxi Welcome Service’, Jernhusen’s 107

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customers had to pay a gate fee equivalent to EUR 2. This fee appeared as ‘Centralen’ on customer receipts, and information about the fee was posted close to the place where passengers lined up. Jernhusen’s website stated, among other things, that its Taxi Welcome Service offers ‘your choice of taxi cab’ (Jernhusen 2013). It did not state, however, that customers could choose cabs from only a few firms. A visit to the Swedavia transfer site at Arlanda Airport reveals that it can be risky to organize the taxi market, which Swedavia’s transfer manager knows only too well. In 2010, he received a death threat that Arlanda Airport’s security department deemed serious enough to offer him personal protection and a safe house. As he explained (T. Kreij, personal communication, 30 September 2013): It was war getting this taxi system passed. And I received a message saying: ‘You’re stealing our children’s food!’ You know, pure mafia style.

Yet his pride in Swedavia’s transfer system for taxis was evident in the interview. According to Swedavia’s presentation material from a meeting with the Swedish Competition Authority (Swedavia 2013), the company had conducted a survey of taxi passengers in the autumn of 2009. It confirmed Swedavia’s suspicions: Passengers had extremely negative views of taxi operations at Arlanda Airport. This information led to the development of a highly organized local marketplace, in cooperation with the transport logistics firm Apcoa. In the summer of 2010, after the taxi system reform, another customer survey was conducted, showing radically improved results. In the words of the transfer manager, ‘Everything’s done in an orderly manner here. That’s why it works.’ Taxi operations at Arlanda Airport had grown by 20 per cent since the system was introduced, he added, and surveys showed customers to be ‘very satisfied’ now. At the time of the study, in fact, the system had attracted visitors from several other European airports who wanted to observe and learn about its operation, and Swedavia was even expressing hopes of exporting the system abroad. Market membership is dependent on contracts between the cab companies and Apcoa, in which each cab company and driver commits to following a number of rules, such as supplying up-to-date information on the type of engine used in each registered taxi, ensuring that drivers are well groomed and that cabs are in good shape, and showing a record of the fuel purchased (Swedavia/Apcoa 2010). All approved cabs, which numbered 3,500 at the time of the study, were equipped with a transponder; the information technology (IT) system could identify the car and open the gates that blocked taxis without the right transponder. The dispatch centres first summoned their cars to a remote parking lot at Arlanda monitored by security people and barrier gates, which, at the time of the study, held about 300 cars. The system was further 108

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designed to influence individual transactions by deciding how quickly a certain seller would gain access to potential customers. A rating system was established whereby each cab was assigned an environmental score, with the most environmentally friendly cars obtaining the highest rating. This score was weighted, along with such other factors as waiting time and cab company, to create a call order for the cars in the lot. The main rule was that the car with the highest environmental points would be called first to the pick-up zones at Terminals 2, 4, and 5. Once there, the cabs first lined up in a gated feeding zone, and proceeded to meet customers in the loading zone, where drivers got out of their cars and presented both themselves and the cab to the customer. ‘There’s an air of beauty contest about it, and that’s the idea’, explained the transfer manager, as it allowed customers to observe the appearance of both the cab and the driver and helped them to choose the company, the driver, and the car. Prices also required a decision. In the autumn of 2013, a maximum fare rate of SEK 625 (EUR 60) was applied for a designated zone stretching roughly between Uppsala and Stockholm. Similar rules for maximum price were also used by others, including the Ports of Stockholm and the A-Train, the owner and operator of Arlanda Express serving Arlanda with express trains (Kihlström 2013). In contrast to the order at Centralplan, Taxi Stockholm and Taxi 020 were given the lanes furthest from the customer exit at Arlanda Airport; after pressure from various sources, including the Competition Authority, the smaller cab companies shared the lane closest to the exit. Swedavia’s system was built largely on monitoring and on severe negative sanctions. At the time of the study, any driver or company misbehaving in some critical way risked immediate exclusion from the system for six months. Because traceability in the system was based on number plate ID, it was the car rather than the driver that was suspended, because Swedavia considered any infractions of the rules to be the responsibility of the employer—the cab company. The site operators not only offered an organization of the taxi market; they created a new side market by selling their ‘services’ to taxi companies. In this sense, the site operators were sellers and the taxi companies were buyers. To finance the taxi system at Arlanda Airport, Swedavia charges a service fee of EUR 3.5 per cab each time a cab is called by the system. The taxi firms that are allowed to bring their cabs to the sites pay the fee, which they pass on to their customers in the form of fares. At the time of the study, 1 €1 of the fare went to Swedavia and the rest to Apcoa. With 1.2 million calls per year, this system yielded 5.04 million€ annually, 1.1 million € of which went to Swedavia. ‘On principle’, Jernhusen did not want to disclose what it earned from its taxi transfer sites. 109

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In this side market, competition among the sites was low because of their local monopolies. One could argue that the city competed by offering public taxi stands for free, but these stands had less value for the taxi drivers, and their numbers were being reduced following pressure from the larger established taxi firms. Similar to other markets, this new market initiated organization in the form of a trade association. Swedavia, Arlanda Express, Ports of Stockholm, and Jernhusen have met quarterly since 2010 in a ‘terminal owners’ forum’. As Swedavia’s transfer manager explained in an interview: ‘The taxi companies collaborate on certain issues and therefore we, the terminal owners, also needed to collaborate.’

Justifying the Organization: The Role of Scapegoating Independent Cabbies In later years, many Swedish newspapers and web columns have been written about the ‘poor, cheated taxi customers’, ‘forced to pay extortionate rates’ for their taxi rides, often in one of Sweden’s larger cities (e.g. Ritzén 2012; Wågström 2009; Landell 2012; Elmsäter Swärd 2013). In these contexts, the small cab companies established after the 1990 reform have, with notable frequency, been pointed to as the black sheep of the taxi market. Partly because these companies have had no trade organization that speaks to the media on their behalf as a group, they are a collective scapegoat, despite the legality of their pricing and despite the reported satisfaction of the vast majority of their customers. The small cabbies have been vital to the new organization of the taxi market, as the scapegoating of their businesses has clearly contributed to shaping public perceptions of the market and its downsides (cf. Alexius 2014a; Alexius et al. 2014). This, in turn, has contributed to attention being deflected from the price collaboration in which the large, established companies in the industry have engaged. Not everyone is happy with the transfer sites; at the time of study, Swedavia had been to Swedish Market Court twice and had had several complaints lodged against it with the Competition Authority. In June 2013, the Competition Authority filed a lawsuit with Stockholm District Court demanding that Swedavia pay the equivalent of SEK 330,800 (EUR 33,000) in fines for overcharging taxi companies and, by extension, their customers. For nine months in 2011, the taxi companies were required to pay a special ‘sign fee’ of SEK 25.0 (EUR 2.5) per customer to Swedavia’s contractor Europark (which later changed its name to Apcoa) for holding up a sign in the arrival hall with the name of a prearranged customer. The actual cost turned out to be only just over 3 per cent of that amount, or SEK 8.3 (EUR 0.85), which, the 110

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Competition Authority found, substantiates the accusation that Swedavia took advantage of its monopoly position at the Arlanda transfer point. The sign fee added approximately SEK 111,900 (EUR 11,500) to individual taxi fares in 2011 (Radio Sweden 18 June 2013). This was not the first time the Competition Authority had criticized organizers of taxi queues and call systems at Arlanda Airport and other locations for abusing their dominant position as a marketplace (Swedish Competition Authority 19 February 2010). Taking a closer look at this critique, I visited the Stockholm Centralplan square just outside the Central Station a second time. Although legally a no-stop zone, on that morning three small-firm cabs were parked there as their drivers waited for customers. I struck up a conversation with one of the cabbies, a young man of about 25, who requested that he remain anonymous. He told me that it had become much more difficult to find customers because, as he said, ‘Where am I supposed to meet them?’ More and more public taxi stands had been removed in recent years, reducing competition for the site operators. ‘How did that happen?’, he wondered. And one by one the best transfer sites were being organized, resulting in his lack of access to them, despite the fact that his business and pricing were completely legal. ‘Do you know what’s happening?’, he asked rhetorically (Anonymous driver, personal communication, 17 September 2013): Well, before we used to get nine or ten fares a day. But now that we don’t have anywhere to stop, we don’t find many customers. Maybe four or five a day. And that means that I either have to raise my prices or stop driving, because it’s not profitable.

The scapegoating of the independent cabbies has contributed to attention being diverted from the fact that the organized sites reduce the number of competitors. Yet reduced competition is likely to create overpricing, which, in turn, has been highlighted to justify the stricter organization of the transfer sites and the removal of public taxi stands (Alexius 2014b; Radio Sweden 14 April 2015). The Transport Workers’ Union recognizes this as a vicious circle for the small cabbies.

‘The Most Regulated Deregulated Market in the World?’ In the last 30 years there has been much ado about the organization of the Swedish taxi market, and the development has confirmed the general thesis that so-called deregulation tends to translate into so-called re-regulation—one reorganization leads to another (cf. Häckner and Nyberg 1995; Dempsey 1996; Sprängs 2014). One peculiarity in this case is the fact that its organization from sellers across market borders went largely unnoticed in the public discourse. This illustrates the power of a myth about market organization 111

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that adheres to the notion that ‘proper’ market organizing ought to be conducted by public agencies (or perhaps by sellers in the focal market—in this case the taxi companies). Because of widespread belief in this myth, when unexpected organizers engage in market organization, sometimes across market borders, their activities and measures may not be perceived as organization—either by themselves or by others. At a time of strong ‘deregulation’ ideals, for example, unexpected market organizers who engaged in extensive rule setting (including sanctions and monitoring) were largely praised for their ‘solutions’ and ‘service’, rather than their actions being seen as ‘troublesome interference and regulation’. To this day, the myth survives about the Swedish taxi market being unusually ‘deregulated’ and ‘free’, following a ‘drastic reform’ in 1990. If we wish to kill this myth, we must help unpack the popular talk about new ‘tools’, ‘solutions’, ‘systems’, and ‘service’, and realize that these are, in actual fact, rules, sanctions, hierarchy, monitoring, and membership—and that despite their origin across borders from other markets, they all contribute to an increased level of organization in the Swedish taxi market. As one of the taxi concierges at Centralplan Stockholm put it: ‘The Swedish taxi market may well be the most regulated deregulated market in the world.’ A final twist to the case worth mentioning is that several of the ‘unexpected’ organizers of the Swedish transfer sites were, in fact, state-and municipallyowned corporations that have assumed the responsibility of establishing local order, despite all the talk of ‘public deregulation’. In other words, the public influence on markets may be expressed in many ways. Until the 1980s, the emphasis fell on the role of the public as planner, rule setter, and monitoring agent, via organizations such as county government boards and the Swedish Transport Council (Transportrådet). Since the ‘deregulation’ reform first entered the agenda in the mid-1980s, the emphasis has been on the influence of the public in its role as a major customer in the taxi market. And from the mid-2000s, a new period began in which there was an obvious, yet less well noted, complement to this governance, in the form of state and municipal corporations organizing local transfer sites.

References Alexius, S. (2014a), Ansvar och marknader. Stockholm: Liber. Alexius, S. (2014b), Världens mest reglerade avreglerade marknad. In J. Björkman, B. Fjaestad, and S. Alexius (eds), Alla dessa marknader (pp. 97–115). Göteborg: Makadam. Alexius, S., Castillo, D., and Rosenström, M. (2014), Contestation in transition: Value configurations and market reform in the markets for gambling, coal and alcohol.

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‘The Most Regulated Deregulated Market in the World’? In S. Alexius and K. Tamm Hallström (eds), Configuring Value Conflicts in Markets (pp. 178–203). Cheltenham: Edward Elgar. Danielsson, M. (1998), Avregleringspolitiken. Exemplet taxi. Politiska institutioner och strategiskt agerande 30—Det trafikpolitiska fallet. Uppsala: Department of Government, Uppsala University. Available at: http://home.swipnet.se/~w-26965/pisa30.pdf. Dempsey, P. S. (1996), Taxi industry regulation, deregulation & reregulation. The paradox of market failure. Transportation Law Journal, 24: 73–120. DsK (1987:8), Avreglering av taxi (Deregulation of the taxi market, Government ministry report from the Ministry of Communication). Elmsäter Swärd, C. (30 April 2013), Dags för krafttag mot fusket i yrkestrafiken. Debatt, Swedish Public Television SVT. Available at: http://www.svt.se/opinion/dags-forkrafttag-mot-fusket-i-yrkestrafiken. Häckner, J. and Nyberg, S. (1995), Deregulating taxi services. A word of caution. Journal of Transport Economics and Policy, 29(2): 195–207. Höjer, H. (28 May 2013), Högre priser på avreglerad taximarknad. Forskning & Framsteg. Available at: http://fof.se/tidning/2013/7/artikel/hogre-priser-pa-avregleradtaximarknad. Jernhusen (2013), Documents on Jernhusen’s taxi regulations: ‘TWS Kundlöften’, ‘TWS Grundkrav 1–4’, ‘TWS Produktionsregler—GBG C’, ‘Trafikeringstillstånd mall 2013-04-11’. Kihlström, S. (16 May 2013), Nu ska taxiskojarna stoppas i Stockholm. Dagens Nyheter. Available at: http://www.dn.se/sthlm/nu-ska-taxiskojarna-stoppas-istockholm/. Landell, L. (6 October 2012), Skydda oss mot ockertaxi. GT/Expressen. Available at: http://www.expressen.se/gt/ledare/ledare-skydda-oss-mot-ockertaxi/. National Price and Cartel Office (1987), Taxi och flyg. Effekter av avregleringen. SPKUS 1987:4 (SPKUS is a Swedish acronym for the National Price and Cartel Office’s report series). Radio Sweden (18 June 2013), Swedavia tog ut felaktiga taxiavgifter på Arlanda. Channel P4 Uppland. Available at: http://sverigesradio.se/sida/artikel.aspx?programid= 114&artikel=5568109. Radio Sweden (14 April 2015), Taximarknaden på väg att styras hårdare, Vetandets värld, P1. Available at: http://sverigesradio.se/sida/avsnitt/529703?programid=412. Ritzén, J. (5 July 2012), Flygblad ska stoppa taxifusket. Dagens Nyheter. Available at: http://www.dn.se/sthlm/flygblad-ska-stoppa-taxifusket/. SIFO (2013), Taxipriser och taxiresor i de tre storstadsregionerna 2013. Study for the Swedish Transport Agency. SOU (1999:60), Kundvänligare taxi. (The aim towards making taxis more customer friendly.) Report from the Taxi Committee of 1998. SOU (2005:4), Liberalisering, regler och marknader. (Liberalisation, regulation and markets.) Report from the Regulatory Reform Committee. Sprängs, T. (3 January 2014), Avregleringarna har kostat staten miljarder. Dagens Nyheter. Available at: http://www.dn.se/ekonomi/avregleringarna-har-kostat-statenmiljarder/.

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Susanna Alexius Swedavia/Apcoa (2010), ‘Documents regarding taxi regulations from 2010. Bilaga 1: Maxpriser; Bilaga 2: Avtal med Ordningsföreskrifter m.m.’ Swedavia (2013), ‘Meeting with the Swedish Competition Authority 2013-01-29’. Swedish Competition Authority (2010), ‘Ärende om taxi vid Arlanda avskrivs’. Retrieved from: http://www.konkurrensverket.se/nyheter/arende-om-taxi-vid-arlandaavskrivs/ (accessed 9 September 2017). Swedish Competition Authority (2012), Regelförändringar i transportsektorn. Report commissioned by the Swedish Competition Authority, 2012:6. Swedish Taxi Association (2013), Branschläget 2013. A report from the Swedish Taxi Association. Swedish Transport Council (2013), ‘Transportstyrelsens marknadsövervakning 2013’, Report no. TSG 2012–172. Swedish Transport Workers’ Union (2013), Uppdrag: Taxi. Taxibranschen i Sverige 2012. Wågström, J. (15 October 2009), Taxipirater retar upp hotellen. Dagens Nyheter. Retrieved from: http://www.dn.se/arkiv/ekonomi/taxipirater-retar-upp-hotellen/.

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8 Markets as Open Systems: Organizing and Reorganizing a Financial Market Mats Jutterström

Organizations are complex phenomena. Attempts at directing them are characterized by dilemmas, and changing demands recurrently introduce new challenges. Reorganization is a prevalent way of dealing with perceived problems, but implementation introduces further challenges such as worried employees, resistance to decided changes, and changed prerequisites between decision and imposition (Dawson 2003). Changing from organization to market, it is widely believed, will eliminate the problems and the many burdensome reorganizations. The individual market takes care of itself, in contrast to organizations requiring recurrent management-led change. Unlike this pleasant idea of markets as systems of self-adjusting order, many markets are subject to recurrent reorganization. The empirical study presented in this chapter—of a huge market for pension funds—is an example. Although the general belief was that the organizing work was largely completed after the launch of the new market, market reorganization became almost perpetual in the years that followed. Several other chapters in this book demonstrate similar processes. Just like formal organizations, markets are often subject to recurrent and demanding reorganization. Why is that so? This chapter addresses two interrelated questions on the subject of market change. What causes market reorganization? And what makes it a frequent activity? The main argument of this chapter is that we need to consider the wider context of the individual market in order to develop theory on its organizational change. Just as with formal organizations, we need to recognize markets as open systems. Based on the empirical study, this chapter highlights three contextual causes of individual market reorganization: (1) other markets (focal and side-market interrelationships) (Jutterström 2010, 2014), (2) general ideas diverging from

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practice, and (3) new ideas. As illustrated in the chapter, these three factors made life both unexpected and difficult for market organizers—largely because of them, market management was no walk in the park. The three highlighted factors led to changes in the focal-market organization and to changed activities to support it; they represent sources of individual market reform. My second question shifts the focus from the cause of a single reform to the high frequency of these events over time. At the end of the chapter, I propose two contextual conditions propelling the frequency of market reorganization. The longitudinal study covers the years between 1998 and 2012. Empirical data comprises 23 in-depth interviews with various stakeholders in the market for premium pensions—mainly with civil servants; politicians; and CEOs, directors, and managers of financial firms, business associations, and advisory firms. All interviews were recorded and transcribed. Further data comprise written reports from public authorities and articles in the Swedish mass media during the time span studied and observations at stakeholder meetings and seminars. Before turning to the study of the financial market, I briefly address the subject of boundaries and of open systems.

Markets: An Open-System Perspective Highlighting the impact of contextual factors on the reorganization of individual markets calls for some discussion of the boundary between an individual market and its context. The subject can be discussed at length, but here I am merely making a few comments and briefly describing the impact of the open system perspective in literature on formal organizations. First, a boundary addresses what is outside an individual system, not only what is inside (Santos and Eisenhardt 2005). Thus the boundary helps in recognizing the context, its elements, and their significance for the focal system. Second, a central purpose of a boundary, according to an open-system approach, is to enable the investigation of causal relationships between exogenous and endogenous variables—in line with my aim for this chapter. The function and appearance of a focal system is not closed off from external impact, nor is it so open that boundaries disappear or lose their relevance (cf. Bunge 2000). Third, boundaries between organizations and their contexts are not easily set. Boundaries may be shifting and ambiguous, and it may be difficult to determine whether particular elements are ‘outside’ or ‘inside’. This is perhaps even more the case with markets, for example, as responsibility for markets is generally more diluted than for organizations, as argued in the final chapter of this book. It seems that markets would be relatively more open. Fourth, organization constructs boundaries. Market organization typically creates and elucidates market elements; rules define buyers, sellers, and products; 116

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and monitoring and sanctions often support rule following. Membership is a significant part of organization. Formal organizations need to define who is a member and who is not—a prerequisite for the division of labour, coordination of work, and distribution of information, for example. In markets, the question of membership seems more complicated. According to the ‘perfect’ market ideal of neoclassical economics, markets should be free and easy for everyone to enter or exit (Lipsey et al. 1987), avoiding membership rather than constructing it, as opposed to formal organizations. Like organizers of formal organizations, however, market organizers need to know who the sellers or buyers are, in order to more easily direct them. And, as with organizations, they often want to include buyers and sellers with certain characteristics only—both aspects of market membership are described in the study of this chapter. The aspect of membership serves as an example of how market boundaries are constructed, but although a relevant aspect of market organization in itself, it is outside the remaining scope of this chapter. All in all, an individual market consists of its elemental parts: product, buyers, sellers, price, competition, and transaction. The elements constitute a market system in the sense that they are interrelated, and each element is required if we are to speak of a market. As demonstrated in this book, buyers and sellers often organize their markets, thereby expanding their internal roles. I also include organizers with a formal right to make decisions about the individual market as one of the endogenous variables of the market. In the literature on formal organizations, the open system perspective has had a fundamental impact. Whereas classical management scholars perceived organizations mainly as closed mechanical systems, paying little attention to their environments, organizational scholars have been developing an open system perspective on organizations for decades (Thompson 1967; Scott 1992). Following this perspective, organizations are in constant interaction with their surroundings and need to be adapted to external changes and demands (Morgan 1986). Various kinds of adaptation represent methods of attaining the generic organizational assets of efficiency (Burns and Stalker 1961; Woodward 1965; Mintzberg 1979) and legitimacy (Meyer and Rowan 1977; Scott 1995; Czarniawska and Sevòn 1996), ultimately implying a matter of life or death for individual or whole populations of organizations (Hannan and Freeman 1977; Aldrich 1979). As the contexts of organizations vary in time and space, there is no one best organization form, promoting organizational diversity. From their impact on formal organizations, contextual aspects are also potentially interesting as drivers of individual market reorganization. Finally, the intrinsic characteristics of a system are relevant in the analysis. Because of their internal characteristics, organizations vary in their ability to adapt to external changes. Buckley (1967) captures this phenomenon with the 117

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concept of morphogenesis—systems that respond to external changes by adaptation. He argues that such social systems have three key characteristics: (1) plasticity and sensitivity to the environment, enabling a constant exchange and ability to absorb external information; (2) mechanisms that enable variation in the organization in response to external variation; and (3) structures to support and conserve such functioning variations. I return to the concept of morphogenesis at the end of this chapter, in the analysis of what drives market reform frequency.

Organizing and Reorganizing a Financial Market In June 1998, after many years of committee work, the Swedish Parliament passed a bill for a new national pension system (SFS 1998:674). From a situation in which the state had made all decisions about the investment of pension funds, all gainfully employed citizens of Sweden were now to decide for themselves how to invest part of their future public pensions: 13.5 per cent of their total pension funding (or 2.5 per cent of total income), up to a certain level. The individual’s first decision about how to invest was to occur in autumn 1999, when 4.1 million Swedes were to place a total of some SEK 56 billion (EUR 5.6 billion)1 in up to five different funds per person. If no active individual choice were made, the person’s contribution would be pooled in the Premium Saving Fund administered by the state. All in all, the state wanted to create a market in which citizens should act as buyers of financial products offered by banks and other financial firms on an internet-based marketplace. The new market was to be created, organized, and administered by a newly founded government authority, the Premium Pension Authority (Premiepensionsmyndigheten), PPM from here on.2 Before the market launch, PPM had a great deal of work to do. Huge amounts of time and effort were spent on organizing the generic market elements—price, competition, products, transactions, buyers, and sellers—to have the market working as planned. Extensive information was also developed to support the intended function of the market. An advanced computer system was developed, monitoring most of the market elements—keeping track of buyers, sellers, products bought and sold, and prices, for example. Even if PPM acted as the principal market organizer, many others participated in the discussions— not least prospective sellers and their associations.

1

10 SEK is equivalent to 1 EUR. This rate will be used throughout this chapter. The word ‘premium’ reflects the fact that it is an additional smaller part of the national pension system, in which the ‘income pension’ constitutes the major part. 2

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Attempts to Organize the Buyers At the time the premium pension market was constructed, financial markets in Sweden were much debated. Many stakeholders also had opinions about the characteristics of the new market. In Swedish mass media, the fees of mutual funds were criticized for being too high, and sellers were criticized for making it difficult for buyers to compare prices and change funds (so-called lock-in effects). The government and other stakeholders stressed the importance of achieving a high level of competition in the new market and offering buyers a large and diverse supply side from which to choose (Proposition 1993/1994:250). The Swedish consumer agency (Konsumentverket) stressed that the new market should provide the individual buyer with easily accessible, relevant, up-to-date, objective information (Proposition 1993/1994:250, 111). Furthermore, civil servants at PPM and involved politicians were intimidated by the results of an earlier constructed pension market in Chile. As that market contained little protection of buyers’ interests, buyers were systematically worse off vis-à-vis the providers of mutual funds—an unwanted potential outcome for Sweden. One significant goal in PPM’s organizing work was to achieve a market with many sellers and products, the idea at the time being the larger the supply side the better. Furthermore, mutual funds should be easy to compare and their fees easy to comprehend. Changing funds should be free of charge for buyers (yet the total administrative costs of PPM were split among all pension savers, whether they were active or not). And individual buyers and their choices should be kept secret from sellers, in order to protect buyers from potentially misleading information. PPM should be the provider of objective relevant information. All in all, PPM tried hard to establish a market close to the ‘perfect’ market ideal of neoclassical economics—a market relatively free from such aspects as information asymmetries, transaction costs, lock-in effects, misleading information, redundant complexity, and a high market concentration (few sellers). PPM officials believed that this ideal would improve the buyers’ situation. Such a market comes neither naturally nor easily, however. On the contrary, the greater the ambition to set up a market close to this ideal type, the greater the need for extensive organization (rules, hierarchy, membership, monitoring, sanctions) (Jutterström 2010, cf. Chapter 1). Because of the immense organizing work, including considerable problems in developing a computer system to administrate the market, the market opening was eventually postponed for a year, to autumn 2000. While stock prices continued to climb, pension savers were missing an opportunity to invest their totally accumulated sum of EUR 5.6 billion in the mutual funds of their choice—a much-criticized situation. 119

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According to the ‘perfect’ market model, buyers are expected to make wellinformed decisions. PPM put a great deal of effort into informing buyers about the new market before its opening. The public authority developed a basic market description and presented it in different forms—on the website, in various brochures in different languages, and on automated telephone answering services. PPM also heavily promoted the new financial market and its functions through more traditional marketing channels: television commercials, billpostings, advertisements, and radio commercials. In 2000— the year of the market launch—PPM spent EUR 18.7 million on information. Of this, EUR 7.3 million was spent on commercials and public relations activities (PPM 2001). Besides providing information about the new market and its functions, one significant task was to promote buyer activity. As many buyers as possible should choose funds actively—a central message in much of the information. In addition to the massive information campaign, several service units were established for buyers to call in case of questions. Buyers were informed of the way the market worked and of the necessity of making active choices, and could obtain more information when in need of help. Buyers would receive information annually about the economic result of the chosen funds in an orange envelope, an important symbol for the new market. Just before the market launch, organizers held a widely shared conception that the extensive task of developing the market was now principally over. From here on, it would mainly be a question of administrating it. But attempts to organize the market did not end there. The organizers soon met unexpected challenges and disappointments driving market reform.

Success, Failure, and Reorganization In autumn 2000, almost three million people, or 67 per cent of Sweden’s pension savers, chose actively among the mutual funds being offered (PPM 2001); to choose to do nothing was to relegate the decision to the state. The proportion of active buyers was generally seen as a very good outcome. The average fund charge was about 0.7 per cent of the capital per year—about half as high as for the same funds outside the market for premium pensions in Sweden at the time. In 2000, according to PPM calculations, the Swedish mass media had written more about the first premium pension choice than about the Summer Olympic Games in Sydney. Many buyers had used the information and customer service supplied by PPM. The launch of the new market was widely considered a success. The expectation among politicians and civil servants was that the interest and activity would automatically continue after the successful launch. When the first choice was over, general interest skydived, however. The number of 120

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calls to the PPM service centres fell from some 6,000 calls per day to 300, where it stabilized. In addition, the number of transactions on the new market fell sharply. PPM had estimated the number of fund changes at between 2,000 and 4,000 per day, and had dimensioned the market to be able to handle peaks of 15,000 to 20,000. In winter and spring 2001, however, there were only about 300 to 600 fund changes per day. In 2001, about 18 per cent of all new pension savers—mainly young adults—made an active choice. The attempts to meet fundamental market goals had failed. And PPM reacted. The buyers had not behaved properly, and now they must be reformed. In March 2001, PPM decided to reduce the number of employees at the service centres by 80 per cent—from 100 to 20 persons—and to wind up the contracted reserve capacity of 60 persons. Concerning the perceived problem of low market activity, PPM reacted mainly through information campaigns and advertisements in the following years. The campaigns were directed primarily towards young adults, the segment with the lowest market activity. Through national billposting campaigns with messages such as ‘You have money on your account’, PPM tried to increase pension savers’ activity. In spring 2002, PPM also distributed to all 196,000 new pension savers a DVD comprising a series of short, humorous films stressing the importance of making active choices. In the first film, a character named Dan Bäckman demonstrates what happens to people who ‘don’t give a crap and let someone else decide’. Letting other people decide what he should do, Dan wrecks an apartment, is poisoned by food in a restaurant, throws up, and is left on a local traffic bus out of town until it stops for the night at a distant terminal station. The sketch ends with Dan informing us that we have now tried not caring and letting someone else decide—not acting as a true buyer—and have experienced what could happen (PPM 2002).3 Yet activity remained low, even among those who had made an active choice at the time of the market launch. Many politicians and experts complained about the situation. A professor in psychology and member of the PPM advisory board publicly proposed that pension savers should be forced to choose actively and that the Premium Saving Fund for buyers who were non-choosing or passively choosing should be closed down (Sydsvenska Dagbladet 31 March 2004). Contrary to the belief among market organizers that this fund would automatically disappear over time, as active buyers were forbidden to re-enter it, the fund became the largest one after the market launch. Financial firms, politicians, and other stakeholders demanded more information and activity promoting campaigns to solve the problem. A few years later, PPM launched yet another campaign, which they called ‘the alarm 3 https://www.youtube.com/watch?v=W6DOYzlGm2g (Dan Bäckman och premiepensionen film 1).

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clock’, posting information to 500,000 persons who had made an active choice at the market launch but had since been passive. Why did so many people not make an active choice of funds? Partly it stemmed from disinterest, partly from a perceived lack of knowledge (see also SOU 2005:87; Nyqvist 2008). The Swedish Government Official Report 2005 (SOU 2005) raised the awareness of PPM officials about the large group of uncertain buyers. In reaction to this problem, PPM developed and launched various tools to support the decision making of buyers. One tool was the ‘PPM pilot’ (PPM-Lotsen), launched in December 2005 on the internet-based marketplace; it asked the user about preferred risk level, age, and income. For a buyer between the ages of 40 and 44 in the highest income category4 and choosing high risk, the pilot recommended a portfolio of 50 per cent global stock and 50 per cent Swedish stock. The buyer was then asked to choose among the funds that matched that suggestion, presented from lowest to highest fee. Mainly for problems with index comparisons, the Harbour Pilot suggested only about 100 funds out of the some 700 available at the time, a decision that was criticized by many sellers. By August 2006, PPM reported, 60,000 persons had used the Harbour Pilot. Only 4,000 persons had used it to change their funds, however, which was described as a ‘fiasco’ in the mass media (Dagens Industri 3 August 2006). Another tool developed to support buyers in their decision making was the fund-rating system. In 2006, PPM decided that this system should be based on past return rates and risk level, but also on such factors as the experience and historical performance of the fund broker and the decision-making process of the company. The information was to be delivered by two rating institutes: Standard & Poor’s and Wassum. In 2007, the rating system was implemented, and in 2009 some 300 funds were rated.

An Unwanted Solution Despite all efforts to inform and support the buyers of funds over the years, the number of buyers choosing actively and ‘wisely’ with the help of the PPM tools remained low. The many efforts to change buyer behaviour had not solved the problems of buyers’ disinterest and uncertainty. Another solution to the problem of uncertainty and low activity appeared outside the premium pension market. Some entrepreneurs saw an opportunity to benefit from the situation by intervening in the function of the focal market. They offered a service of choosing and changing funds for uncertain pension savers for a sum of what was normally EUR 50–60 per person per year. 4

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 EUR 35,100 per year in 2010.

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This new market rapidly expanded to several hundred thousand customers. Two companies that began early and grew quickly were Monetar and Solidar Pension. According to Solidar, 300,000 pension savers used the services of advisory firms in 2008. By the end of 2009, this market had grown to approximately 600,000 customers, and 20 to 30 advisory firms now controlled the investments of about EUR 3 billion (PPM 2009). Due mainly to the expansion of advisory firms, the number of fund exchanges went from about 0.64 million in 2004 to 4.5 million in 2009 (PPM, 2010). The emergence and explosive expansion of the advisory market was totally unexpected by market organizers. As a politician and member of the pension working group put it: It did not exist in our world of imagination when the premium pension system was set up.

To PPM officials, politicians, and sellers in the market for premium pensions, the new market was also unwanted. There were several reasons for this scepticism. The advisory firms frequently changed funds for many or all of their customers at the same time. This affected PPM negatively, as it increased both administrative and capital costs and caused capacity problems in the transaction systems. PPM could now have to administer as many as 50,000–100,000 changes within a few hours, with total sums up to EUR 1 billion. The financial firms on the supply side were affected in a similar way. As huge purchases or sales now could occur suddenly and frequently, business became more uncertain, difficult, and expensive to run. Some political parties behind the new premium pension market had the idea that it would make people more interested in stocks, business firms, and financial markets. The new advisory market—a side market promoting passivity— now threatened this idea. Involved politicians and PPM officials were also concerned about the extra fees, hollowing future pensions per se. In addition, the advisory firms generally did not beat the stock indexes (the average returns) over time. All in all, the increased activity that had earlier been so desirable to market organizers now implied a considerable problem and, as described in the next section, a driver for further reorganization. PPM officials reacted by developing various solutions to the problem. The new side market should be handled primarily through reorganization of the market for premium pensions. One idea was to demand a personal electronic identification when changing funds, putting an end to mass changes; another was to introduce a fee for each change of funds. EUR 8 was discussed, but EUR 2 was the formal proposition to the government in 2007. This would make frequent mass changes costly, practically excluding the advisory firms from the premium pension market. The proposition did not receive government support, however. Instead of excluding the advisory market, PPM started to 123

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develop a reform based on cooperation, in the hope that this would make it easier for PPM to influence the advisory firms. To access the market for premium pensions, advisory firms had to sign a standard contract called 2K, the development of which, PPM estimated, would cost some EUR 3 million. The 2K project was heavily criticized, however, both within and outside PPM, for not corresponding with the initial intentions of the market for premium pensions. The debate also became public. In December 2009, the Minister of Finance declared that he should ‘put an end to the wild west of PPM’, as such a reorganization would be expensive and bad for the buyers (Dagens Industri 11 December 2009). The 2K project stopped and PPM went back to developing reforms to exclude the side market. In 2011, the government approved PPM’s requests to end the mass exchanges of the advisory market by reorganizing the premium pension market. Technically, a captcha code was requested at every marketplace entry as of December 2011,5 making automated computerized mass exchanges impossible. The reaction from several advisory firms was to establish fund-in-funds: to introduce their own funds into the market for premium pensions, put their clients’ money there, and have these funds invest their capital in other funds in the same market—usually at above-average total fees. PPM also experienced some manual attempts at mass changes in 2012. Nevertheless, the reorganization caused the number of fund changes to fall from 4.6 million in 2011 to 1.4 million in 2012 (PPM 2013). In 2012, 621,000 persons changed funds, an equivalent of 10 per cent of all pension savers in the premium pension market.

Attempts to Organize the Sellers While a significant part of the attempts to direct the market was concerning the buyers, another significant part was concerning the sellers—sellers were the target for considerable organization and reorganization as well. Not only did the ‘perfect’ market ideal influence the initial market organization; other key influences, presented by such stakeholders as the Swedish consumer agency, stemmed from other markets for mutual funds in Sweden, from a pension reform in Chile, and from concern about consumers’ situation in markets in general. All in all, these other influences contributed to an explicit and central ambition for the organizing work: to strengthen buyers’ position on the market vis-à-vis the sellers, leading to extensive organizational efforts.

5 Captcha is an acronym for the phrase ‘Completely Automated Public Turing Test to Tell Computers and Humans Apart’.

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Goals at the Time of the Market Launch Involved politicians and PPM officials wanted sellers to have certain characteristics, both separately and as a group, to suit the market. Importantly, sellers were to be many, act alike, and inform objectively. Yet although their information and transactions should be alike, sellers should present variation in other respects. For instance, market organizers wanted foreign financial firms—not only Swedish ones—in the market, to add to the supply-side plurality. They also wanted the supply side to offer a variety of funds (e.g. stocks, bonds, mixed funds, funds with a different geographical and industrial focus). At the time of the market launch, the common idea was that the more sellers and products there were for buyers to choose among, the better the market would be.

Initial Organization of Sellers The organization of sellers and their behaviour were based largely on a comprehensive contract developed by PPM and structured in four parts: price, trade, payments, and information. It was the same for all sellers; no specific arrangements were accepted. To PPM, the main purpose of this conformity was to save administrative costs, which were paid for by all pension savers, and to create the same conditions for all sellers in order to promote a fair and high level of competition. The idea was that both cost savings and a high level of competition would pressure total fees, for the benefit of all buyers. Financial firms that wanted to be members of the new market were required to sign this contract with PPM. The contract implied an absolute barrier to entry, thus reflecting the hierarchical relation between PPM and prospective sellers. While it was being constructed, many rules in the contract met considerable resistance from financial firms and their association, the Swedish Investment Fund Association (Fondbolagens Förening). Specifically, prices were much debated between PPM and financial firms through discussions held in private and through the mass media. In other financial markets, large buyers normally received kickbacks in the form of quantity discounts on the fund fees, a concept that influenced PPM. The contract was designed such that PPM would act as a coordinating buyer, providing a quantity discount for all single buyers choosing the same funds. Swedish financial firms were generally used to considerably higher margins compared with what the market for premium pensions seemed to be providing. Many of them expressed strong discontent with the discount model that they argued would provide them with low return rates. The progressivity of the discount model, in particular, was criticized for offering overly large discounts for high-volume funds. Because of the expressed problem with prices, some financial firms threatened to stay out of the new market. 125

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Sellers also expressed discontent with the information part of the contract. According to it, product information should be uniform, objective, relevant, and easily grasped, making it easier for buyers to compare price and quality of funds and to choose among them more rationally. It was thought that improved comparability would also lead to increased competition. In addition, individual buyers should be known only to PPM, in order to protect buyers from potentially misleading information. Thus, laws regarding classified information protected the database of buyers. Many financial firms opposed this decision, as they wanted access to buyers, to provide them with information. But to PPM and politicians, this was not seen as being in the interest of the buyers. As one civil servant in PPM said: We consider it to be more in the interest of financial firms selling their products than in the interests of pension savers finding good options.

The contract also included sanctions. PPM would be compensated if sellers violated the rules in ways that increased the authority’s administrative costs. If financial firms reported the wrong fund price, for example, as sometimes occurred, the fund would be traded at the wrong price. Even if the financial firm submitted the correct information later, PPM was left with the delicate task of correcting the error with all concerned buyers. Furthermore, PPM could withdraw the market membership of sellers if they violated the rules in more severe ways. Although PPM had threatened sellers with market exclusion a few times, this sanction was first executed in 2008 (Dagens Industri 8 July 2008). The task of monitoring sellers was performed mainly by PPM. Monthly or bimonthly, PPM dealt with such issues as whether sellers conducted transactions properly, delivered price information, and accounted sales on time. The internet-based marketplace, where all the information was reported electronically, facilitated overall monitoring. Certain parts of the monitoring activities, however, were under the responsibility of another public agency, the Swedish Financial Supervisory Authority (Finansinspektionen). It had, for example, the responsibility of checking that the fund prices reflected their underlying assets.

A Conflict of Goals: Price Pressure vs Plurality As much as low fund prices were a central goal in the market-managing work of PPM, so was the goal of supply-side plurality. A situation with few sellers, funds, and fund variations was seen as a market failure. Consequently, PPM officials were afraid to push quantity discounts too far, as it increased the risk of attracting fewer sellers and fewer funds. As one PPM civil servant said: The risk was to take the price-reduction model too far so that prices would be too low. It could have resulted in a supply that was too low or too poor.

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Despite the discontent expressed by sellers, 460 funds from 68 financial firms applied to the new market before its launch. This amount was considerably higher than PPM officials had expected; they had been concerned that the sellers and product variations would not be numerous enough.

Effects and Reorganizations The first decade after the market launch brought many reorganizations with it, some of which also affected sellers. Many reorganizations were less extensive: adjusted rules for the types of funds that sellers could offer, for example, and how their result-based fund prices should be handled in the discount model. A routine to revise the contract with sellers was established, usually resulting in smaller annual adjustments in the following decade. Other reorganizations were more radical, demanding more work to develop and implement. A few years after the launch, the market for premium pensions was examined in a public investigation (SOU 2005:87). PPM’s ambition for the market—plurality, anonymity, accessibility, comparability, and a high level of buyer activity and interest, for example—had been heavily influenced by the ‘perfect’ market ideal since the creation of the market. In the public investigation and within PPM, however, another idea emerged and grew stronger among market organizers. In psychological research on decision making, it is argued that more than ten options make it difficult for individuals to choose, and the number of active choices falls drastically. Results from consumer choice research on marmalade and chocolate in supermarkets (Iyengar and Lepper 2000; Loewenstein 1999) began to circulate in the discussions among market organizers. The huge number of funds to choose among, exceeding 700 in 2005, became an explanation for the disturbing buyer inactivity. The large supply side, which earlier had been perceived as an obvious quality of the market, turned into a significant problem. The changed conception of supply-side plurality led to new reorganizations of sellers. It no longer mattered so much if the number of sellers decreased. On the contrary, many PPM officials considered it necessary. Because of this change, the perceived relative value of low fund fees increased, and organizers raised their formal demands on sellers, for the benefit of lower prices for buyers. The most important example of this was a new model for PPM quantity discounts, providing buyers with larger discounts than they had received in the past. With the new model, the average fund fee would decrease by 25 per cent: from 0.4 per cent to 0.3 per cent per year. The new pricing model also implied that the discounts would be calculated for each financial firm instead of each fund. In order to avoid the progressivity inherent in the discount model, the trend among large financial firms had been to offer many different funds, which expanded the large supply side even more. The 127

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expectation was that the reorganization would end this way of outmanoeuvring the purpose of the market organization. The reform was imposed on 1 April 2007, despite the critiques and lobbying activities of financial firms during its development. The same year, PPM presented further propositions to decrease the size of the supply side more directly. Some of the more important propositions were to impose an annual fee of EUR 10,000 per financial firm for market membership, to limit the maximum number of funds per financial firm from 50 to ten, and to exclude funds with the lowest returns in relation to relevant indexes over five years. The government did not approve these propositions, however. Sellers made other attempts to outmanoeuvre the market organization, leading to new reorganizations. The rapidly emergent side market of advisory firms not only imposed problems for sellers, but also offered possibilities. A few sellers—the large Swedbank, for example—used the side market as a way of circumventing the rule that disallowed sellers to know about individual buyers and their choices. They achieved this by expanding into the advisory market, so they could be both seller and adviser to the same buyers, thereby getting information about the individual buyers for whom they chose and changed funds. Swedbank and others could also choose their own funds for the customers they advised. More and more sellers and advisory firms began to copy the PPM website and present it on their own websites. PPM officials did not see this as a favourable development, as they believed they were losing control of the market information. Within PPM, there was uncertainty about the way the information was used by advisers and sellers, if it was being updated properly, and whether it was complemented with other potentially biased information. Attempts to outmanoeuvre the market organization resulted in a great deal of reform work within PPM—not least, the 2K reform. This reform would provide a stronger organizational grip on advisory firms and on sellers in the market for premium pensions that were also acting as advisory firms. Although the 2K reform would contain stricter information rules, sellers could still obtain information on individual buyers, and PPM market information could still be copied on external websites. As mentioned, the 2K reform was subjected to heavy criticism for deviating too much from the initial idea of how the premium pension market should function and was eventually stopped by the government before implementation.

Contextual Causes of Market Reorganization In the empirical case I have described, the initial market organization was followed by seemingly endless attempts to reorganize buyers, sellers, and 128

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other market elements. In addition, PPM developed significant support for the market organization over time—mainly in the forms of information and technology. One can point to several problems within the market that gave rise to reorganizations. Considerable sources for reorganization were extrinsic to the individual market, however, highlighting the importance of considering the wider context when analysing causes of market reform. Three generic external factors that interfered with the work of market organizers were: (1) side markets, (2) general ideas that diverge from practice, and (3) new ideas. These factors, which are discussed in the next three subsections, represent contextual causes of market reorganization, thus providing answers to the first question raised. As the factors are common and generic phenomena, they would be potentially relevant in any analysis of market organization change.

Side-Market Intervention Unexpected and particularly disturbing to organizers was the rapidly emerging advisory market, capitalizing on the indecision of many buyers. I have referred to this market as a side market that intervened in the function of the focal market (Jutterström 2010, 2014)—the market for premium pension funds in this case. The term side market is an analytical concept, implying that the study includes a focal market, another market in the direct environment of the focal market, and an actual or potential relationship between the two. The significant issue here is that side markets may lead to the reorganization of focal markets, and that reorganization implies a basic way of managing market interrelations. The rapidly growing advisory market was neither expected nor wanted by many stakeholders in the focal market. It represented a contextual change of great concern, causing ideological, transactional, and other administrative problems that were largely met with market reorganization. E-legitimation, the captcha code, and the 2K project were considerable reorganizations that were initiated in hopes of managing the negative effects of side-market intervention. Great effort was also spent on informing buyers how much the extra annual fees of side-market services hollow out future pensions. Other concepts that resemble side markets are ‘complementors’ and ‘complementary markets’ (e.g. Pierce 2008), as they offer solutions to perceived problems in other markets. Yet those concepts indicate a harmonious and symbiotic relationship between markets. Furthermore, they focus on single market elements—particularly on products for the use of individual buyers and sellers—rather than on the characteristics and functioning of the whole market. The term side market has a neutral and broader meaning. It captures forms of both cooperation and conflict, covering various types of relationships among stakeholders of different markets. The concept also addresses an interest 129

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in the individual market per se. Side-market intervention is no extraordinary phenomena. Side markets may be new markets—either emergent or decided— addressing problems with the way other markets function (Jutterström 2014). But sellers and buyers in established markets may also intervene in the functioning of other markets; Chapter 7 describes how sellers in an airport market intervened in the organization of a taxi market, for example. A closer look at focal-market reorganizations dealing with the side market in the premium pension study shows that they mainly comprised rules and membership elements, which primarily addressed market transactions. How markets are related to each other is a central research question (Aspers 2011). The empirical case of this chapter describes how problems with markets may lead to more rather than less markets—the problems in one market led to the formation of a new market addressing the problems. It also demonstrates that intermarket relationships can be other than symbiotic, and that reorganization of the focal market represents one generic way of dealing with intrusive side markets.

Diverging Ideas Although organizers tend to import general ideas into their organizing work, the most popular ideas are often impractical. They tend to be simplistic, omitting, and universalistic in relation to the diverse and complex practical situations they address (Røvik 2002). Whereas such characteristics make the ideas attractive in relation to complex realities—the ‘perfect’ market model being an example—they also tend to make them misleading when used to solve practical problems. In the PPM case, the ‘perfect’ market ideal had a strong position among market organizers. They wanted a market with few or no information asymmetries, transaction costs, binding relations, undue influence, and redundant complexity, and with low market concentration (many sellers). The impact of the ‘perfect’ market ideal on organizers’ preferences has been reported in other market studies as well (MacKenzie 2006; MacKenzie et al. 2007), notably in an often-cited study of a radically reformed strawberry market in France (GarciaParpet 2007). As illustrated in the premium pension study, market practice deviated considerably from the desired market model. One market element—the buyers—was particularly problematic in this sense. In order to fit the ‘perfect’ market model, buyers were to be interested, active, and rational. These partly desired, partly expected characteristics correspond to the concept of homo economicus (see also Nyqvist 2008), a basic assumption of mainstream economics. According to the work of John Stuart Mill, homo economicus desires wealth and is capable of judging the comparative efficacy of the means for 130

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obtaining that end (see Ng and Tseng 2008). This idea largely coincides with the conception of actorhood: that individuals and organizations automatically possess rationality, autonomy, preferences, and identity (cf. Meyer and Jepperson 2000; Brunsson and Sahlin-Andersson 2000; Jutterström 2004). Most pension savers were either uninterested—despite the future financial returns at stake—or perceived that they lacked sufficient knowledge to choose wisely. The significant divergence between the institutionalized market idea and individual market practice implied a generic problem for organizers. The problem was not the hegemonic map but the deviating local market practice, causing attempts to change the local market practice. Market organizers closed down service centres because of buyer disinterest and launched several reforms to support buyer activity and decision making. Seller behaviour deviated from the standard market idea as well. Buyers’ and sellers’ conformity to market law, whether natural or constructed, is inherent in neoclassical economics (Liljenberg et al. 2004). In the PPM case, however, some sellers resisted and avoided the individual market organization. This deviation between idea and practice led to reorganization—mainly to block discovered loopholes—in order to decrease the discrepancy between model and market.

New Ideas Ideas generally develop over time. Some increase in strength and diffusion, whereas earlier, taken-for-granted, ideas may be questioned on the basis of new ones. A strong initial idea among market organizers was the self-evident value of a large supply side: the larger the better. Such a market state is often seen as an element of perfect competition, as no individual seller can affect market prices (Lipsey et al. 1987). A large supply side also goes hand in hand with the assumption of buyers’ rational decision-making capabilities and economic interests. This idea impeded another important goal in the initial work: lowering overall fund fees. Market organizers feared that an extensive price-reduction model would increase the risk of attracting too few sellers and products. The large supply side was generally seen as a measure of success at the market launch. Over the years, however, another idea emerged and grew stronger among market organizers in this empirical study—the idea that many options prevent buyers from choosing (Iyengar and Lepper 2000; Loewenstein 1999; March 1988). As a consequence of this idea shift, the large supply side changed from a self-evident value into an explanation of buyer inactivity, leading, in turn, to market reorganization. As the huge supply side changed from an asset to a liability, a more radical price-reduction model was developed and implemented, and PPM planned several reorganizations that were not implemented, 131

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intended to limit the huge supply side. Literature on performativity (e.g. Callon 1998; MacKenzie 2006; MacKenzie et al. 2007) has mainly analysed the impact of the ‘perfect’ market model on individual markets. The premium pension case demonstrates how other ideas may challenge at least some of the performative power of the standard market ideal in the local setting, leading to market reorganization.

What Propels the Frequency of Market Reorganization? The three highlighted factors—other markets, ideas diverging from practice, and new ideas—represent contextual causes of individual market reorganization, as illustrated in this study. They demonstrate the relevance of both technical and institutional environments (Scott 1992) in the analysis of market organizational change. As for the second question—on the frequency of market reorganizations—the focus shifts from the specific reorganization to the prevalence of such events over time. Based on the empirical study, I end this chapter by proposing two external factors that propel market reform frequency: contextual dynamism and unrealistic institutionalized ideas. Their impact, however, is affected by an attribute of the focal market: morphogenesis. First, the emergence of both other markets and new ideas significantly contributed to the contextual dynamics. The surroundings of the individual market were in flux in ways that were difficult for market organizers to anticipate. Reorganizations were repeatedly undertaken to try to cope with the changes, making contextual dynamism a source of frequent market reorganization. There is no reason to believe that the dynamism in the context of the premium pension market will cease. Consequently, neither will market reorganizations or new attempts at supporting the market organization. Second, the standard market ideal was unrealistic in its simplistic, omitting, and universalistic characteristics. This study has demonstrated how it deviated considerably from individual market practice. The deviation was considered a problem in the individual market, rather than in the ‘perfect’ market model. Thus, the deviation was also a driver of market reorganization and other reform attempts. The unrealistic ideal had an institutionalized position among organizers; it was largely taken for granted as a blueprint for the reform efforts. Despite the many disappointing outcomes of reform, market organizers largely maintained their faith in the institutionalized ‘perfect’ market ideal, with the result being frequent and seemingly never-ending reorganizations and support efforts. These ‘mechanisms of hope’ were similar to those in formal organizations (cf. Brunsson 2006). Third, the focal market had the three elemental characteristics of a morphogenetic system (Buckley 1967)—of a system that is adaptive to external demands and changes: (1) central market organizers demonstrated plasticity 132

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and sensitivity to the environment of the individual market. They were in constant interaction with other stakeholders, within and outside national borders, providing an extensive inflow and analysis of information; (2) market organizers repeatedly reacted to external change, not least to the emerging advisory market and the new ideas about buyer decision making; (3) such reactions led to many reorganizations over time—to decisions about formal order that at least temporarily conserved change. Overall, morphogenesis represents a significant factor in open-system analyses of market stability and change—a factor in which we could expect differences between markets.

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Mats Jutterström Jutterström, Mats (2010), Organisationsreformer: marknad och hierarki—exemplet premiepensionsmarknaden. Tvärsnitt, Vetenskapsrådet, no. 1. Jutterström, Mats (2014), Bimarknader—huvudmarknaders problemlösare? In Jenny Björkman, Björn Fjæstad, and Susanna Alexius (eds), Alla dessa marknader (pp. 75–85). Gothenburg: Makadam. Liljenberg, Anders, Kjellberg, Hans, and Helgesson, Claes-Fredrik (2004), Idéer om marknaden. In Claes-Fredrik Helgesson, Hans Kjellberg, and Anders Liljenberg (eds), Den där marknaden (pp. 11–25). Lund: Studentlitteratur. Lipsey, Richard, Steiner, Peter, and Purvis, Douglas (1987), Economics. London: Harper & Row. Loewenstein, George (1999), Is more choice always better? Social Security Brief: National Academy of Social Insurance. October; 7: 1–8. MacKenzie, Donald (2006), An Engine, Not a Camera: How Financial Models Shape Markets. Cambridge, MA: MIT Press. MacKenzie, Donald, Munieza, Fabian, and Siu, Lucia (eds) (2007), Do Economists Make Markets? On the Performativity of Economics. Princeton, NJ: Princeton University Press. March, James (1988), Decisions and Organizations. New York: Blackwell. Meyer, John and Jepperson, Ronald (2000), The ‘actors’ of modern society: The cultural construction of social agency. Sociological Theory, 18: 100–20. Meyer, John and Rowan, Brian (1977), Institutionalized organizations: Formal structure as myth and ceremony. American Journal of Sociology, 83(2): 340–63. Mintzberg, Henry (1979), The Structuring of Organizations: A Synthesis of the Research. Englewood Cliffs, NJ: Prentice Hall. Morgan, Gareth (1986), Images of Organization. Beverly Hills, CA: SAGE. Ng, Irene C. L. and Tseng, Lu-Ming (2008), Learning to be sociable: The evolution of homo economicus. American Journal of Economics and Sociology, 67: 265–86. Nyqvist, Anette (2008), Opening the Orange Envelope: Reform and Responsibility in the Remaking of the Swedish National Pension System. Dissertation, Stockholm University. Pierce, Lamar (2008), Big losses in ecosystem niches: How core firm decisions drive complementary product shakeouts. Strategic Management Journal, 30(3): 323–47. PPM (2001), Analys av första fondvalet—vidtagna åtgärder och merkostnader. PPM (2002), Dan Bäckman och premiepensionen, film 1. CD-ROM. PPM (2009), Analytiskt testamente—11,5 år med premiepensionssystemet och PPM, p. 58. PPM (2010), Årsredovisning för Premiepensionsmyndigheten för år 2009, p. 24. PPM (2013), Årsredovisning för år 2012, p. 85. (The name of the public authority changed to Pensionsmyndigheten, 2010.) Proposition 1993/1994:250. Reformering av det allmänna pensionssystemet. Stockholm: Regeringskansliet. Røvik, Kjell-Arne (2002), The secrets of the winners: Management ideas that flow. In Kerstin Sahlin-Andersson and Lars Engwall (eds), The Expansion of Management Knowledge (pp. 113–44). Stanford, CA: Stanford University Press. Santos, Filipe M. and Eisenhardt Kathleen M. (2005), Organizational boundaries and theories of organization. Organization Science, 16(5): 491–508. Scott, W. Richard (1992), Organisations: Rational, Natural and Open Systems (3rd edition, 1st edition 1981). Englewood Cliffs, NJ: Prentice Hall.

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Markets as Open Systems Scott, W. Richard (1995), Institutions and Organizations. Thousand Oaks, CA: SAGE. SFS (Svensk författningssamling) (1998), Lag (1998:674) om inkomstgrundad ålderspension. Stockholm: Regeringskansliet. SOU (Statens Offentliga Utredningar) 2005:87, Svårnavigerat? Premiepensionssparande på rätt kurs. Stockholm: Finansdepartementet. Sydsvenska Dagbladet (31 March 2004), Forskare vill slopa ickeväljarfond. Andersson, Elisabeth. Thompson, James (1967), Organizations in Action. New York: McGraw-Hill. Woodward, Joan (1965), Industrial Organisation: Theory and Practice. London: Oxford University Press.

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9 Markets, Trust, and the Construction of Macro-Organizations Nils Brunsson, Ingrid Gustafsson, and Kristina Tamm Hallström

If the Lord Almighty had consulted me before embarking upon Creation, I should have recommended something simpler (Alfonso X).

How can buyers know what they are buying? Put differently, how can buyers trust that the product provided by a producer is of good quality and is what they prefer? In the simplest case, the problem is a small one. Buyers may be interested only in the design, fit, and price of a garment, and all these characteristics can easily be determined in the store. In other cases, buyers meet with more difficulty. How does one know that an innocent-looking teddy bear will not pose a direct threat to a child? How does one know that the teddy bear’s eyes will not fall out and choke the child or that the fur is not flammable or toxic? Many contemporary consumers have raised their expectations, demonstrating an increased interest in the history of the product and the consequences of its use beyond their personal benefit. The difficulty then becomes even greater. How can they know that a product has been produced in a way that has not involved pollution or risked workers’ health? How can they know that their use of the product will not severely harm the environment? Even buying a seemingly simple product such as detergent poses a serious information problem. It is not enough to observe the product or its effect on laundry. Besides investigating the product, there is another source of information in a buying situation—the seller. Sellers may tell buyers about their products and production processes and answer questions from the buyer. But how does the buyer know that sellers have the correct information, are willing to reveal it, or are even telling the truth? Perhaps the sellers’ interest in

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selling their products makes them provide false or biased stories. How can sellers be trusted? This problem opens the door for intermediary organizations to intervene between seller and buyer. The intermediary can claim to provide buyers with trustworthy, neutral information. Intermediaries can monitor products and production processes or estimate their consequences and provide the results of their research on a label attached to the product, thereby giving their guarantee that it is safe, that it has been produced in an acceptable way, or that it has little impact on the physical environment. The label becomes a symbol for the information that the intermediary has collected and buyers are back to the situation of obtaining all required information merely by inspecting the product and its labels. Increasingly, these labels may be observed on products or in the shape of a certificate on the website of the sellers. Behind the labels and certificates are an increasing number of organizations, such as the Forest Stewardship Council (FSC), the International Organization for Standardization (ISO), Social Accountability International (SAI), Fairtrade (FLO), and the Marine Stewardship Council (MSC). Although these intermediary organizations may differ in the values they target by their labels—sustainability, legitimate work conditions, quality assurance, and so on—they are similar in that they offer rules that other organizations can follow if they want to obtain the right to use the label. Our studies of markets for environmentally friendly household products, organic farm products, sustainable paper, and safe toys (Gustafsson and Tamm Hallström 2013; Tamm Hallström and Gustafsson 2014; Brunsson 2015; Gustafsson 2015; Näslund and Tamm Hallström 2017) demonstrate that the information problem does not usually lead to the establishment of only one intermediary that writes the rules behind the label and monitors producers to ensure that the rules are being followed. Rather it leads to the establishment and involvement of a multitude of organizations, an observation that has been made in other markets as well (Hatanaka 2014; Hatanaka and Busch 2008; Loconto and Busch 2010; Tamm Hallström and Boström 2010; Tamm Hallström and Gustafsson 2014). In this chapter, we analyse this tendency by describing one example—the European Union’s New Approach (NA)—in some detail. This ‘approach’ is an attempt at helping buyers to assess sellers’ stories about their production processes, an effort that has produced a highly complex set of organizations. Through this case, we show how organizations that attend to the trust problems of producers in primary markets themselves face trust problems that are attended to by yet other organizations, which perceive their own trust problems, and so on and so on. This transfer of trust problems leads to the creation of a number of closely connected markets and organizations, forming what we call macroorganizations. 137

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The Case of the New Approach One key EU project is to create the so-called ‘single market’, to enable trade and competition across national borders within the European Union. Arguably, for this project to work, it is crucial that retailers and consumers can trust products and producers not only from local firms they have previously bought from, but also from distant, previously unknown sellers. Over the past 30 years, the European Commission (EC) has successively built a system of organizations in order to help create or support that level of trust. Recurrent arguments for this organization were the promotion of trust and the avoidance of ‘bureaucracy’—reduction of costs and increase of efficiency—and, thereby, the facilitation of cross-border trade. It is not clear that any of these purposes were reached. In the rest of this section we tell the history of the NA to illustrate the complexity of organizations and organization, rooted in a fundamental information problem in markets. The study is based on EU legislative documents and Swedish government documents from 1985 to 2014 and on interviews with people active within certification, accreditation, and the ministries responsible for state-run accreditation in the Netherlands, Sweden, and the UK.1 Launched in its initial form in 1985, NA’s primary target was the safety of industrial products. Products conforming to EU rules covering the essential safety aspects of products are admitted all over the Union. Some rules are mandatory directives, complemented by standards that specify the details of the essential and general aspects presented in the directives. Although the standards are voluntary, they have significant weight, because it is assumed that a producer complying with a standard referenced in a European directive is complying, by definition, with the directive. According to the NA, the producer of a toy, for example, must ensure that the product is manufactured in compliance with the relevant rules. The producer must provide technical documentation: a general description and design of the product, including a list of all standards followed during the production process. This documentation constitutes an evaluation or allows someone else to evaluate the toy’s conformity with relevant rules and presents an EC declaration of conformity. Once these requirements have been met, the producer is allowed to place a CE mark on the product, thereby assuming responsibility for the product and its compliance with the relevant rules. Moreover, the producer must make random tests of its product and institute routines to assure that the serial production of the toy continues to be in compliance with the rules. The product must be marked with a serial number 1 The empirical material on the New Approach is based on the PhD thesis of one of the authors (Gustafsson 2016).

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or similar identification and the name and contact information of the producer, allowing consumers or any other party in the supply chain to contact the producer.

A Market for Certifiers So far, so good! But how can the producer’s label be trusted? Maybe it is more favourable to the producer merely to pretend to have complied with the rules. The solution to this problem, developed by the designers of the NA, was to monitor the producers. What constitutes this monitoring depends on the type of product. Whether toys or pressure vessels, products with perceived high or even potential safety risks require certifying firms to monitor the producer’s so-called quality system—documented policies and procedures—in order to guarantee that the production process creates products that comply with the rules. Certifying firms sell their monitoring services to producers and issue certificates for the firms that, they believe, have an acceptable quality system. The certifier must be impartial and independent of the producer—an arrangement referred to as an ‘open system for testing and control’. The ‘open’ part of the system refers to the fact that a multitude of certification firms compete for certification contracts from producers (SOU 2006:113). In other words, the designers of the NA initiated a new, EU-wide market in which competing firms sold certification services to producers. This certification market can be seen as a symbiotic, secondary market to the primary market of products, which can exist only because of perceived problems in the primary market (cf. Jutterström 2014). The perceived trust problem in primary markets was handled by creating a new market, involving many organizations other than sellers in the primary market. The competition among certification firms was thought to guarantee that the system was efficient.

Organizing the Certification Market The secondary market seemed to require organization, too, however. The EU decision makers saw two risks that had to be handled. One was lack of consistency: the risk that different certification firms would come to different conclusions regarding the same case, so that certification would depend on the certifier involved. The second problem was similar to the one in the primary market: How can one know that a certificate is actually justified; can the certifiers be trusted? There was fear about a race to the bottom: As the certificates are bought by those being certified, there is a risk that the producers could be inclined to commission unscrupulous certifiers who provide their certificates easily, cheaply, and without the appropriate requirements. 139

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One solution to this problem was to connect the monitoring activity to rules. By establishing clear rules for all certifiers, it was hoped that two different certification firms monitoring the same producer would come to the same result. The rules would preferably be standards, which, in the case of toys, for example, are product standards of the so-called EN 71 series developed by the European Committee for Standardization (CEN). The EN 71 series covers different categories of risks: the EN 71-1 standard covers the mechanical and physical aspects of toys, whereas the EN 71-2 standard covers the flammability aspects of toys. The product standards were paired with the management system standard ISO 9001 for quality systems. The second solution was to monitor the certifiers. This monitoring was combined with a sanction, just like in the primary market: a certification of the certifier, called accreditation, to be undertaken by special accreditation organizations. And so more organizations were enrolled. The accreditation process referred not only to monitoring and sanctions; membership in the market for certification was to be controlled through the accreditation process, which allowed only accredited certifiers to work in this market. And again, the impartiality and independence of the monitoring (accreditation) organization, was emphasized, with recurring descriptions such as: Conducted by an authoritative body against nationally and internationally recognised standards, accreditation is the independent and impartial evaluation of an organization’s competence in relation to specific activities or services. (IAF 2016b, 3)

Yet trust appeared as a problem in this market as well, which mobilized even more organizational efforts.

Organizing the Accreditation Market Similar to the situation in the certification market, there was a market for competing accreditation organizations selling their services to certification firms. This market was symbiotic in relation to the secondary market, that is, it could exist only because of perceived problems in the market for certification. It was at a tertiary level in relation to the primary market of producers and consumers. At first, most countries had only one accreditation organization, but the certification firms were free to choose an accreditation organization in another country. Some countries, such as Sweden, had one state-run agency; in yet other countries, there were no accrediting organizations. In some countries, such as in Germany, the UK, and the Netherlands, several competing accreditation firms existed. One perceived problem was similar to the one observed in the certification market: the risk of two accreditation organizations assessing the same 140

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certification firm but reaching different results. The accreditation market needed rules, and again the designers found standards to be the appropriate choice. In order for a certifier to become accredited, it was stipulated that it must comply with the ISO 17021 standard, which includes rules for the competence, consistency, and impartiality of organizations providing certification of all types of management systems. Another problem was that some sellers in the tertiary market had better reputations than others, and the price levels varied. In the Netherlands, for example, one of the accreditation organizations had been founded because some certification firms had had problems receiving accreditation by the largest accreditation organization and started their own accrediting firm, with somewhat lower requirements. Again, there was a perceived risk of a race to the bottom. Could accreditation organizations be trusted? The solution was to introduce more organization into the market—with the result that it was eliminated by its competition aspect being abolished. Competition among the accepted accreditation organizations was prevented by the rule that only one accreditation organization per country was allowed and that certification organizations had to apply for accreditation in the country where they were registered—that they were not allowed to shop around for accreditations in other countries. Moreover, these national monopolists were expected to act in the capacity of a public authority. In countries such as Sweden, where one state-run accreditation organization already existed, adaption to the new rules was simple. In other countries with several competing accreditation firms, however, it was more complicated. In the Netherlands, the UK, and Germany some competitors merged and formed a new organization that was appointed by their national government to act as the public authority of accreditation. It was also decided that the accreditation organizations must be monitored and that monitoring should be based on a specific standard: the ISO 17011, which specifies rules for how to do accreditation. Impartiality and independence were once again emphasized in ISO 17011, but this time they concerned the work of the accreditation organization in its accreditation of certification firms. Although the idea was to reduce the number of accreditation organizations, in 2008 another organization was added to the system: the European Co-operation for Accreditation (EA). It was a meta-organization, a formal organization with other organizations as its members. All national accreditation organizations were required to be members of this meta-organization, which would monitor its members. The idea that a meta-organization can increase trust is not a new one; it is common for firms in a given industry to form a meta-organization—an industry association—one purpose of which is to portray the member firms as serious and trustworthy, complying with certain 141

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ethical rules of the association. This situation differs from our case only in the fact that the meta-organization solution was introduced as a way of organizing a tertiary market rather than a primary one.

Organizing a Meta-Organization The meta-organization represents a major shift. Rather than organizing a market, the task at this fourth level now became the proper organization of a formal organization—the EA. Just like markets, formal organizations can be more or less organized and differentially organized, and meta-organizations are examples of formal organizations that are relatively difficult to organize (Ahrne et al. 2016; Ahrne and Brunsson 2008). As noted, one of the main activities of the EA is monitoring, but here the accreditation organizations monitor each other through a peer-review procedure rather than paying yet another fifth-level organization to monitor them. In addition to peer reviews, the EA engages in yet another aspect of the trustworthiness of accreditation: the ‘coordination’ of accreditation activities, meaning that accreditation made in one EU country would be valid in another. Members sign rigorous contracts connecting the accreditations made in different EU countries. These multilateral agreements (MLAs) are considered a crucial part of the ‘international accreditation infrastructure’. A policy document from the EA (EA 2/02) describing the peer-review process preceding the MLA signatory states that the applying accreditation must show ‘mutual recognition’ with rules for all levels: the rules for accreditation bodies (ISO 17011), the rules for accreditation of certification firms (ISO 17021), and the rules for certification firms certifying producers (ISO 9001). Hence, an accreditation organization is monitored for compliance to rules organizing the tertiary market (ISO 17011), the secondary market (ISO 17021), and the primary market (ISO 9001). The actual peerreview process, conducted by a ‘team’ of people from different accreditation organizations going from country to country, is described in a chart showing 56 steps. Through all these procedures, certification companies could claim, based on Regulation (EC) No. 765/2008, to have a valid accreditation, regardless of where in the EU the accreditation was made. In effect, the EU Commission recognized the EA through Regulation (EC) No. 765/2008. The mandatory membership for all accreditation organizations within the EU communicates that the accreditation organizations belong to the ‘proper’ scheme, as one of our interviewees put it. From the perspective of the decision makers of Regulation (EC) No. 765/2008, the element of hierarchical authority was also emphasized through reference to its binding character. 142

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More Meta-Organizations To comply with their international trade argument, the decision makers had to go beyond the borders of the EU. Here, one organized by membership once again, but this time it attached the EA to a global equivalent: the International Accreditation Forum (IAF). The IAF is a meta-organization for accreditation organizations from countries all over the world. It has developed a complex system of membership—to say the least. Organizations can be full members and MLA ‘signatories’; they can be members but not signatories (although the IAF requires that the nonsignatory shows intent to sign the MLA agreement); they can be ‘associate members’, meaning that they are in some way involved in the implementation or use of certification systems and may apply for full membership; or they can have ‘special recognition’ status as non-voting members. The special recognition membership is given to regional meta-organizations of accreditation organizations such as the EA in Europe, the Inter-American Accreditation Cooperation (IAAC), or the Pacific Accreditation Cooperation (PAC), and to so-called observer organizations, meta-organizations for various stakeholders such as certification organizations. The organization of memberships is also constructed such that a national accreditation organization that is a member of the EA may become a member of the IAF, under the condition of being an ‘MLA signatory’. As members of the IAF, EA members must comply with some rules, mostly ISO standards such as ISO 17021, ISO 65, or ISO 9001. And monitoring is employed here as well; EA members are peer-evaluated by other IAF members every fourth year. Another IAF activity is rule making: writing guidelines for the interpretation of standards. The IAF also considers new areas of accreditation. The slogan used in IAF brochures is ‘Certified once. Accepted everywhere’, confirming the purpose of accreditation: to ensure credibility for certification. The IAF has a more ideological purpose as well. In June of each year, for instance, IAF members organize a celebration in their respective countries called World Accreditation Day, during which accreditation organizations invite guests (such as certification organizations) to celebrate accreditation and promote the role of accreditation in establishing trust in markets. In 2015, the theme of this annual event was ‘Health and social Care’. The following justification from one of the IAF presentations at this celebration clearly illustrates the role of trust through such wording as ‘credibility’, ‘confidence’, and ‘reliance’: Internationally, accreditation provides health and social care regulators with a robust and credible framework to accept outcomes with an equivalent level of confidence as if they had been carried out in the local economy. Ultimately, accreditation provides regulators with a reliable monitoring tool to support the continuous improvement of all health and social care services. (IAF 2016b, 4)

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Organization as Attempt Not all these organizational efforts worked completely according to plan. There were organizations calling themselves certifiers and accreditors that did not comply with the rules. People involved in the NA organization described these organizations as ‘cowboys’ that did not take the monitoring work seriously and were interested only in making money. They were thought to be enhancing the distrust generated by commercial driving forces in markets. Producers that avoided paying for a proper certification—claiming, rather, to be certified by self-certification—were also mentioned as bad examples. According to the IAF, ‘self-certification is not a real thing’: Every once in a while we hear of a company that claims to have a self-certification to ISO 9001—or some other management system standard. The company ‘certifies’ that its organization conforms to the requirements of ISO 9001. It sounds pretty good until you start to ask what this self-certification actually means [ . . . ] Bottom line: There is no such thing as self-certification. It’s just an attractive catchphrase with no substance [ . . . ] [It] doesn’t have any of the credentials, expertise, and objective scrutiny that make the certification process a meaningful organizational asset. [ . . . ] If you’re looking at a certificate from a potential supplier and the accreditation mark is missing, you may want to reconsider doing business with the company. (IAF 2016a)

Various campaign efforts were undertaken by accreditation organizations and the two meta-organizations, with the purpose of raising awareness about these ‘false’ actors and simultaneously promoting the ‘right choice’. One such campaign resulted in the establishment of World Accreditation Day, another measure was to create websites with information about research reporting positive effects of the system.

A Complex Macro-Organization for Organizing Markets The case of NA shows how primary markets are organized with the help of another symbiotic market and that this secondary market, in turn, is organized by a symbiotic tertiary market that becomes reorganized into a monopoly organized by a meta-organization which is in turn a member of another metaorganization. There are many hundreds of organizations involved in organizing these markets, most of which were created for the purpose of establishing trust in the markets. There are a great many certification firms, several accreditation organizations, and two meta-organizations. All organizational elements are used: membership, rules, monitoring, sanctions, and hierarchy. Some organizations specialize in one or two organizational elements, such as rule setting (e.g. ISO, CEN) or monitoring combined with sanctioning 144

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(e.g. certification firms and accreditation organizations that are able to approve certificates), whereas others use several elements (e.g. EA using membership, setting rules, referring to hierarchical authority performing monitoring, and approving members). Moreover, in contrast to a great deal of other market organizing, the organizers did not represent very different or conflicting ideas about how the market should be organized. Rather, they built on the work of the others. The whole set of organizations is tightly connected, and the role or even the very existence of each organization is dependent upon the roles and existence of the others. The system as a whole has strong similarities to a complex, highly organized formal organization with different specialized but interacting departments and internal markets. The difference is that this is not one formal organization. Rather, the ‘departments’ consist of separate formal organizations. And these organizations have not all been included in one allencompassing meta-organization. In the language of the organizers, these organizations are ‘independent’—an expression that seemingly does not fit the situation at all, but can perhaps be meaningfully interpreted as emphasizing exactly the fact that the parts are separate formal organizations. Instead of one formal organization, there is what can be called a macro-organization. This macro-organization way of organizing markets is not unique. For example, the Forest Stewardship Council (FSC) was founded in 1993 with forestry firms and social and environmental organizations as its members. Its purpose was to promote environmentally appropriate, socially beneficial, and economically viable management of the world’s forests, by providing labels and certificates that would show that the history of the product was appropriate (Tamm Hallström and Boström 2010; Kenne et al. 2013). The FSC develops sustainability standards directed towards forest owners and chainof-custody standards for manufacturers of products that come from certified forests. Certification firms monitor compliance with these standards. They were first accredited by the FSC itself, but the FSC decided in 2007 to move the accreditation function into a separate organization: Accreditation Services International (ASI), which accredits not only FSC certifiers, but also certifiers working with six other standards (Kenne et al. 2013). The standard setter SAI, which has issued the SA8000 standard for the history of products concerning human rights at work since 1997, developed in a similar way. It started by having accreditation services in-house, but by 2007 decided to move the accreditation function into a separate accreditation organization: the Social Accountability International Accreditation Services (SAAS) (Kenne et al. 2013). Both ASI and SAAS are members of yet another organization: the international meta-organization ISEAL Alliance, which also has other, similar organizations as its members—the International Organic Accreditation 145

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Service (IOAS) (Kenne et al. 2013), for instance. The ISEAL Alliance issues a code of conduct and monitors its members to ensure that they comply with it. To a large extent, it adheres to the same rules as the NA—the standards ISO Guide 65, ISO 17021, and ISO 17011—for accreditation and monitoring of members (Brunsson 2015; Hatanaka and Busch 2008; Loconto 2017; Loconto and Busch 2010; Loconto and Fouilleux 2014; Kenne et al. 2013). To conclude, the consumer’s problem of knowing the quality of their purchases has given rise to macro-organizations involving standard-setting organizations; new markets for hundreds of certification organizations; and space for accreditation organizations and various meta-organizations with standardizing, certifying, or accrediting organizations as their members. And established standards organizations such as the ISO have been increasingly involved in standard setting for these certification and accreditation activities.

The Trust Spiral The development in the NA case can be seen as a spiral of more and more organization. The macro-organization that has resulted to date is highly complex: it consists of many parts and many connections among these parts. The complexity seems to be an unintended result for many of the parties involved. The explicit intention was quite the opposite: reduced bureaucracy, lower costs for businesses, and improved operational efficiency (IAF 2013). Maybe there are other solutions that would have been even more complex. Yet, arguably, many accreditation days seem to be needed in order to convince external parties that a non-bureaucratic and efficient system has been achieved. How to explain this high degree of complexity? What led decision makers into this spiral of increasing organization? We suggest that the key factor was the rhetoric about trust and the attempts to solve the perceived trust problems through organization. ‘Impartiality’, ‘trust’, ‘confidence’, and ‘assurance’ were recurrent words when the development was described and justified by the organizations involved. The British accreditation organization, UK Accreditation Service (UKAS), summarizes the significance of trust succinctly by choosing ‘Delivering Confidence’ as its slogan. Certifiers and accreditors should draw the same conclusion had they monitored the same organizations, and there should not be a race to the bottom. We summarize all these justifications under the concept of trust. Consumers should be able to trust sellers’ descriptions of their products; they should be confident that they are buying products that are safe and that adhere to the producers’ promises. Certifiers should be able to make these guarantees, but as there is a perceived risk that certifiers will act in 146

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accordance with their self-interest (just as sellers in primary markets may do), trust in certifiers should be guaranteed by trustworthy accreditors, and so on. According to Luhmann (1968), trust emerges from repetitive successful interactions among individuals. Because people’s positive expectations have been met again and again, perceived uncertainty is reduced, and people perceive the others as trustworthy. If people and organizations have demonstrated goodwill in the past, one can expect that they will continue to do so, even if the circumstances vary over time. In an uncertain world, trust makes it possible to act as if there is certainty. When people trust each other there is less need for rules and monitoring. Trust may make organization unnecessary. Arguably, it is somewhat more difficult to trust organizations than to trust individuals. Organizations are precarious constructions that may be expected to change quickly when top management or other employees leave them and replacements are hired. And they are often accorded the moral right to be highly egoistical and interested almost exclusively in their own welfare (Brunsson 2017). In markets, however, trust can be built through long-term relationships between seller and buyer, even if the parties are organizations (Håkansson et al. 2009). Buying firms may prefer doing business with selling firms that are well known from earlier business transactions rather than investigating the possibility that there are other sellers that can offer better products or prices. The buyer trusts the seller based on experience and the expectation that the seller will continue acting in line with high moral values. In many contemporary consumer markets, this way of building trust is not realistic. Consumers do not learn more about the production process or salient future consequences of the product just because they buy it on several occasions. The knowledge that is important for the consumer remains hidden. The greater the distance between producer and consumer, the more difficult it is to gain relevant information. In a globalized world, distance is the rule rather than the exception. Globalization is often assumed to create closer connections among people and organizations around the world, but it can also be seen as creating distance—making distant organizations and people more relevant—and reducing opportunities for building trust. Organization was the solution in the case of NA. Decisions were made to organize more and to create more organizations, under the argument that organization could create trust. On the other hand, the decision makers seemed to doubt that the organization they installed really solved the trust problem. In order to rid themselves of those doubts, they installed even more organization: a spiral of fear of mistrust gave rise to organization that produced the same fear that was in turn handled by organization again, and so on. The trust problem was not solved; it merely moved from one level to another. 147

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We suggest that such a trust spiral can be explained by the special characteristics of decisions and organization. When trust is used as a justification for decisions, it is no longer merely a spontaneous sentiment; it becomes explicit. But when the issue of trust becomes explicit, it easily provokes its opposite: the issue of mistrust. Deciding in order to improve the conditions for trust presumes a line of reasoning in which the danger of mistrust is actualized. In other words, decisions about increasing trust may increase awareness of reasons for mistrust. It seems that this is what happened in the NA case. And because the solution to the trust problem was to make more decisions, the problem turned up again and again. Moreover, many of the decisions involved the creation or engaging of more organizations. But adding more organizations runs the risk of aggravating the trust problem rather than solving it. Instead of trusting just one organization—the producer—the consumer must now trust another organization, and in order to trust it, another organization must be trusted. Furthermore, the macro-organization was built in such a coherent way that, logically, the mistrust of an organization at one level would destroy the whole project, creating a mistrust of the label. In summary, the attempt to solve problems of trust by organization proved to be a highly complex and dynamic process, and not even the present situation is likely to be stable. The problem of trust has been handled but not solved. The last links in the chain (EA and IAF) may also be questioned. The members could cheat in their monitoring activities, and their legitimacy as members could be based on false pretences. In principle, more organization could be added ad infinitum.

Avoiding the Trust Spiral There have been simpler ways of solving trust problems than that offered by macro-organizations such as the NA. During the 1970s, the problem of product safety in Sweden, for instance, was handled through seven national centres for testing, Riksprovplatser (RPPs). The RPPs were owned by the government, and each of them had a monopoly in a certain area. The Swedish Electric Equipment Control Office tested electrical products, marking the safe ones with an ‘S’, for instance, and the state owned Pharmaceutical Company (Apoteksbolaget) tested medications. In addition to testing products, the RPPs could be delegated the task of deciding if a product should be allowed into the Swedish market. The organizing of monitoring and testing in seven monopoly organizations was justified with arguments for impartiality, and it seemed obvious that the only organization that could conduct impartial tests was the state; the Swedish state was seen as highly trustworthy and free from commercial pressures (as argued in Props 1972:54 and 1974:162). 148

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Another example of a situation with less complexity than the NA and similar organizations is found in the Swedish context of environmentally friendly products marked by the Good Environmental Choice label, developed by a private environmental organization, the Swedish Society for Nature Conservation (SSNC). The eco-labelling secretariat of this association employs experts relevant to the product fields they wish to influence through their ecolabel. The expert deciding the criteria of each label standard is also the one checking compliance and approving licenses (Tamm Hallström and Näslund 2015). The label produced is well known in Sweden, and there has been little or no public discussion in which the trustworthiness of the SSNC has been questioned. With a long history, beginning with its establishment in 1909, the SSNC enjoys high levels of trust as an organization working for the environment. The SSNC still clearly communicates its identity primarily as an environmental rather than an eco-labelling organization. Running the ecolabel is just one in a broad array of activities in which the association engages, to satisfy its purpose of saving the environment. In more recent years, the SSNC has become a member of a global meta-organization, the Global Ecolabelling Network (GEN), but the organization structure is still much less complex than that of the NA. We suggest that it was the high levels of legitimacy and trustworthiness of the Swedish state and the SSNC within their national contexts that made it possible to keep the organization simple. We further suggest that the trust spiral is less likely to emerge or continue to develop if a highly trustworthy organization intervenes. If we are correct, one explanation for the NA’s high level of complexity is that there was no such organization in this macroorganization, at least partly because many of the organizations were new and had not had the opportunity to build trust through a long record of trustworthy behaviour. Furthermore, the NA and other contemporary macro-organizations of the same type likely reflect the fact that that it is more difficult to build legitimacy and create a sense of trustworthiness for organizations on a global scale than within a national or local context (cf. Hatanaka 2014). Building on existing trust for certain organizations can be part of a conscious strategy for legitimizing labels. The Swiss Max Havelaar Stiftung, founded in 1992 for labelling fair-trade products, recruited a specific set of other members, such as Schweizer Hilfswerken Brot für alle (the Swiss Protestant aid organization, Bread for All), Caritas (the worldwide Catholic aid organization), Fastenopfer (Feast sacrifice), and Swissaid—all well known and highly trusted charity organizations with positive records in Switzerland. And the name Max Havelaar was taken from an established Dutch organization with a similar purpose. The foundation set standards, monitored, and issued labels. During its first decade in operation, it had considerable impact in Switzerland 149

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without any organizational superstructure before it became connected with the ISEAL Alliance macro-organization (Arnold 2017). Our overall hypothesis is that even though organizations are sometimes trusted, it is difficult to produce trust by organizing. Established trust may stop the trust spiral, but adding organizational elements and organizations runs the risk of propelling it forward. Compared with the designers of NA, God would have had a much better chance of following the advice of Alfonso X, quoted at the beginning of this chapter.

Is the Consumer’s Problem Solved? We have described the logic behind the construction of the New Approach macro-organization. We can only speculate about the degree of trust that this organization has produced among European consumers. Maybe consumers trust the CE label. But if so, is it because of their knowledge or their lack of knowledge about the macro-organization? If consumers knew about the organization and the methods by which it was justified, would they be drawn into the same spiral of trust as the decision makers were? Would they be less certain about the products they purchased than if they had merely observed the label under a veil of ignorance and innocence?

References Ahrne, G. and Brunsson, N. (2008), Meta-Organizations. Cheltenham: Edward Elgar. Ahrne, G. Brunsson, N., and Kerwer, D. (2016), The paradox of organizing states. A meta-organization perspective on international organizations. Journal of International Organizations Studies, 7(1): 5–24. Arnold, N. (2017), Standardisierungsdynamiken im Fairen Handel. Wiesbaden: Springer VS. Brunsson, K. (2017), The Teachings of Management: Perceptions in a Society of Organizations. Berlin: Springer. Brunsson, N. (ed.) (2015), Att organisera marknader. Slutrapport från ett forskningsprogram. Stockholm: Makadam. EU Regulation 765/2008 (2008), (EG) no. 765/2008 om krav för ackreditering och marknadskontroll i samband med saluföring av produkter och upphävande av förordning (EEG) no. 339/93. EU regulation. Gustafsson, I. (2015), Leksaker och CE-märkningar—det mobila ansvaret. Scores rapportserie 2015:3. Gustafsson, I. (2016), Organisering av standarder, certifiering och ackreditering som en global styrregim. Doctoral dissertation, School of Public Administration, University of Gothenburg.

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Markets, Trust, and the Construction of Macro-Organizations Gustafsson, I. and Tamm Hallström, K. (2013), The certification paradox: Monitoring as a solution and a problem. In M. Reuter, F. Wijkström, and B. Kristensson Uggla (eds), Trust and Organizations: Confidence across Borders (pp. 91–109). New York: Palgrave. Håkansson, H., Ford, D., Gadde, L., Snehota, I., and Waluszewski, A. (2009), Business in Networks. Chichester: Wiley. Hatanaka, M. (2014), Standardized food governance? Reflections on the potential and limitations of chemical-free shrimp. Food Policy, 45: 138–45. Hatanaka, M. and Busch, L. (2008), Third-party certification in the global agrifood system: An objective or socially mediated governance mechanism? Sociologia Ruralis, 48(1): 73–91. IAF (2013), Article published by the International Accreditation Forum. Available at: http:// www.iaf.nu/articles/World_Accreditation_Day_2013/272 (accessed 24 April 2013). IAF (2016a), Article published by the International Accreditation Forum. Available at: http://www.iaf.nu/articles/SelfCertification_Is_Not_a_Real_Thing/391 (accessed 4 April 2016). IAF (2016b), Brochure published by the International Accreditation Forum for World Accreditation Day 2015. Available at: http://www.iaf.nu/upFiles/ WADBrochureGeneralMedres FINALVERSION13.2.15.pdf (accessed 4 April 2016). Jutterström, M. (2014), Bimarknader—huvudmarknaders problemlösare? In J. Björkman, B. Fjaestad, and S. Alexius (eds), Alla dessa marknader. Riksbankens Jubileumsfonds årsbok 2014 (pp. 75–85). Stockholm: Makadam. Kenne, A., Lindqvist, B., and Tamm Hallström, K. (2013), Kontrollorganiseringens mångfald. En kartläggning av hållbarhetsmärkningars kontrollorganisering internationellt och nationellt i Sverige. Score report 2013:5. Score: Stockholm School of Economics and Stockholm University. Loconto, A. M. (2017). Models of assurance: Diversity and standardization of modes of intermediation. The Annals of the American Academy of Political and Social Science, 670, March: 112–32. Loconto, A. and Busch, L. (2010), Standards, techno-economic networks, and playing fields: Performing the global market economy. Review of International Political Economy, 17(3): 507–36. Loconto, A. and Fouilleux, E. (2014), Politics of private regulation: ISEAL and the shaping of transnational sustainability governance. Regulation & Governance, 8(2): 166–85. Luhmann, N. (1968), Vertrauen: ein Mechanismus der Reduktion sozialer Komplexität. Stuttgart: Ferdinand Enke Verlag. Näslund, L. and Tamm Hallström, K. (2017), Being everybody’s accomplice: Trust and control in eco-labelling In F. E. Six and K. Verhoest (eds), Trust in Regulatory Regimes. Cheltenham and Northampton, MA: Edward Elgar. Prop. 1972:54. Kungl. Maj:ts proposition angående organisationen av officiell provning och kontroll samt officiell metrologisk verksamhet, m.m. Proposal of the Swedish government (1972). Prop. 1974:162. Kungl. Maj:ts proposition med förslag till lag om riksprovplatser, m.m Proposal of the Swedish government (1974). SOU 2006:113. Öppna system för provning och kontroll—en utvärdering. Swedish governmental bill (2006).

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Nils Brunsson, Ingrid Gustafsson, and Kristina Tamm Hallström Tamm Hallström, K. and Boström, M. (2010), Transnational Multi-Stakeholder Standardization: Organizing Fragile Non-State Authority. Cheltenham and Northampton, MA: Edward Elgar. Tamm Hallström, K. and Gustafsson, I. (2014), Value-neutralizing in verification markets: Organizing for independence through accreditation. In S. Alexius and K. Tamm Hallström (eds), Configuring Value Conflicts in Markets. Cheltenham and Northampton, MA: Edward Elgar. Tamm Hallström, K. and Näslund, L. (2015), Kontroll och certifiering av produktmärkningar. Organisering för förtroende. Stockholm: Handelns Utvecklingsråd forskningsrapport 2015:4.

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10 Shaping the Consumer: A Century of Consumer Guidance Susanna Alexius and Leina Löwenberg

Although market organization is typically directed at organizations, it is common to legitimize it with reference to individuals. Because clever and active consumers constitute an often-assumed precondition for well functioning markets, there is much ado about maintaining this ideal. Thus reorganization aimed at increased competition and a greater supply of goods is encouraged, because the consumer is assumed to have free choice—to be willing and able, when faced with a range of options, to decide what to buy and from whom to buy it. To date, the hopes of maintaining the fragile pipe dream of the clever and active consumer, so fundamental to much of market organization, has taken little advice from scholars demonstrating that real people lack the capacity to anticipate all possible options and evaluate all available information (Simon 1982; March and Simon 1958). As this chapter demonstrates, however, the discrepancy between these highly held ideals and humbler human capacities is contributing to a broad range of organizations engaging in efforts to shape ‘proper consumers’. Through a chronological historical account of a century of these efforts (c.1900–2015), we provide insights into the development of consumer guidance in Sweden. Beginning in 1900, pioneering attempts at shaping proper consumers targeted members of established organizations and offered basic knowledge on ways to save money and make informed choices between product categories—not to spend one’s daily wages on alcohol, for example, but to save and invest in a new harrow. In the state-centred, post-WWII period, beginning in the mid-1940s, there were increased standards and monitoring aimed at guiding consumers to choose not only between but also within product categories—how to calculate the price/quality ratio of different kinds of hosiery, for example. This era also saw the establishment of many

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specialized organizations aimed at consumer guidance. The contemporary global era, beginning in the 1990s, has seen a sharp increase in standards, labels, and consumer guidance. In the late 1990s, a third and somewhat unexpected type of advice went a step beyond the choice among and within product categories to provide advice among consumer guides. We offer a wide range of empirical examples of consumer guidance, organized by such diverse market organizers as agricultural societies, savings banks, cooperatives, municipalities, government agencies, businesses, and bloggers. The content of the advice is analysed and, most important for this volume, we exemplify the range of market elements and information and technology used by those engaged in the task of upholding the fragile construction of the active and clever consumer. Our account is based on three sets of empirical data collected primarily in 2012: (a) relevant secondary data from historical research and (b) our qualitative content analyses of historical and contemporary materials related to Swedish consumer guidance, such as stakeholder documents and information made publicly available through archives and the media. In addition, (c) three key informant interviews contributed to our general understanding of the contemporary Swedish field of consumer guidance (Alexius and Löwenberg 2012). In all, we see an overwhelming number of attempts to shape consumers during a period of more than one hundred years.

Using Membership to Shape Consumers Efforts at shaping consumers were conducted as early as the 1700s, when a Swedish law on excess regulation (Överflödsförordningen) was introduced to restrict excess consumption. This law applied to only a few wealthy Swedes, however, as Sweden was primarily a poor nation of farmers at the time, and market exchange for the vast majority of ordinary Swedes remained limited until the early 1900s. The late 1800s had seen suffering, starvation, and emigration, but the remaining Swedes toiled on, putting their trust in the village community, in Lutheran Protestantism, and, above all, in the Swedish state. Sweden, with its centuries-old roots, had evolved into a nation of loyal citizens with strong links to public institutions and representatives (Trägårdh 2011; Berggren and Trägårdh 2009). The early roots of Swedish consumer guidance can be traced back to these poor local community settings around the year 1900, when ‘America letters’ from emigrant relatives and friends in the USA and Canada told stories of an overseas market society in the making—a market that must have come across as extremely exotic to most rural Swedes at the time. The first organizations to assume the role of guides to proper behaviour in the markets targeted individuals who could become objects of their advice and 154

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gradually turned into consumers: the proper subjects of market exchange. To this end, the early guides used the organizational element of membership, by targeting members of established organizations and offering to turn them into consumers. In this process of what may be called identity bridging, membership was used in a gradual effort to socialize Swedes through their established member identities into new, additional identities as consumers. Thus these established member identities—citizens, pupils, ‘housewives’, association members—were used strategically by consumer guides as a bridge to the new identity and as a way of establishing the consumer as a broadly accepted social institution (Berger and Luckmann 1967; Clarke et al. 2007). It is no surprise, then, to find that the content of the first guidance focused mainly on identity work and socialization: knowledge of the basic conditions and functions of markets. In the next sections, the use of membership to create consumers is illustrated with empirical examples from the Thrift Societies and domestic advisers, the savings banks, and the Cooperative Federation (KF) in the first decades of the 1900s.

The Thrift Societies and Domestic Advisers Thrift, moderation, and responsibility were keywords of the so-called Thrift Societies, which were founded by county administrative boards (Länsstyrelser) from the late 1800s onwards. The governor chaired these societies and, beginning in 1890, the newly founded organization, the Farmer’s Society (Lantbruksstyrelsen), was their agent (Aléx 2003). Thrift Societies offered education on economic and social matters to the rural population. They engaged in a number of activities, mainly related to the needs of the agricultural society. Some Thrift Societies employed so-called domestic advisers (hemkonsulenter), who paid home visits to households offering guidance on such skills as laundering techniques and fruit conservation (Hushållningssällskapet 2017). Targeting citizens who were members of rural households, the Thrift Societies and their domestic advisers brought state propaganda on economic household efficiency straight into the everyday homes and lives of the Swedes (Rosén 2007). The idea was that individuals who were taught to cope with their emotional impulses would become increasingly civilized, rational, and better prepared for a future of greater consumption opportunities in the markets (Aléx 2003).

The Savings Banks The savings banks were the first to engage commercially in consumer guidance in Sweden. The widespread poverty of the 1800s had prompted the Swedish government to call for the establishment of savings banks in parishes, 155

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congregations, and county councils. The idea was, as the name suggests, that the savings banks would specifically encourage saving, and they were highly integrated in the local communities, where part of the profits was reinvested (Brisman et al. 1931). The first Swedish savings bank, following a European model, was founded in 1820, and the number of savings banks increased steadily. In 1928, for instance, there were 498 savings banks in Sweden (Swedbank; Royal Coin Cabinet–National Museum of Economy n.d.b). One critical breakthrough for the savings movement was cooperation between the savings banks and the public schools, which offered these banks the opportunity of socializing and educating pupils to be future customers. The Swedish saying ‘The one who saves it has it’ (‘Den som spar han har’) is characteristic of this breakthrough of the savings movement, which was developed in a collaboration between the state, the Swedish savings banks, and the public school system. One early market device that the savings banks used to socialize pupils was a school savings bank—a metal box comprising various compartments and a lock. These banks were placed in schools for pupils to keep their savings safe until they could be taken to the savings bank, a procedure that the bank hoped would help shape the behaviour of these future consumers. With scarce resources and limited space for consumption, the first advice was to save money in order to be able to spend later in the markets. Saving was also seen as a prerequisite for the ability to choose a more expensive product: ‘Better to scrimp and save to buy a harrow in a year, than to amuse oneself with sweets from the rural country fair on the weekend’ (Aléx 2003). In 1900, the Swedish savings banks established their own association to provide better coordination for the savings movement. The Swedish Savings Banks Association became an influential consumer guide that produced and distributed knowledge on thrift and home economics. As a result of these efforts, the savings banks were increasingly seen not only as facilitators of saving, but also as educators and promoters of the thrift ideal (Brisman et al. 1931). The Swedish Savings Banks Association had a department exclusively devoted to the production of thrift propaganda. It published such educational material as handbooks for teachers and its own magazine: The Lucky Penny (Lyckoslanten). A popular highlight of this magazine, which targeted pupils, was a recurrent comic strip about two girls named Spara and Slösa (Spend and Save). Slösa wasted money on entertainment and consumption, whereas the role model, Spara, was a thrifty and self-sufficient pupil, who was able to craft her own rug from old clothes. These magazines and the handbook illustrated how clever spending (as is often encouraged today) was still considered a bit of an oxymoron at a time when self-sufficiency and thrift were seen as superior to market exchange (Myntkabinettet n.d.a; Furuland 1981). 156

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The Cooperative Federation, KF Another influential organization that was involved in the early shaping of Swedish consumers was the Cooperative Federation (Kooperativa Förbundet, KF). Just like the Thrift Societies and savings banks, KF accomplished its goal by targeting members of established organizations—in this case, members of the local cooperative associations that were, in turn, members of KF. KF was founded in 1899 as a politically and religiously independent national metaorganization, through the merging of 41 local cooperative societies representing 8,900 members. KF was founded with the explicit purpose of benefiting the budding consumer interests of its members’ members (Aléx 1994; see also Coop n.d.a). In 1900, KF founded the Cooperative Wholesale Society. Its purpose was to improve purchasing conditions through joint purchases that would provide lower prices to consumers—the individual members of KF’s organizational members (Coop n.d.a). In 1904, KF went on to create sellers within its own organization when it opened its own shops, initially selling only to members—the local cooperative associations (Friberg 2005). Thus a highly organized internal market gathered and governed both buyers and sellers within the realm of the same formal organization, KF. Members decided jointly which goods should be sold, at what prices, and in which shops. Individual members (the consumers) of the member associations were then free to decide what to buy in which KF shop, but they could also shop from competing sellers outside the association (Friberg 2005). KF can therefore be seen as a practice ground for inexperienced consumers. In the protected environment of the cooperative societies, consumers were shielded from such downsides of the markets as the opportunism of sellers, as both sellers and buyers were direct or indirect members of the KF association. On the other hand, the choices were restrained, not least by the restricted supply of products and the fixed prices (Friberg 2005). KF also engaged heavily in education. In the early 1900s, many advocates of cooperatives were concerned with sound finances of the cooperative societies and their individual members, and one way to exert influence in that area was through education (Friberg 2005). KF’s public education ambitions leaned on the ideological idea that citizens needed to be educated and become more rational with respect to their purchases. Ever since the first cooperative congress in 1899, KF contributed with business education aimed at both employees and individual members of the local cooperative societies. A 1908 motion in congress proposed that KF should start a business school, and a few years later it offered a handbook on bookkeeping for a KF correspondence course (Ruin 1960; Elldin 1950, cited in Friberg 2005, 322). In 1904, KF published the first issue of its magazine The Cooperator (Kooperatören), a relatively advanced 157

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scholarly financial magazine. And beginning in 1914, KF published and distributed The Consumer Magazine (Konsumentbladet), directly targeting all individual members of its local societies. The Consumer Magazine covered subjects such as nutrition and health, childcare, and home economics, and gave warnings against credit purchases. KF also published its own handbook on accounting, aimed at the local cooperative consumer societies and their members (Coop n.d.a). The Cooperative Magazine and The Consumer Magazine are two early examples of publications disseminating standards for proper consumer behaviour. Taking advantage of an association’s main organizational element—its membership—KF was thus able to participate in the common goal of an educated public by communicating consumer advice to its members’ members. Through their membership in the meta-organization of KF, the local societies had access to a main supplier of educational material, as KF’s secretariat and education department developed literature and course material that was typically used in local study circles (Friberg 2005). In 1911, a new law on economic associations allowed KF and its local member societies to expand their sales of goods to non-member individuals. The allure of greater freedom of choice among and within product categories increased sales but gradually weakened the cooperative ambition. Energy and resources had to be divided between efforts at keeping the existing member– consumers loyal and attracting new consumers who had no member status—a struggle KF has had to endure ever since.

Using Standards and Monitoring to Shape Consumers The emerging consumer and market orientation that developed rapidly in the 1920s and 1930s came to a halt with WWII. There was a setback as Swedes were encouraged once more to scrimp and save and patch up in their homes rather than consuming in the markets. The focus was on rationing of scarce resources, and although Sweden was never actively engaged in the war, public initiatives expanded during this period, as the state took measures to guide its citizens through wartime hardships. This guidance was now primarily conducted by way of standards—voluntary, albeit strongly advocated rules on how to behave as a responsible consumer in times of scarce resources. The domestic advisers gained a gradually more prominent position in this era, as, beginning in 1938, they had received government subsidies for standardizing kitchen equipment. State-run organizations such as Active Housekeeping (Aktiv Hushållning) and the National Information Board (Statens Informationsstyrelse) also became influential advisers and standardizers in this era. A typical example from their productions is a 1951 handbook for housewives, entitled We cook, we patch up, we stuff (Vi lagar, vi lappar, vi stoppar), 158

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written and published by Active Housekeeping. It encouraged housewives to prioritize carefully to avoid spending unwisely on new clothes, because old clothes could last longer if they were better cared for. Overall, the content of consumer guidance remained the same in the postwar decades. Despite the emerging market orientation, the old thrift ideal remained prominent. Pupils and other consumers-in-the-making were still taught to save and to plan their consumption according to state preferences through school exercises on such subjects as housing costs, household purchases, and home interiors (Aléx 2003). In the postwar decades, the boundary between citizen and consumer roles remained blurred, but over time the ideal of the educated and modern citizen seemed to demand an increasingly sophisticated citizen– consumer capacity (Clarke et al. 2007)—citizens who were aware of what they consumed and why (Aléx 1994). New technologies enabled mass production, and a variety of tasks were relocated from households to industry and commerce, as Sweden made a transition to an increasingly consumer-oriented market economy. And with higher productivity, consumers were faced with the challenge of choosing from a wider selection of more specialized goods. Public commissions claimed that in order for consumer power not to be eroded in the face of commercialism and mass consumption, citizens had to become more rational when categorizing goods in terms of quality and aesthetics (SOU 1949:18). Development of the content and scope of the guidance can therefore be analysed as a gradual layering of advice, adding new, more sophisticated types of advice to the existing basics.

The Domestic Research Institute: HFI In addition to shaping consumers through basic education and standards on thrift and home economics, a new emphasis was placed on standardization and market monitoring, as guidance on quality controls became more widespread. Beginning in the late 1940s, public committees within the Department of Commerce studied consumers’ awareness of quality and goods and mapped existing research and testing facilities of, for example, home appliances. It was concluded that further research, testing, and translation of manuals was needed (SOU 1949:18; SOU 1955:16). Above all, the reports stressed the need for increased consumer awareness on comparing and choosing among products within the same product category. The basis for consumer decisions was described as the ‘undivided trinity’ of price, quality, and service—a trinity that consumer guidance could help clarify. But in order to do so, further research was needed—or so the authors claimed. The Domestic Research Institute (Hemmens forskningsinstitut, HFI) was founded in 1944 by a private organization, the Housewives’ Committee 159

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(Husmödrarnas samarbetskommitté), and the Housekeeping Teachers’ Organization (Hushållslärarinnornas samarbetsorganisation), with the purpose of rationalizing Swedish homes and household work. The Domestic Research Institute was granted state funding in 1944 for its cooperation with the state agency Active Housekeeping. It examined items from functional, hygienic, and economical perspectives, and organized awareness activities in order to disseminate its research and test results (SOU 1964:4). In the Domestic Research Institute’s statutes, the household was depicted as a ‘consumption centre’ and a workplace in need of research on technical and economic problems. The institute not only produced numerous household-related standards—for kitchen design, for example—but also performed systematic testing of kitchen equipment, vacuum cleaners, and other home appliances (Aléx 2003). In 1957, the Domestic Research Institute was turned over to the state. The Swedish Consumer Agency has its roots in Active Housekeeping. The results of the market monitoring were communicated to interested citizens via the magazine Advice & Findings (Råd & Rön), published by the National Institute for Consumer Affairs. First published in 1958, the magazine contained such consumer-related information as the results of product quality tests, warnings about dangerous products, and suggestions for products worth buying, clearly acting for or against certain producers. Like the Cooperative Federation, KF, the state thereby undertook a role in shaping the market preferences of its citizens by offering a guide to a suggested selection of appropriate—and, by elimination, inappropriate—consumer choices (Aléx 2003).

Organizing Consumer Guidance The state’s interest and engagement in consumer guidance had gained solid ground, and the general mindset of rationalization and modernization required that it must be developed further. Sweden’s state-centred efforts during the 1960s to provide a more efficient consumer guidance programme were channelled through a number of public organizations, such as the National Institute for Consumer Affairs; the National Consumers’ Council, which had a mission to provide a scientific basis for the public (typically household-related) standards; and the National Board of Goods Declaration, which was responsible for monitoring and testing various goods against public standards. The goal of the protective, paternalistic government to shape the minds and lives of its citizen-consumers also spurred a dramatic increase in the number of public investigations in the 1960s. Between 1950 and 1970, there were 45 new memoranda, reports, and propositions in the field of consumer 160

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guidance (Aléx 2003). The investigation boom was then followed closely by a period of reform of the public consumer guidance. In 1963, a public investigation by the National Institute for Consumer Affairs found that there was a demand for wide-ranging organized and objective information to consumers in the wake of the postwar period. The institute highlighted the more affluent Swedish goods market, in which goods had become more differentiated and therefore more difficult to evaluate. Because of these challenges, investigators found that consumers needed various types of guidance to turn them into consumers of ‘wise and economic purchasing’ (SOU 1964:4). A series of mergers and consolidations in the field eventually brought about the founding of the Swedish Consumer Agency in 1973. This new state agency was the result of a merger of three state institutes: the National Institute for Consumer Affairs, the National Consumers’ Council, and the Board of Goods Declaration. This reform was part of an organized response to the 1970s debate on the downsides of advertising and its effects on consumers (see Konsumentverket n.d.a). Three years later, another organizational novelty in the field, the Consumers’ Ombudsman (KO), was appointed. The KO monitors the market, defends the interests of consumers against companies in court, and can help solve a dispute if it is important for the application of the law or if it is of common consumer interest. When first appointed, the role of the KO was unique to the area of consumer guidance worldwide.

Meta Consumer Guidance When public product labels were first introduced in Sweden in the 1940s, they were based on the idea of a rule-setter monopoly, and the public (household-related) standards represented a relatively narrow and homogeneous understanding of product quality. In contrast, the market for standards is huge in the 2010s, and both products and services are commonly judged on an increasing number of variables, including environmental and social concerns (Boström and Tamm Hallström 2010). Labels from organizations such as Fair Trade, the Rainforest Alliance, the Marine Stewardship Council, and the Forest Stewardship Council became popular during the 1990s, and according to the organizations behind them (many of them private corporations with global reach), these increasingly specialized labels help legitimize producers and products and guide consumers in their decision making. But as the number of labels increases and there is no given hierarchy in the market of labels, the authority of the organizations behind them may be uncertain (see Chapter 9), and there is a risk that, due to rising information 161

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costs, the many labels will make consumers less certain and more confused than ever. An increasing number of consumer guides are reaching out to help reduce this confusion, however. Contemporary consumers are approached from all sides, and internet technology has created a new channel for guidance—one with a potentially global reach. A closer look reveals that many of the consumer guides that we have discussed in this chapter are still active in the field in the mid-2010s: the Consumers’ Agency and the Consumers’ Ombudsman, for example. Traditional means of socialization and education, such as magazines and handbooks, still exist. There are newcomers, however, and additions to the consumer guides’ toolbox. The Consumers’ Insurance Bureau, The Consumer Energy Advice Bureau, and The Telecom Advisors are just three examples of novel and more specialized consumer guides, typically organized as foundations owned and governed by meta-organizations representing their specific industry in cooperation with relevant Swedish state agencies. In fact, most state agencies are currently involved to some degree in consumer guidance (Andersson et al. 2017), and the public field also includes municipal consumer guides. Guidance organized in and about the transnational field includes such organizations as EU Consumer Affairs (Konsument Europa), organized by the EU Commission, and Consumers International, a meta-organization founded in 1960, today organized as a not-for-profit company representing 240 consumer organizations in 120 countries. One of its members is the Swedish Consumers’ Association (Sveriges konsumenter), founded in 1992. Contemporary consumers are also pursued by a range of private companies with the potential to make money from consumers’ perceived uncertainty and insecurity in the increasingly specialized and global markets. Online companies such as PriceRunner, Prisjakt.nu, and Svartlista.se offer market monitoring, particularly price comparisons and information and guidance to consumers. Established bloggers can reach out and earn money as market cicerones (Karpik 2010; Alexius and Löwenberg 2012). As for the channels used to communicate and shape consumers, old media have been complemented by more recent additions. On Swedish television and radio, a growing range of programmes, such as Plus (with a market-monitoring and producersanctioning profile), The Luxury Trap (Lyxfällan) (with an educating profile), and The Wallet (Plånboken), deal specifically with consumption and the consumer’s role. Established public magazines such as Advice & Findings are still published, and daily newspapers have editors specializing in consumer economy. One example is Your Economy (Din ekonomi), a section of the Swedish daily newspaper Dagens Nyheter, which features a piggy bank as its symbol. In addition to these many channels, social media featuring such sites as Facebook, Twitter, Instagram, and many blogs offer amble opportunities to spread advice to consumers. 162

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New Information Costs The increasing number of consumer guides in recent decades has, somewhat paradoxically, created new information costs for consumers. It turns out that more advisers do not necessarily result in abler consumers. Because of the fine line between marketing and ‘independent’ consumer guidance, it is difficult to orientate oneself among a plethora of consumer guides: what the different labels stand for (the rules behind them), who supplies them, who monitors them, and which market information to trust. Critical voices have been raised about so-called eco-talk and green washing, for instance (Livesey and Graham 2007; Ongkrutraksa 2007; Alexius and Tamm Hallström 2014). These misleading labels are typically issued by a seller as part of its strategy for branding or for escaping stricter industry standards (Alexius 2007). The Norwegian fish producer Domstein, for example, has a brand label that may be mistaken for a similar industry standard label of the Marine Stewardship Council (Domstein 2017). Consequently, the Swedish State Consumer Agency recently recognized the need to guide consumers through this ‘jungle of labels’. And the agency is not alone; there is competition among the ‘jungle guides’ as well. The Society for Nature Conservation (Naturskyddsföreningen), for example, offers labelling advice in its Green Guide—a web guide that addresses ‘trusted labels’ and so-called ‘false labels’ that the organization considers confusing to consumers (Alexius and Löwenberg 2012). The Label Guide of the food retailer Coop (previously KF) is yet another example of this second-degree ‘metaadvice’, which may also be analysed as a type of market monitoring. It presents seventeen labels that Coop claims can be trusted, describing its Label Guide as convenient consumer gear: ‘A small, sleek and popular guide to keep in your bag!’ (Alexius and Löwenberg 2012). The Swedish Consumers’ Agency has commented on the credibility of various eco-labels and questioned whether the consumer is able to keep track of and differentiate among product labels. The agency warns against misleading labels that may be confused with ‘true’ eco-labels (Swedish Consumers’ Agency n.d.b). Faced with a plethora of guides and guidance, contemporary consumers must not only know how to choose among and within product categories and labels, but are now also urged to choose among guides first. We note, therefore, that consumer guidance in this contemporary era has developed into a product category in itself, a side market where guides not only cooperate with one another in shaping the consumer but also compete for sales and influence (where advice is sometimes paid for directly and actively by consumers, and other times indirectly, for example as part of a magazine subscription, the public broadcasting fee, or by watching commercials). The important learning point about this side market that developed as a response to information costs in other markets is that it will also—somewhat paradoxically, considering its 163

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aims—bring about new information costs due to consumers facing the task of orientating themselves to choose among guides and their advice—before going on to choose the products and services this advice concerns (Williamson 1981). Considering the rising number of standards and labels and the new information costs associated with choosing among consumer guides, a Swedish public inquiry, the Consumer in Focus—a Future Support to Consumers (SOU 2012:43), advocated an even greater degree of organization in the growing consumer guidance area. Discussing the paradoxical consequences of the ‘escalating spiral of guidance’, the investigators suggested a reform that would bring greater coordination and hierarchy to the field, by emphasizing the desirability of having one single, hierarchically superior interface with consumers, preferably the state’s Consumers’ Agency. Although the suggested reform has not yet been realized, we anticipate that the future will continue to demonstrate that more information is not always, in fact, the solution to all market problems. But rest assured that the pipe dream of the clever and active consumer will keep market organizers busy for centuries to come.

References Aléx, P. (1994), Den rationella konsumenten: KF som folkuppfostrare 1899–1939. Doctoral dissertation. Umeå, Sweden: Umeå Universitet. Aléx, P. (2003), Konsumera rätt—ett svenskt ideal: behov, hushållning och konsumtion. Lund: Studentlitteratur. Alexius, S. (2007), Regelmotståndarna—Om konsten att undkomma regler. Doctoral disseration. Stockholm: Stockholm School of Economics, EFI Publishing. Alexius, S. and Löwenberg, L. (2012), Drömmen om den kloka konsumenten. Score working paper series: 2012:2. Alexius, S. and Tamm Hallström, K. (2014), Value work in markets: Configuring values, organizing markets. In S. Alexius and K. Tamm Hallström (eds), Configuring Value Conflicts in Markets (pp. 1–21). Cheltenham: Edward Elgar. Andersson, C., Erlandsson, M., and Sundström, G. (2017), Marknadsstaten—Om vad den svenska staten gör med marknaderna och marknaderna med staten. Stockholm: Liber. Berger, Peter L. and Luckmann, T. (1967), The Social Construction of Reality: A Treatise in the Sociology of Knowledge. Anchor Book. New York: Doubleday. Berggren, H. and Trägårdh, L. (2009), Är svensken människa? Gemenskap och oberoende i det moderna Sverige. Stockholm: Norstedt. Boström, M. and Tamm Hallström, K. (2010), Transnational Multi-Stakeholder Standardization. Cheltenham: Edward Elgar. Brisman, S., Lidman, C., and Lindberg, A. (1931), Uppfostran till sparsamhet: handbok till lärares tjänst vid undervisning i sparsamhet. På uppdrag av Svenska sparbanksföreningens styrelse. Stockholm: Kungl. Boktryckeriet P.A. Norstedt & söner.

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Shaping the Consumer Clarke, J., Newman, J., Smith, N., Vidler, E., and Westmarland, L. (2007), Creating Citizen-Consumers. London: SAGE Publications. Coop (n.d.a). Available at: https://www.coop.se/Globala-sidor/om-coop/Var-historia1/ (accessed 9 October 2017). Coop (n.d.b). Available at: https://www.coop.se/globalassets/kf/finansiell-information/kf_ pop_2013_140403.pdf (accessed 9 October 2017). Domstein (2017). Available at: https://www.domstein.no/kvalitet/sertifisering (accessed 9 October 2017). Elldin, H. (1950), Klipp och bakgrunder till kooperativt fostringsarbete under ett halvsekel. Stockholm: Kooperativa förbundets bokförlag. Friberg, K. (2005), The Workings of Co-operation. A Comparative Study of Consumer Co-operative Organisation in Britain and Sweden 1860–1970. Doctoral dissertation. Växjö: Växjö University Press, Acta Wexionensa No. 71/2005. Humaniora. Furuland, Lars (1981), Skolsparrörelsen och Lyckoslanten. (Efterskrift i Spara och Slösa av Birgitta Lilliehöök). Stockholm: Gidlund. Hushållningssällskapet (2017). Available at: http://hushallningssallskapet.se/tjansterprodukter/livsmedel-mat-och-halsa/vara-matkonsulter/matkonsulten-tidigarehemkonsulenten/ (accessed 9 October 2017). Karpik, L. (2010), Valuing the Unique: The Economics of Singularities. Princeton, NJ: Princeton University Press. National Consumers Council/Konsumentverket (n.d.a). Available at: https://www. youtube.com/watch?v=LODmHxGUkMw (accessed 3 August 2016). National Consumers Council/Konsumentverket (n.d.b). Available at: http:// www.konsumentverket.se/Om-oss/Konsumentombudsmannen/ (accessed 3 August 2016). Livesey, S. M. and Graham, J. (2007), Greening of corporations? Eco-talk and the emerging social imaginary of sustainable development. In S. May, G. Cheney, and J. Roper (eds), The Debate over Corporate Social Responsibility (pp. 336–50). New York: Oxford University Press. March, J. G. and Simon, H. A. (1958), Organizations (1st edition). New York: John Wiley & Sons. Ongkrutraksa, W. (2007), Green marketing and advertising. In S. May, G. Cheney, and J. Rope (eds), The Debate over Corporate Social Responsibility (pp. 365–79). New York: Oxford University Press. Rosén, U. (2007), Hemkonsulent—mellan stat och medborgare. Nordisk arbetarhistorisk konferens, Landskrona 24–25 May. Växjö universitet. Available at http://arbetarhistoria.org/texter/Rosen.pdf (accessed 12 December 2012). Royal Coin Cabinet – National Museum of Economy/Myntkabinettet (n.d.a). available at : http://www.myntkabinettet.se/utstallningar/spara_i_bossa_och_bank/ sparframjandet/sparande (accessed 3 August 2016). Royal Coin Cabinet – National Museum of Economy/Myntkabinettet (n.d.b). Available at: http://www.myntkabinettet.se/utstallningar/spara_i_bossa_och_bank/ sparbanken/ar_1928 (accessed 3 August 2016). Ruin, O. (1960), Kooperativa förbundet 1899–1929. En organisationsstudie. Stockholm: Rabén & Sjögren.

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Susanna Alexius and Leina Löwenberg Simon, H. A. (1982), Models of Bounded Rationality, Volume 1: Economic Analysis and Public Policy. Cambridge, MA: MIT Press, pp. 235–44. SOU (1949):18. Kvalitetsforskning och konsumentupplysning: betänkande avgivet av 1946 års utredning angående kvalitetsforskning och konsumentupplysning. Stockholm: Regeringskansliet, Handelsdepartementet. SOU (1955):16. Pris och prestation i handeln: Varudistributionsutredningens betänkande. Stockholm: Regeringskansliet, Handelsdepartementet. SOU (1964):4. Effektivare konsumentupplysning—betänkande av givet av konsumentupplysningsutredningen. Stockholm: Regeringskansliet, Handelsdepartementet. SOU (2012):43. Konsumenten i centrum—ett framtida konsumentstöd. Justitiedepartementet, Stockholm: Fritzes. Swedbank. Available at: http://www.swedbank.se/om-swedbank/fakta-om-swedbank/ban kens-historia/ (accessed 2 August 2016). Trägårdh, L. (2011), The Mysteries of a Pippi Longstocking Economy: Radical Individualism in the Land of Social Trust. Stockholm: Working paper. Williamson, Oliver E. (1981), The economics of organization: The transaction cost approach. American Journal of Sociology, 87(3): 548–77.

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11 When Market Organization Does Not Help: High Ambitions and Challenges in the Market for Eldercare Eva Hagbjer and Anna Krohwinkel

In many welfare states, such key areas of public service as healthcare, education, and eldercare have been increasingly marketized over the past decades. The welfare sector has been opened up to private sellers, with a goal of containing or lowering the cost of these public services through competition (Hood 1991) and giving care users greater influence over the content and design of these services (Aberbach and Christensen 2005). As part of the reform process, government organizations act as market organizers in creating the conditions believed necessary to reap the benefits of marketization. These conditions have often been based on preconceptions about the way markets function and should function; they are, in turn, rooted in the discipline of economics and the idea that we refer to as the ‘perfect’ market in this book. In this chapter, we discuss the organization of public sector markets, inspired by the idea of the ‘perfect’ market, with the Swedish eldercare sector as our example. Specifically, we demonstrate how market organizers tried to compensate for a malfunctioning price mechanism, a key component of the ‘perfect’ market, by gathering and disseminating information through the use of rules, membership, and monitoring. These efforts at organizing influenced both the market exchange and the services available, although not always in the intended direction. The case demonstrates how market organizers emphasized and, most notably, simplified comparable information. In choosing this strategy, they tried to emulate the ‘perfect’ market as closely as possible, regardless of the buyers’ and sellers’ preferences. These attempts to create a ‘perfect’ market contributed to a greater homogenization of eldercare services, thereby counteracting the greater diversity and customization that was an original aim of the

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marketization. The result was a market that satisfies neither its creators nor the eldercare users it was meant to serve. The empirical description is based on content analyses of the various texts (mainly law texts, guidelines, contractual agreements, audit reports, information leaflets, web portals, and comparative statistics) through which information flows are organized and displayed. We also drew on a longitudinal study by one of the authors of this chapter (Hagbjer et al. 2013; Hagbjer 2014)— a study of supervisory meetings between managers of two privatized residential nursing homes and the municipal buyers of their services in the municipality she called Metropolis. In the course of this study, 25 interviews and 22 participant observations of supervisory meetings were conducted over a period of three years. All quotes were translated by the authors. The next section describes information aspects of the market organization. It compares the idea of the ‘perfect’ market with its implementation in the market for eldercare and some of the information problems that the organizers perceived. In the following section, we show how organizers tried to solve these problems by designing the information flows among buyers, sellers, and users through the use of various organization elements. The chapter ends with a discussion of the effects of the observed interventions.

The Overall Reform and its Guiding Model: Transparency Problems and Information Needs The marketization of welfare services proceeded in two steps. First, the services were outsourced from the state or local government to a multitude of private firms or other organizations outside the public sector. Sometimes the public organization kept some service units in-house and sometimes it did not, but in order for organizations outside the public sector to gain membership in the market and receive public funding, they were evaluated by the public organization in a tendering or accreditation process. In the second step, service users were regarded in a new way. Traditionally, service users had been seen as citizens with a collective right to certain public services. With the new emphasis on markets, users were transformed into customers with an individual right to ‘personal satisfaction with the services they receive from government’ (Aberbach and Christensen 2005, 226). This change included the right to choose their service seller and to switch among sellers in case of dissatisfaction. The market organizers we studied believed that the realization of a ‘perfect’ market required empowered customers— with individual preferences and the capacity to express demand for services. At the same time, the financing of the services remained within the public realm. The provision of welfare services can therefore be described as a 168

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tripartite exchange relationship among the seller, the public buyer, and the individual user, with requirements for two-way information flows between each pair of actors. The Swedish eldercare system covers all citizens, regardless of income, insurance, or other personal circumstances. It provides comprehensive medical and social services. The common right to eldercare is regulated in the Social Services Act (SFS 2001:453), a framework law that states the overall goals for care services without regulating their content in detail. The specification and provision of the care services is delegated to local governments—to approximately 290 Swedish municipalities. Apart from their responsibility to provide the care, the municipalities enjoy considerable autonomy in deciding the extent to which and under what conditions eldercare should be outsourced to private sellers. Although a majority of the municipal services is provided by the public sector, the proportion of care services provided by private sellers increased from 1 per cent in 1990 to 21–24 per cent in 2013 (Stolt et al. 2011; Socialstyrelsen 2015). The proportion varied across the country, with some municipalities having no private sellers and others relying almost exclusively on private sellers for the service (Stolt and Winblad 2009). In many municipalities, including Metropolis, the presence of private sellers was combined with a user choice system, which meant that several care sellers operated within the same area and were paid according to the number of care users who chose their services. A closer examination of the ideal of the ‘perfect’ market is key to understanding the organization of the eldercare market, because the aspirations of market organizers were heavily influenced by the effects that such markets are supposed to generate, according to economic theories. In the ‘perfect’ market, supply and demand are ideally regulated through the invisible hand of the price mechanism (Smith 1776/1981). If there is a high demand from customers, creating a scarcity of available goods, for example, market prices are assumed to rise, signalling to sellers that they should expand production (Coase 1937). As a market matures, the willingness of various groups of consumers to pay different prices for varieties of the same basic product will lead to a price- and quality-differentiated supply (Hayek 1931/2008). In short, price is regarded as the primary information carrier that helps both sellers and buyers to make the ‘right’ production and purchasing decisions (Ouchi 1980). Thus the range of products is constantly adapted to the customers’ varying preferences. According to a common assumption in economics, in order for the price mechanism to fill its intended function, a prerequisite exists: sufficient transparency in the market. A lack of transparency means that consumers do not have adequate knowledge of the suppliers’ offerings or that the producers are 169

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not fully aware of consumer preferences. Eldercare markets are characterized by the first transparency problem: lack of information about the quality of services. Although information problems are an issue in many markets, there are some areas in which the problem of information deficiencies and the corresponding need for organization can be expected to be particularly high. These are the markets in which the services offered are complex and the users are weak information gatherers and processors. This situation renders it difficult to act on ex ante information before the purchase decision, when purchasing decisions are far apart, or when switching costs are high—which creates difficulties acting on ex post information acquired by using the services (Williamson 1985). Eldercare is a prime example of a sector that exhibits all of these characteristics and where the need for organization has consequently been described as critical (Edebalk and Svensson 2005; Kastberg 2010). In particular, research has shown that over half of the Swedish population aged 77 and over have either considerably impaired cognitive ability or difficulty finding and processing information, and that one-third suffer from severe limitations of either a sensory function or mobility (Meinow et al. 2011). Another complication is the division of the consumer function between public buyers and individual users. The users do not know the cost of services used, and those financing them know little about users’ perceptions of the quality of the service. Similarly, the relationship between buyers and sellers decouples the parameters of price and quality, as the services are reimbursed according to pre-estimated user needs rather than the actual content of the offered services.

The Basic Market Organization Public organizations decided on membership in the market for sellers (through tendering or accreditation processes) and users (by assessing whether the individual care needs were sufficient to grant access to publicly funded care). The assessment of individual users’ care needs was performed by so-called social care administrators employed by the municipalities. The administrator’s evaluation was a prerequisite to receiving a place in a publicly financed home. The evaluation could also determine the level of reimbursement for the seller. Furthermore, the social care administrators were responsible for making future re-evaluations of the users’ care needs for reimbursement purposes. In a tendering process, a municipality offered the exclusive rights to sell eldercare in a particular area to a single or limited number of sellers. The rights were awarded to the sellers that offered a predefined level of quality at the lowest price, the highest level of quality (according to a set of predefined criteria) for a fixed price, or a weighted average of price and quality (SFS 2007:1091). In an accreditation process, any seller that met the predefined 170

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quality level had the right to enter the market and be remunerated according to a price list published by the municipality. Consequently, a municipality acting as a buyer of public services was required to outline a set of rules for quality, compliance with which determined membership as a seller in the care-service market, in advance of the tendering or accreditation process (SFS 2008:962). In most municipalities, the outsourcing of eldercare was combined with a system of user choice. This meant that care users had the right to choose among nursing homes and to change homes if dissatisfied. The care suppliers’ remuneration followed the care users’ choice, which meant that a supplier that failed to attract users could theoretically end up without any income.

Problems In practice, however, several limitations to the users’ choice were observed in the eldercare market. First, as no choice could be made until the care user had received a care evaluation, users had limited opportunity to plan ahead (Socialstyrelsen 2012). Moreover, eldercare is a highly complex service for which it may be difficult to establish a set of preferences before it has actually been tried (Statskontoret 2007). These complexities made it difficult to distinguish information that was relevant for determining the quality of a seller’s services—a problem aggravated by the reduced ability to process information that often results from old age (Statskontoret 2007; Meinow et al. 2011). Once the care service was being consumed, there were also obstacles to switching. Eldercare provision often involves the development of emotional bonds to certain personnel or a specific location. This dependency is combined with general incentives against relocation, such as the difficulty of moving in old age (Odenjung et al. 2010; see also Hugemark 2004). These obstacles were compounded for senile eldercare users. As one municipal nurse in Metropolis commented: [Research has shown that] it’s not good to switch nursing homes if you’re senile. Not too frequently, at least, and you know . . . It’s difficult [for the care users] because it’s a new environment, etc., that they’re not familiar with.

In fact, research indicates that eldercare users rarely change sellers once they have made their initial choice (Professional Management 2009), which increases the impact of the information available before and during the first decision. The nature of the care services also affected the municipalities’ outsourcing process and its information flows. Eldercare involves a complex mixture of medical and social care. It is conducted in a secluded setting and involves intimate interaction with weak and vulnerable user groups. In addition, the 171

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perception of care quality is characterized by its subjectivity (Zimmerman 2003). Consequently, there was a need for the municipalities, as buyers, to obtain information on the quality of eldercare, and preferably on user satisfaction with the services. Even if the municipality did not provide the services directly, it still bore the final responsibility for their quality (SFS 2001:453, 2 ch. 1§); it was held accountable for the presence of a functioning eldercare sector for as long as the care was financed with public funds.

Organizing Information Flows to Manage Perceived Market Deficiencies Given the lack of a spontaneous price mechanism to govern the market, market organizers assumed that the people participating in the exchange must be given access to ‘correct and sufficient’ information in order to make rational decisions (Statskontoret 2007; Odenjung et al. 2010). Frequently mentioned ‘necessary’ interventions involved the assurance that users would be given information about other possible sellers, that sellers were informed about the conditions for opening and managing homes, and that buyers could assess information about the type, quantity, and quality of services (Statskontoret 2007; SOU 2008:15). Market organizers sought to recreate transparency by organizing information gathering and dissemination. The organization of information was performed through organizational elements, primarily rules, monitoring, and definition of the criteria for membership in the market.

Organizing Information Flows to the User If the users were to be able to choose a care seller within a user choice system, they first had to be aware of their own right to choose and how the choice was made. Various types of rules were utilized to create this information flow. The Social Services Act (SFS 2001:453) gave the municipalities a general responsibility to inform all citizens about their right to eldercare. In most municipalities, general information about the way eldercare decisions were made and who was eligible for care were regularly sent to all senior citizens in the municipality. In addition, some municipalities announced, through newspapers, television, radio, or open information sessions, the process that users would undergo in making their choices (Ramböll Management Consulting 2009). Most municipal websites contained information about the option of choosing care sellers, descriptions of the initial choice process, and the opportunity for a dissatisfied user to make subsequent changes. 172

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When it was time for the user to choose a care seller, the municipal social care administrator was a crucial information source (SOU 2014:2). Care administrators played a complicated and somewhat paradoxical role in the information supply, as their interaction with prospective care users was heavily influenced and organized by restrictive rules. Swedish law requires municipalities to provide ‘objective, relevant, comparable, comprehensible and easily accessible’ information on all sellers within a user choice system (SFS 2008:962, 6 ch. 8§). Consequently, although responsible for informing the care user, the care administrators were required to be neutral with respect to the alternative sellers (Odenjung et al. 2010; SOU 2014:2)—sometimes to the extent that they were not allowed to offer any recommendations or information about the homes except for basic facts (Stadsrevisionen 2007). One care administrator in Metropolis described the dilemma: If [a care user] asks me, ‘Should I pick Home X or Home Y’, I will answer. But normally, we’re supposed to stay neutral. But then again, you can’t ignore how things are . . . Originally, it was really important that we should stay neutral and that you couldn’t offer any advice, no matter how many complaints a nursing home had received. But that’s not reasonable either. So . . . we’re still supposed to stay neutral, and we try to. But at the same time it’s unreasonable not to answer if they ask you a question.

Users were given other types of information, however—information based on monitoring. Many municipalities collected and displayed various types of quality information about the sellers in a uniform way (Statskontoret 2007). They tried to achieve comparability and ease of access to the information. And most information was simplified. Metropolis, for example, displayed measures on the nursing homes’ indoor and outdoor environment, meals, and social activities, and sometimes the results of local client surveys (Ramböll Management Consulting 2009; Odenjung et al. 2010). Metropolis went so far as to offer prospective care users the option of displaying the nursing homes listed on their website in order of their user satisfaction scores. In connection with this opportunity, information from the latest survey about user satisfaction with personnel, meals, and general user satisfaction was presented. Moreover, the Swedish National Board of Health and Welfare, a national monitoring and standard-setting agency, conducted an annual survey of eldercare quality. It rated Swedish nursing homes on criteria such as care continuity, personnel education, and the number of employed staff per resident (Socialstyrelsen 2010). The results were presented on the National Board’s website, providing care users with the opportunity to compare the aggregate quality results for different geographic areas as well as the results of individual homes. 173

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As a result of the neutrality requirement for social care administrators and the simplified nature of much of the publicly available information, care sellers and users often engaged in direct information exchanges. Sellers were allowed to advertise their services as long as they followed basic ethical rules, and friends and acquaintances served as additional information sources (Statskontoret 2007; Socialstyrelsen 2012). It was usually possible for a prospective client or family member to visit different nursing homes before deciding on one. Thus the users and their relatives assumed major responsibility for obtaining detailed and qualitative information about available options. To gain personal first-hand information about a seller, however, the users needed to be healthy enough to visit the nursing home themselves or to have a family member willing and able to assist them. One care placement coordinator in Metropolis described her experience of the aspects that prospective care users examine before choosing: They look at whether you can spend time outside, if there’s a balcony, if there are nice interiors, how the other residents are . . . or if there’s a garden. And the reputation is important. If you’ve always lived [in this area] you probably know someone who’s moved to a nursing home. Like, Nursing Home X in this area has a really . . . a really bad reputation, but that was 10 years ago. It’s not even called X anymore. But the bad reputation still sticks with it.

Organizing Information Flows to the Seller The information flow from buyers to sellers of eldercare was organized primarily through rules. Notably, a municipality that wanted to outsource the provision of its eldercare through tendering or accreditation needed to provide prospective sellers with information about the minimum quality requirements for market membership. Although contracts and accreditations regulated the relationship between the buyer and a single seller, they tended to be identical between sellers contracted at the same occasion. It has been an explicit ambition of the state legislators that tender and accreditation procedures should become increasingly homogenized across the country, in both design and content. One notable example is the Guide for the procurement of home-based eldercare under LOV (2010). It contains standards developed by the state agency Kammarkollegiet, as part of the agency’s assignment to support the development of membership criteria for the service markets. These criteria are seen as a particular challenge within eldercare, because they need to cover services within both the medical and social realms (basic hygiene, social activities, and simpler healthcare, for example) and to ensure the users’ ability to influence their own care. Membership criteria in Metropolis included the care users being given the opportunity to shower or bathe every 174

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day, to choose one of at least two dishes during their main meals, and to have the opportunity to participate in at least two social activities every day. Metropolis’s remuneration to the nursing homes was tied to the number of clients and the extent of the individual clients’ needs, which were assessed at the time of placement and again if the user’s condition changed over time. Metropolis had solved the requirement for information by introducing a monitoring ‘mediator’ in the form of the care administrator, who made the initial assessment of the user’s care needs. Later, the administrator either visited the nursing home or reviewed documentation of the user’s current health in order to determine whether the needs had de facto changed significantly. The need for reassessment posed a dilemma, because the social care administrators did not interact regularly with the users and Metropolis did not always agree that a user had moved to a level of care that was higher than the seller was being remunerated for. In addition, sellers’ direct contacts with users in the course of care served as a crucial source of information about their customers. Many homes administered regular user surveys among their residents, who were asked about their level of satisfaction or dissatisfaction with various aspects of the services, such as users’ influence on the provided care and whether users felt secure (Riksrevisionen 2008; Ramböll Management Consulting 2009). The sellers also interacted more informally with the elderly and their relatives whenever an issue arose. Research has demonstrated, however, that the same factors that infringe on switching (notably, the dependency situation) seem to have a hampering effect on the propensity to raise complaints with a current care seller (Hugemark 2004). It was seen as important, therefore, that users had access to ‘neutral’ bodies of complaint handling, as discussed in the next section.

Organizing Information Flows to the Buyer The contract and accreditation documents contained a clear hierarchical element. As well as defining the conditions for membership in the market, the documents established certain mandatory rules that formed the basis for the municipalities’ right to monitor seller performance. In addition to substantial specifications of the services to be performed, most contracts included a clause by which the seller guaranteed buyer access to information about the care operations. In other words, the information flows from the sellers were primarily organized through the buyers’ monitoring of the operations. In practice, the main venue of monitoring typically comprised sellers’ reports in combination with buyer inspections. The care operations were reviewed at least annually, with a higher frequency at the beginning of a contract period. Sellers were usually required to report on a number of predefined performance 175

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measures referring to such basic quality criteria as the general level of staffing and other resource-based measures. Slagsvold (1997) has argued, however, that quantitative measures such as personnel-to-client ratio and personnel education are a poor proxy for such ‘soft’ quality factors as the behaviour and attitudes of the personnel. Therefore, most municipalities performed announced and unannounced visits to the nursing homes, where they observed both social and medical aspects of the care. They also interviewed the care personnel and monitored documentation routines (Riksrevisionen 2008; Ramböll Management Consulting 2009). The eldercare supervisors in Metropolis commented that they often found the impressions made during an inspection more useful than the evaluation forms used by the municipality: [When I inspect a nursing home] I bring the forms with me and I bring the parts of the contract where we’ve made specific demands, like regarding the numbers of staff on duty . . . But there is also a kind of mental, over-all . . . Like, you keep your eyes open. You check everything. You check if the premises are clean, you check hygiene practices, you check if the personnel wear aprons while preparing food, how they prepare the food, what temperature they keep the food at . . . Like, we know this by now, we know what to look at.

The law requires that a designated nurse monitor the medical aspects of the care with the responsibility of ensuring that proper healthcare routines are upheld (SFS 1982:763). This person is also required to investigate any incidents ‘that have resulted in, or could have resulted in, healthcare damage’ to prevent similar events in the future (SFS 2010:659, 3 & 5§§). In addition to the municipal monitoring activities, the buyers could also receive information from the monitoring activities of other local or national authorities, such as the National Board of Health and Welfare and the public audit offices. As mentioned, it was also common for municipalities to engage in monitoring in the form of annual client surveys. The drawback of client surveys was their low response rates, given that many of the clients were unable, or needed help, to complete it. As one municipal supervisor in Metropolis commented: ‘With a response rate of 50%, it’s not very good information.’ In addition to the surveys, some municipalities had an eldercare ombudsman, or some variation thereof, to whom users and their relatives could direct questions and complaints. Dissatisfied clients could also turn directly to their care administrator, and sometimes to the civil servants in charge of overseeing and enforcing outsourcing contracts. Care users could also choose to report issues of concern to proxy supervisory organizations, such as the local Patient Committee or the National Board of Health and Welfare. This type of organization was created in order to function as mediators of information. Their main purpose, however, was to handle deficiencies on an ad hoc basis, rather 176

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than providing systematic information flows to facilitate exchange. They, in their turn, could inform the buyers or take other actions as deemed necessary.

Where Has Organization Led? To summarize, the market organizers—both the state organizers and the buying municipalities—used several organizational elements. They spent a great deal of effort deciding on membership in the market—who could be a seller and who could be a user. Most commonly, they used rules. These included prescriptive rules, regarding the type of information that should be provided and to whom; and restrictive rules, which limited the mandates of care administrators to provide information about individual homes, for example, and the scope for the care sellers to market themselves. They also used monitoring, performed by the buyer and by independent monitoring agencies. Also noteworthy are the organizational elements that were not observed or were present to a lesser extent. The weakness of sanctions was striking. Whereas contract termination or individual client exit is the utmost signal of discontent in theory, in practice this function was virtually absent or heavily constrained on the part of both buyers (Edwards and Shaoul 2003) and users (Professional Management 2009). Similarly, there was no use of positive sanctions—economic rewards in cases in which quality exceeded expectations, for instance. These attempts at organization were all aimed at mimicking the conditions of a ‘perfect’ market, but several studies of new welfare markets have shown that the intended effects of diversity and dynamics have failed to materialize (Kastberg 2010). It is also unclear whether the overall quality of the services has increased (Szebehely 2011). Given the outspoken aim of reformers to increase the range of quality and user choice—and, importantly, the number of active choices—the result is disappointing. From our case, we can deduce some explanations about the deviations between ambitions and results. One fundamental explanation is the fact that the market organizers were trying to create an ideal type of buyer and seller, regardless of the characteristics of the actual buyers and sellers. The organization was based on a theoretical model predicting rational (‘good’) decisions by consumers and producers as long as they have access to ‘appropriate’ information about their choices. This model was coupled with a concurrent assumption of bounded rationality—that actors have a limited ability to process large amounts of complex information. As described, these assumptions influenced the kind of information flows promoted. Market organizers focused on producing simplified and 177

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comparable information in the form of a limited set of quality indicators. When only certain indicators were made visible on websites and other instruments of comparison, there was an incentive for sellers to focus on the measured features at the expense of other, less visible, quality aspects. The market organizers’ approach thus made the sellers converge around these aspects, rather than acting on opportunities for diversification. This trend towards convergence around certain quality criteria was strengthened by the rules requiring buyers to adopt a streamlined definition of ‘good quality’ as criteria for membership. As a result, the service offerings became harmonized. Furthermore, the choice of which user information to collect and the ways of displaying available information was made with an apparent indifference towards the information that users really wanted and the ways in which they wanted it. Most notably, care administrators were restrained from providing the kind of information for which users can be expected to have the greatest demand: personal suggestions and advice about different homes. As a result, more resourceful or technologically able users had a substantially better opportunity to obtain information that was directly relevant to their pending choice. These differences persisted despite the market organizers’ aspirations to create a situation of equal possibilities. Consequently, although the market organizers set out to increase the care users’ influence on the eldercare services’ content and design, their very efforts to compensate for the users’ difficulties in processing and acting on both ex ante and ex post information about the services ensured that the expected benefits of the marketization failed to materialize. Instead, there was homogenization of services and inequality among users. On the other hand, it probably would have been politically problematic—or even impossible—to create a situation of highly differentiated services, because that would break the norm of equal treatment of all citizens. Perhaps, then, the creation of an eldercare market was predestined to suffer failure? If so, there is a need to explore other ways of improving eldercare users’ influence on the service content—by allowing for greater individualization and user influence in the practical delivery of the services, rather than as a choice among sellers. Such designs may enable a larger degree of needs adjustment and preference fulfilment, thereby rendering them more in line with the market organizers’ original intentions. It would place the main task of choosing and monitoring care sellers at the feet of the municipalities rather than the users, however—contrary to the market organizers’ ideas about how a market for welfare services should work. The users would lose their role as actors in a market for nursing homes, and would regain their previous role: trying to influence the inner operations of an organization.

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References Aberbach, J. D. and Christensen, T. (2005), Citizens and consumers. Public Management Review, 7(2): 226–45. Coase, R. (1937), The nature of the firm. Economica, 4(16): 386–405. Edebalk, P. G. and Svensson, M. (2005), Kundval för äldre och funktionshindrade i Norden: Konsumentperspektivet (TemaNord 2005:507). Copenhagen: Nordiska ministerrådet. Edwards, P. and Shaoul, J. (2003), Partnerships: For better, for worse? Accounting, Auditing & Accountability Journal, 16(3): 397–421. Hagbjer, E. (2014), Navigating a Network of Competing Demands: Accountability as Issue Formulation and Role Attribution across Organisational Boundaries. Doctoral dissertation. Stockholm: Stockholm School of Economics. Hagbjer, E., Lind, J., and Sjögren, E. (2013), Trust in the monitoring of publicly financed services: A case study of two outsourced care homes for the elderly. In M. Reuter, B. Kristensson Uggla, and F. Wijkström (eds), Trust and Organizations: Confidence across Borders (pp. 147–63). Basingstoke: Palgrave Macmillan. Hayek, F. A. (2008), Prices and Production and Other Works: F.A. Hayek on Money, the Business Cycle, and the Gold Standard. Ed. J. T. Saleno. Auburn, AL: Ludwig von Mises Institute. (Original work published 1931). Hood, C. (1991), A Public Management for all Seasons? Public Administration, 69(1): 3–19. Hugemark, A. (2004), Med rätt att bestämma själv? Exit, voice och personlig assistans. In K. Gynnerstedt (ed.), Personlig assistans och medborgarskap (pp. 99–120). Lund: Studentlitteratur. Kastberg, G. (2010), Vad vet vi om kundval—En forskningsöversikt. Stockholm: Sveriges Kommuner och Landsting. Meinow, B., Parker, M. G., and Thorslund, M. (2011), Consumers of eldercare in Sweden: The semblance of choice. Social Science & Medicine, 73(9): 1285–9. Odenjung, H., Eriksson, M., Hedlund, H., Stöckel, B., Söderström, E., Helldén, D., and Broberg, E. (2010), Valfrihet och vårdval—Slutrapport från programberedningen om valfrihet. Stockholm: Sveriges Kommuner och Landsting. Ouchi, W. G. (1980), Markets, bureaucracies, and clans. Administrative Science Quarterly, 25(1): 129–41. Professional Management (2009), Utvärdering av valfrihetssystem i kommuner och landsting. Stockholm: Sveriges Kommuner och Landsting. Ramböll Management Consulting (2009), Valfrihetssystem—Erfarenheter från ett antal kommuner och landsting. Stockholm: Sveriges Kommuner och Landsting. Riksrevisionen (2008), Statens styrning av kvalitet i privat äldreomsorg (RiR 2008:21). Stockholm: Riksdagstryckeriet. SFS 1982:763. Hälso- och sjukvårdslag [Health and Medical Service Act]. SFS 2001:453. Socialtjänstlag [Social Services Act]. SFS 2007:1091. Lag om offentlig upphandling [Public Procurement Act]. SFS 2008:962. Lag om valfrihetssystem [Act on System of Choice in the Public Sector]. SFS 2010:659. Patientsäkerhetslag [Patient Safety Act].

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Eva Hagbjer and Anna Krohwinkel Slagsvold, B. (1997), Quality measurements and some unintended consequences: Can quasi-quality be a consequence of quality standards? In A. Evers, R. Haverinen, K. Leichsenring, and G. Wistow (eds), Developing Quality in Personal Social Services: Concepts, Cases and Comments (pp. 291–310). Vienna: Ashgate Publishing. Smith, A. (1981), An Inquiry into the Nature and Causes of the Wealth of Nations. Indianapolis, IN: Liberty Press. (Original work published 1779). Socialstyrelsen (2010), Införandet av vårdval i primärvården (Reg. no. 2010-2-10). Stockholm: Socialstyrelsen. Socialstyrelsen (2012), Val inom hemtjänst och äldreboende. Fokusgrupper med äldre och anhöriga som valt utförare inom äldreomsorg (Reg. no. 2012-2-25). Stockholm: Socialstyrelsen. Socialstyrelsen (2015), Tillståndet och utvecklingen inom hälso- och sjukvård och socialtjänst— Lägesrapport 2015 (Reg. no. 2015-2-51). Stockholm: Socialstyrelsen. SOU 2008:15. LOV att välja—Lag Om Valfrihetssystem. Final report from the Committee on Systems of Choice (Frittvalutredningen). Stockholm: Fritzes. SOU 2014:2. Framtidens valfrihetssystem—inom socialtjänsten. Final report from the Committee on Future Systems of Choice in Social Services (Utredningen om framtida valfrihetssystem inom socialtjänsten). Stockholm: Fritzes. Stadsrevisionen (2007), Uppdraget som biståndshandläggare inom äldreomsorgen (DNR 420/87-07). Stockholm: Revisionskontoret. Statskontoret (2007), Vård, skola och omsorg—vilken information behöver brukaren för att välja? (Reg. no. 2007/71-5). Stockholm: Statskontoret. Stolt, R., Blomqvist, P., and Winblad, U. (2011), Privatization of social services: Quality differences in Swedish elderly care. Social Science & Medicine, 72(4): 560–7. Stolt, R. and Winblad, U. (2009), Mechanisms behind privatization: A case study of private growth in Swedish elderly care. Social Science & Medicine, 68: 903–11. Szebehely, M. (2011), Insatser för äldre och funktionshindrade i privat regi. In L. Hartman (ed.), Konkurrensens konsekvenser: Vad händer med svensk välfärd? (pp. 215–57). Stockholm: SNS Förlag. Williamson, O. E. (1985), The Economic Institutions of Capitalism: Firms, Markets, Relational Contracting. New York: Free Press. Zimmerman, R. D. (2003), Improving nursing home quality of care through outcomes data: The MDS quality indicators. International Journal of Geriatric Psychiatry, 18: 250–7.

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12 Dealing with Asymmetric Information Organizing and Reorganizing a Market for Child Insurance Martin Gustavsson

Asymmetric Information and Market Organization In many consumer markets, sellers want to know as much about buyers as possible. Buyers, on the other hand, are far less inclined to share that information with the seller—not least for privacy reasons. This situation is related to the organization of markets in at least two ways: (1) The distribution of information may be affected by the existing characteristics of market organization, and (2) market organization may be used as a reactive attempt to change perceived imbalances in conflicting information interests. This chapter illustrates conflicting information interests and their relationship to market organization through a case study of the market for personal insurance. Insurance sellers require in-depth information about a buyer’s health, in order to make an accurate risk assessment. If the company has less information than the applicant has, the risk assessment can be inaccurate and the premium inadequate. All forms of private insurance are based on the principle that the insurer and the insured have the same information when the insurance is purchased. As this information is sensitive to buyers, however, and can potentially exclude them from the market, buyers have been concerned about sharing it. The risk that the buyer knows more than the seller has led sellers to expend considerable resources trying to organize buyers, using rules (required health declarations), membership (the exclusion of illegitimate customers and the categorization and division of

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legitimate customers into segments), monitoring (control of submitted data against patient records), and direct sanctions (the invalidation of an approved insurance if the customer has provided false information). The state has also been an organizing force in this market, typically covering both buyers and sellers. Since 1903, insurance companies in Sweden have been obliged to demonstrate that they are financially solid and able to pay compensation for insured damage (cf. ‘solidity or stability principle’ in Insurance Business Act, SFS 2010:2043, ch. 4, § 1). And since 1927, potential customers have been obliged to disclose any personal information of relevance to the purchase of their personal insurance (cf. ‘duty of disclosure’ in Insurance Contracts Act, SFS 2005:104, ch. 12, 1–4§§). At the beginning of the 2000s, the duty of disclosure and the solidity principle collided with another principle: the need to protect policyholders’ privacy. The main empirical section of this chapter is devoted to a description of the struggles among all the stakeholders, resulting in an expansion of the Swedish state legislation in the early 2000s. My focus in this chapter is on child insurance—a strongly debated type of personal insurance wherein the lines of conflict between seller and buyer are particularly clear. I use press materials, materials from stakeholders and governmental investigations, and interviews to highlight a decade-long debate that finally led to a new law (SFS 2011:12) on the actions of insurance companies. The change of rules, therefore, was an outcome of a variety of interest group struggles. First I outline the ways in which the criticized market was organized at the outset. I then describe the organizations and persons most active in attempts at reorganizing the market at the beginning of the 2000s, the problems and solutions they raised, and the strategies they used. Finally, I describe the state’s reactions to proposals for reorganization.

Reaching the Customer with Information: An Historical Retrospect 1890–2010 The first child insurance was introduced in Sweden in the early 1890s (Palme 1915, 661; cf. Leffler 1901, 953). Along with the asymmetry dilemma, there was another information problem at the time: informing parents who seemed uninformed about or uninterested in the product. This market was certainly not initiated by demand. As Figure 12.1 shows, sales were slow initially; only a few thousand insurance policies for children were sold annually during the 1910s. It required hard work for the marketing departments to attract the attention of prospective 182

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Year Child accident insurance: sold by Swedish and foreign companies Child accident insurance: approximations for one company Child accident insurance: ‘etc’.

Figure 12.1. Number of child accident insurance policies sold in the Swedish market, 1914–1981. Sources: Enskilda försäkringsanstalter 1914–1981; Statistisk Årsbok 1953–1958.

customers.1 The campaigns seem to have had an effect, however, as Figure 12.1 shows that sales increased slowly but steadily until 1930 and then rapidly during the 1940s. Sales declined in the early 1950s and stopped completely in 1955—a trend driven by various factors. Municipalities began to sign collective accident insurance for schoolchildren, adding to the increasingly perceived problem of ‘over-insured’ children (cf. Sporrong 2014, 1). Moreover, the Insurance Supervisory Authority was critical of the existing private child accident benefit scheme (Enskilda försäkringsanstalter 1954:16*). The old type of insurance was phased out during the golden years of the welfare state and industrial capitalism between 1949 and 1974, which is roughly contemporary with the period of strict state regulation of the Swedish insurance market (cf. Schön 2001; Larsson et al. 2005, 262; Gustavsson 2014, 107).

1 Examples of the advertising material used: 1923–1955 in Skandia web archive http://www. skandiahistoria.se, ‘Schoolboy gets leg cut off by a tram’ (The picture represents a newspaper clip), Skandinavien, child accident insurance, 1923–1930, SKN002510; ‘On your own . . . ’ (A picture of a cute little girl on the street in front of two big menacing cars), Nornan, child protection insurance, 1931, SKN003326; ‘Small becomes big’ (A picture of a cute little girl looking into the future and eating a banana), Skåne-Malmö, insurance against child accidents and the disease of polio, 1945–1955, SKN004038.

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The Rise of the Second Child Insurance from 1974 Before the old child insurance had completely disappeared from the market in the early 1980s, Skandia, one of the major insurance companies in Sweden at the time, had introduced a new form of child insurance: individual insurance covering both accidents and childhood diseases other than polio (a virus by then eradicated in Sweden) (cf. Committee on Civil Affairs 2013, 17). Skandia argued that new insurance was a valuable supplement to public social insurance, which provided children with weak personal insurance coverage— especially in cases of work incapacity when they became adults. The new product was far from an instant hit; it took a long time for potential customers to find the product, distinguish its contents from the old forms of child insurance, and perceive a need for it (U. Lindqvist, personal communication, 9 June 2010; cf. Hult 1998, 63). As was the case in the early 1900s, substantial information campaigns were needed to create sufficient demand.2 Marketing in general increased during the 1980s in Sweden. As the demand for child insurance failed to grow, sellers invented new ways of contacting potential buyers. The insurance companies purchased lists of all newborn babies, in order to contact parents through direct marketing, and telemarketing became more common. Insurance was also sold with the help of agents and brokers (Sporrong 2014, 3). The active marketing efforts seem to have borne fruit. During the 1990s and 2000s, sales grew considerably, as illustrated by Skandia’s sales (see Figure 12.2). As child and youth insurances became more common, the topic of child insurance slowly made its way into media conversations towards the mid1990s and received considerably more attention a decade later (Gustavsson 2014, 119–21) (see Figure 12.3). One theme in the debate was ‘fairness’. Despite the fact that private child insurance is a commercial product developed by profit-driven companies, many critics found it unfair that not all children could be granted an insurance policy or could be granted it only under exceptional conditions. Another theme in the debate, on which I now focus, was buyer privacy and the gathering of buyer information.

Retrieving Information about the Customers: 2001–2011 It was a nurse at a child health centre in Stockholm who, around the turn of 2000, first blew the whistle on the insurance industry’s access to patients’ confidential health information. The nurse contacted Chief Physician 2 See, for example, Skandia 1985, and the campaign in Skandia web archive: http://www. skandiahistoria.se, ‘Cars are better insured than children’, Skandia, 1990–1995, SKN001503.

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Figure 12.2. Premium income for Skandia’s child and youth insurance, 1980–2009. Source: Unpublished data from actuary Daniel Höök, Skandia Liv, 15 December 2010.

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Figure 12.3. Search results for ‘child insurance’ in Mediearkivet. Number of hits for the publication period 1982–2011 (n = 1,257). Source: Mediearkivet—a digital archive covering all the big dailies, local newspapers, and journals in Sweden—5 March 2012.

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Margareta Blennow, who was responsible for the quality assurance of 110 child health centres in Stockholm (M. Blennow, personal communication, 18 March 2010. See also letter from Margaret Blennow to the Swedish National Council on Medical Ethics, 19 February 2002). Blennow began to pursue the issue nationally—by having it placed on the agenda of various medical organizations, for example, and by participating in media discussions (e.g. Helte 2003b and debate programmes chaired by Swedish television (SVT) journalist Johan Winblad 2003). A journalist at the largest newspaper in Sweden, Dagens Nyheter, was also informed (Weilenmann 2001). Increased public discussions led to scepticism about private personal insurance and dissatisfaction with the Swedish child healthcare system. Some parents became restrictive with information when they took their children to hospitals; they did not want information about their children’s health to be recorded and passed on to private insurance companies. Their concerns were based partly on the fact that health information is private and sensitive and partly on their fear that, having revealed too much, they would not be allowed to buy the product or that they would not be compensated if they made an insurance claim. Goal conflicts between buyers and sellers emerged: the insurance companies’ need for health status information stood against the customers’ need for confidentiality and for uncensored conversations about their children with medical personnel. Neither the duties of disclosure nor health examinations were new. The customer’s ‘duty of disclosure’ was, as previously mentioned, part of the 1927 insurance law. Medical examinations in connection with personal insurance had existed at least since the 1890s (although it was possible to buy a special type of life insurance without a medical examination around 1900) (see Palme 1915, 661; cf. Larsson 1991, 17–18, 37; Zelizer 2011, 44, 52). The fact that medical examinations were associated with discomfort for some prospective customers was not new either (dictionary word ‘Karensförsäkring’ in Nordisk familjebok 1910, 933). The debate in the years around 2000 was fuelled by three other interrelated factors, however: increased sales, digital information, and personal privacy issues. The sales of this product increased considerably around this time, making the subject relevant to more people. In 2014, a majority of Swedish children had individual private child insurance (Sporrong 2014, 5). Furthermore, new digital information systems had been developed and adopted (cf. Haufler, 2001, 85–90), facilitating detailed monitoring of, among other things, medical records of individuals. Partly due to the development of information technology, potentially privacy-sensitive information had become more available for sellers to exploit. In addition, issues of personal privacy were general subjects of discussion in the years around 2000—more than they had been around 1900. 186

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Interactions between Buyers, Sellers, and Medical Personnel I have been given access to material on how the market for child insurance worked in local practice—material that Chief Physician Margareta Blennow started to collect in 2001.3 The description that follows is partly based on these sources. A study of the everyday contacts between market actors reveals substantial information problems. Buyers’ communication with sellers and medical personnel is often as complicated as the discussions between medical personnel and sellers. The information play between the actors is intricate. Public health medical records are protected by rules of confidentiality, although the individuals to whom the data relate withdraw the confidentiality requirement when they give insurance companies their consent to access their health records (Government Bill 2010, 17). Many insurance customers were upset when, in January 2001, it became publicly known that insurance companies had found a legal backdoor to access the confidential medical records of the public health service. ‘It is absurd’, said the parents of a four-year-old who was denied insurance because of a journal note about mood changes. They had missed the small print section of the application form saying that a signature meant that the company was given the right to order unedited medical records (Weilenmann 2001). They were not alone in that experience. Many parents contacted child health centres (Barnavårdscentral, BVC for short) at the time, asking how the company had received information from the medical records (e.g. letter from BVC Rissne to Margareta Blennow, 7 March 2001). Knowledge about the way insurance companies were using the application documents soon became widely known, which, in turn, affected parents’ contacts with child health clinics. In the autumn of 2003, for example, the parents of a bilingual boy did not want to bring him for a routine three-year check-up at the BVC because it included a language evaluation. ‘They now want to cancel the visit because they are afraid of what will be in the record. The boy speaks good Polish but poor Swedish (according to the father). This is based on the debate over insurance companies and child insurance’ (letter from BVC Bandhagen to Margareta Blennow, 22 September 2003).4 Two other concerned parents asked a child health nurse to ‘document the visit as if it were a week later, as they were about to buy an insurance’. A nurse provided a further example of a parent telling her not to write down the content of their telephone conversation—that her son had had a fever for a few days after a vaccination—‘because they were looking for child insurance. Threatening to never call BVC again [!] if we document the information we 3 All this material, including the previously mentioned letters and an unpublished survey (distributed in summer 2003 to all nurses at 106 child health centres in Stockholm), is kept at Stockholm South General Hospital (Södersjukhuset). 4 This and all other translations from Swedish are my own.

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receive’ in the medical record (two letters from Lugnets BVC to Margareta Blennow, 16 January 2008). How the information was gathered also had implications for the way health personnel related to state laws governing their work. As nurses and others who are required to keep medical records became aware that their records could form the basis for insurance companies’ assessments, many of them became more restrictive in their record keeping. The fear that so-called working diagnoses became actual diagnoses when the medical records left the hospital building—that noted hypotheses of the healthcare work were turned into facts in the insurance companies’ risk assessment—led nurses to record fewer details, with more reservations and fewer hypotheses. Although it is illegal for nurses to carry ‘double bookkeeping’ (unofficial notes in addition to the actual journal entries; Journal Law Act), nurses and other medical personnel sometimes felt compelled to do so. There was a tension between rules and actual behaviour. As professionals, nurses were responsible for complying with existing regulations. But at the same time, they wanted to respect their patients’ wishes and interests, by not keeping a record of alcohol consumption, relationship problems, or children’s skin rashes, for example (Ministry of Justice 2005, 124, 152). In 2003, nearly 30 per cent of the child health centre nurses in Stockholm stated that the insurance companies’ handling of medical records affected their reporting. ‘You write a lot less, more cryptically, and expend a lot of thought behind the words.’5 There were also communication problems between the nurses at child health centres and risk assessors in insurance companies. As medical records have the official purpose of providing working tools in health-promoting work rather than serving as the basis for insurance companies’ medical assessments, they caused interpretation problems. A BVC nurse’s note that a child was ‘alert and talented, very active’ could, in extreme cases, be interpreted as ‘a future ADHD child’6 in the hands of an insurance risk assessor (Ministry of Justice 2005, 114, 123, 149, 164).

Critique and Suggestions for Reorganization Criticism of the existing market order was voiced from many different camps, not least the health sector. It can be summarized in five points. 1. Criticism focused on the design of the consent forms for the collection of health data, asserting that the application forms were unclear and should be improved. Many prospective customers seemed to miss or 5

Unpublished survey distributed in summer 2003 to all nurses at 106 child health centres in Stockholm – see note 3. 6 Acronym for attention deficit hyperactivity disorder.

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misunderstand the implications of the fine print on the current conditions. Did they really realize that by signing, they had agreed that everything they had ever said and done in a formal context in front of a physician or nurse could be shared with private companies (cf. Gunnartz 2007, 117)? 2. Critics argued that it was unreasonable that there was no time limit for the length of time that insurance companies were allowed to save information about a buyer’s medical history. They also questioned the fact that companies could keep the information on rejected insurance applicants or buyers who withdrew their applications (cf. Ministry of Justice 2005, 111). 3. Insurers were allowed to demand complete medical records. Critics thought that limited journal extracts or special certificates were a better idea. Now, companies had access to highly sensitive surplus information, which was irrelevant from an insurance standpoint. As one interviewed doctor described: ‘We write a lot in the records that belong in the private sphere [ . . . ] In order to assess a whiplash injury, for example, the insurance companies do not need to know if the patient has been depressed at some point in their life or if she had been to a gynaecological clinic’ (Helte 2003a). 4. The fact that journal material stored in private insurance companies was not covered by the Official Secrecy Act generated further criticism. Because the insurance companies had built up a huge database with sensitive information about the physical and mental health of the Swedish population, the lack of confidentiality regulated by law was regarded as serious. Like the staff in public healthcare, the detractors argued, insurance company employees should be subjected to statutory duties of confidentiality. 5. Critics were concerned that insurance companies would overinterpret or misinterpret information, not least about children’s health, as this information was developed for health assessment purposes and not for risk assessments. Children’s healthcare kept health records, not medical records. And although it is physicians—not nurses—who make diagnoses, this documentation was based primarily on BVC nurses’ observations, assessments, and advice (see letter from Margareta Blennow to Ministry of Justice, 8 April 2005). The insurance companies’ risk assessors—trained nurses, not physicians—therefore had a poor base with which to work. Insurers had previously asked doctors for advice in assessments, Margareta Blennow told a television audience in 2003, but now they asked only for the journal, because it was simpler and cheaper (SVT 2003). That became an aggravation for healthcare workers. Critics 189

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argued that specific restrictive regulations should be imposed on records that were for health supervisory purposes within the child health services (for pre-schoolers) and school health services (for school-aged children). Furthermore, they argued that insurance companies’ needs for necessary information should be met by specific questions to the treating physician. Overall, the criticism pointed at a number of serious shortcomings with the existing system. It was not merely that patient safety was threatened by parents withholding information from nurses and physicians or that nursing staff omitted relevant data. Even public trust in insurance companies, public healthcare, and ultimately the entire legislative state was being jeopardized (cf. Ministry of Justice 2005, 153, 187–8). According to critics, the need for reorganization of information aspects of the child insurance market was therefore urgent.

Strategies for Market Change The stakeholders, often representing healthcare interests and often with Margareta Blennow in the lead, were active in many areas. Internal discussions at various levels within the health sector started early. Blennow not only initiated the survey to nurses in Stockholm; she also raised the issue at various medical conferences. External contacts with the insurance industry were also established. An initiative was conducted by a joint working group, with representatives of the Swedish Insurance Federation (an industry association for insurance companies), the Children’s Medical Society (an interest organization for paediatricians), the insurance companies’ risk assessors, and the Swedish Consumers Insurance Bureau (a foundation run jointly by the industry association Swedish Insurance Federation and two state authorities— the Swedish Consumer Agency and the Financial Supervisory Authority—with an overall mission of helping consumers make informed decisions in the financial sector). Their joint efforts quickly resulted in a public information brochure (Barnförsäkring och riskbedömning (Child insurance and risk assessment) 2002). Blennow and other critics also spread the issue through newspapers, radio, and television (Gunnartz 2007, 116–17). Above all, the healthcare representatives made several attempts to engage state representatives. They needed more systematic examination of the insurance companies’ use of confidential information, of the efficacy of campaigns recently launched by the joint initiative, and other issues. ‘Is it possible for you to undertake this investigation?’, Blennow asked the Government Offices Policy Department (in a letter of 5 November 2002). A month later, the Swedish National Council on Medical Ethics, which had just begun a cooperative 190

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effort with Blennow (Sjökvist 2007, 18), made a proposal: that the government should investigate conditions for limiting insurance companies’ ability to use general consents and for removing insurance companies’ ability to obtain medical records conducted within the child and school health systems. ‘Legitimate information needs’ could be solved ‘by an opportunity for insurers to ask focused questions to the treating physicians’ (Swedish National Council on Medical Ethics, 18 December 2002).

Governmental Investigations 2005–2010 On 8 March 2004, the Social Democratic Minister for Justice decided to establish a commission, comprising the Director General of the Swedish Consumer Agency and the Acting Consumer Ombudsperson, to assist the Ministry of Justice with an analysis of the insurance companies’ access to medical records. The results of the survey, reported approximately a year later (Ministry of Justice 2005: 13), were consistent in most respects with the criticisms and suggestions for solutions that Blennow and others had previously presented (cf. Gunnartz 2007, 122). During the consultation, it became clear that there was disagreement over the commission’s proposals. Particularly controversial was the proposed solution to use limited journal extracts and special certificates rather than giving the insurance companies access to the complete journal notes. Seller representatives were negative towards the idea, although it was welcomed by the respondents who represented the children, the healthcare interests, the consumers, and the protection of citizens’ privacy (the physicians’ professional association, the Swedish Medical Association (11 November 2005), and state authorities such as the Ombudsman for Children in Sweden (4 October 2005), the National Board for Consumer Disputes (24 October 2005), the Swedish Data Protection Authority (24 October 2005), and the Swedish National Council on Medical Ethics (11 October 2005)). According to the insurance industry, the proposal to limit the ability of insurance companies to obtain ‘complete’ medical records would have negative consequences for individual buyers, as sellers would not be able to provide insurance as good as the insurance they were currently providing. According to sellers’ representatives, the proposal would also have negative effects for medical personnel, who would be heavily burdened by the task of selecting from sets of medical records. Although the Swedish Insurance Federation did assert that it shared the government’s view that buyers were in need of privacy protection and that it was imperative to eliminate any concerns that might exist among individuals about the way insurance companies dealt with health information, they also argued that the extent of privacy protection should 191

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always be weighed against the need for adequate insurance. The following citation illustrates this line of argument: One of the starting points for private insurance to be conveyed is that there is information balance between policyholders and insurers. A far-reaching protection of privacy that causes important information not to reach insurance companies affects ultimately the individual customer and the rest of the insured population through increased premiums and deteriorating insurance. (Swedish Insurance Federation, 2 November 2005)

The Financial Supervisory Authority was another critic. If the proposal were to proceed, professionals obliged to keep records would be heavily overloaded with work and the price of insurance would increase: ‘Lack of information leads to a larger margin of uncertainty in price setting and therefore more expensive insurance premiums’ (Financial Supervisory Authority, 31 October 2005). Given the arguments of key stakeholders, the proposal was redesigned within the Ministry of Justice. It took a long time. A right-wing government came into power in 2006 and was re-elected in 2010—before a new proposal was presented in March 2010 (Ministry of Justice 2010). The new proposal took more account of the insurance industry’s interests than the 2005 proposal did. The insurance industry also noted ‘with satisfaction that the legislator largely has taken into account the needs of the health data available in the insurance field, in the formulation of the draft to legislation’ (Swedish Insurance Federation, 29 April 2010). The organizations representing the insurance consumers, on the other hand, were sceptical about the revisions. The interest organization for people with impaired mobility, for instance, asserted: ‘It appears that the government has complied with the insurance companies in order to reduce the probabilities of children with serious illnesses or injuries being able to obtain insurance’ (Association for a Society without Disabilities, 8 April 2010).

A Slight Market Reorganization The final changes in the law (Government Bill 2010), which came into force in July 2011, ignored three central arguments from critics of the existing system (see Table 12.1). First, there were no prohibitions on insurers obtaining complete medical records. According to the government, a significant shortcoming of the proposal about limited journal excerpts was that such an arrangement would consume healthcare resources and jeopardize the basic insurance law principles—not least the one stating that there should be an information balance between policyholders and insurance companies. If the insurance companies were required to pay a fee for each request, healthcare would 192

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Dealing with Asymmetric Information Table 12.1. Comparison of reformers’ criticisms and the final law 2011 Criticism of Order 2002–2010 and proposals

New law in 2011 (SFS 2011: 12)

The authorizations are too general; much irrelevant excess information is collected. The companies should obtain only extracts from medical records.

Issue not addressed

The insurance companies overinterpret and misinterpret information in the records from the child and school healthcare system. Special restriction rules should be introduced for them.

Issue not addressed

Employees of insurance companies who are not governed by statutory duties of confidentiality handle classified information. Urgent legislation on confidentiality is needed.

Issue not addressed

The insurance companies request generally, and unnecessarily, the complete medical records. A more restrictive regime should be introduced.

Taken into account, but presented as vague concepts: it is no longer allowed for companies to ask routinely for consent to collect data on health status, but ‘only if it is necessary’ (ch. 11, 1a §) for handling the application and ‘if needed’ for settlement of claims (ch. 16, 1a §).

The companies save the collected information too long. It should be culled and shredded as soon as possible.

Taken into account, but with an unclear time frame: the consent shall be limited in time and apply only ‘during the examination of the application’ (ch. 11, 1a §) and ‘during the regulation of the claim’ (ch., 1a §).

The forms are unclear, which creates the likelihood that the person who gives consent does not realize the implications and consequences. The forms should be clarified.

Taken into account: consent shall be given in ‘particular draft documents’. The companies must ‘provide information on the implications’ of the consent given (ch. 11, 1a § and ch. 16, 1a §).

certainly receive more resources, but this money would not solve the problem of doctors having to prepare tailored information for insurance companies. There was already a shortage of physicians in many parts of the country, and not enough physicians to fill the empty slots, so this type of reform would leave less time for patient contact (Government Bill 2010, 28–30). A second criticism focused on the lack of limitations on the collection of children’s health data in medical records within the child and school healthcare systems. The government argued that the restrictions it proposed were sufficient for child insurance as well. Complete health data obtained from the Child Health Record could certainly: lead to continued problems with parents that withhold information, health professionals neglecting to record relevant information and insurers over-interpreting the acquired information. (Government Bill 2010, 39–40)

But the government agreed to follow the development of the issue, and to propose further measures if necessary. 193

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The third criticism of Government Bill 2010 addressed the fact that no rule of confidentiality for employees of insurance companies had been introduced, even though none of the 60 respondents opposed such a bill. Although the government reasoning was that the data were inadequate, it did consider the question a significant one, and intended ‘further analysing the conditions and forms for a statutory duty of confidentiality for employees of insurance companies’ (Government Bill 2010, 42–3). Although the conservative government rejected three key proposals from the main critics of the established order, it also introduced some paragraphs directing the insurance companies to act in a manner consistent with the critics’ suggestions. Under the new restrictions, companies could no longer routinely request consent to collect health information when considering applications or insurance claims (Government Bill 2010, 30–2), but only ‘if necessary’ and ‘if needed’ (see Table 12.1). Furthermore, consent that was given at the time of the insurance application could no longer be used by the insurer if the purchaser were to make an insurance claim many years later (Government Bill 2010, 35). Under the new law, consent was to be timelimited and could apply only ‘during examination of the application’ and ‘during the regulation of the claim’ (see Table 12.1). And finally, new rules were introduced regarding the company’s obligation to provide information (Government Bill 2010, 35–7, 45). Sellers now had to inform the purchaser about the implications of the consent, which had to be submitted in a separate document (see Table 12.1).

No Sanctions According to critics, the new laws still remain toothless tigers because of their ambiguities and lack of sanctions. The insurance companies may continue to request consent to obtain complete medical records if ‘necessary’ and ‘needed’. But what is considered necessary and needed is up to sellers to decide. The terms used were criticized for being ‘imprecise and should be highly elastic for the insurance companies’ (Ombudsman for Children in Sweden, 27 April 2010; cf. Swedish Medical Association, 20 April 2010). Critics, such as the professional association for Sweden’s practising lawyers, called for clearer guidelines regulating the ‘time limitation’ (Swedish Bar Association, 27 April 2010). The Swedish Data Protection Authority even feared that there would be no change in practice in the existing arrangements: In combination with the fact that the insurance companies will continue to save data for a long time, and that the information is not protected by confidentiality, it means a maintained high risk to the privacy of individuals. (Swedish Data Protection Authority, 8 April 2010)

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Although the government discussed the disadvantages of what it called ‘self-regulation’, it was not manifested in Government Bill 2010, 25. Selfregulation does not have the same democratic legitimacy as legislation would have and is difficult to sanction if violated. As the Court of Appeal for Northern Norrland argued, the practical effects of the new laws are not likely to be great, as the rules were not accompanied by sanctions in the form of direct penalties. ‘For what is typically the power of legislation?’, the Court of Appeal asked rhetorically: It is of course that government has the means to ensure that legislation is respected and not just perceived as a vague recommendation. This proposed legislation, however, takes a regulation that is not sanctioned other than indirectly. At best, it thus provides a framework regulation for the self-remediation that the industry has already begun. It is a rather low level of ambition. (Court of Appeal for Northern Norrland, 23 April 2010)

Although the new parts of the Insurance Contracts Act that will enhance customers’ privacy protection are not linked to strong direct sanctions, the old parts of the same law that address the customers’ duties of disclosure are ‘sanctioned by fairly severe penalties’ (Government Bill 2010, 12). If policyholders, in the discharge of their duty of disclosure, have acted fraudulently or contrary to faith and honour, their contracts are invalid and the insurance company is free from responsibility for any claims occurring thereafter (SFS 2005:104, ch. 12, 2 §).

The State and the Companies as Organizing Forces This chapter has demonstrated that the state, often seen as the only actor to reorganize markets, may be rather reluctant to do so. This reluctance does not imply a status quo of market organization by any means. On the contrary, I have described how a plurality of other organizations and individuals organized the market and pressured it for change. Although the new law, without sanctions, is relatively toothless, and the reorganization of the market was modest, the debate has largely fallen silent. In comparison with another contemporary Swedish debate on serious intervention in privacy, some puzzling differences can be noted. The insurance companies’ continued legitimate access to sensitive information about citizens’ physical and mental health does not seem to inspire as much protest as does the National Defence Radio Establishments’ (FRA) access to sensitive information about citizens’ private telephone and e-mail conversations. These private companies are not subjected to the same statutory duties of confidentiality as are authorities such as the FRA. The contemporary ‘FRA 195

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debate’, launched in 2008 when a new law that allowed enhanced signal monitoring came into force, was nevertheless considerably rougher than the privacy debate about insurance. Information from patient records on sexually transmitted diseases, for instance, cannot be assumed to be less sensitive than information from intercepted intimate telephone or e-mail conversations. How should the differences be understood? Perhaps it has to do with a difference in responsibility allocation between markets and organizations? The responsibility becomes more diffused and less visible when private companies monitor citizens than when states do, even if the monitoring is just as detailed and far-reaching.

References Association for a society without disabilities (2010) (Förbundet för ett samhälle utan rörelsehinder. Delaktighet, Handlingskraft, Rörelsefrihet (DHR)), Remissyttrande över Promemoria med utkast till lagrådsremiss. Ett förstärkt integritetsskydd i försäkringssammanhang (Ju2005/4619/L2), 2010-04-08. Barnförsäkring och riskbedömning (2002), En rapport utgiven av Sveriges försäkringsförbund och Konsumenternas Försäkringsbyrå. Stockholm. Committee on Civil Affairs (2013) (Civilutskottet), Kontraheringsplikt vid tecknandet av barnförsäkringar. Stockholm: Civilutskottet (CU), Swedish Parliament (Sveriges riksdag). Court of Appeal for Northern Norrland (2010) (Hovrätten för Övre Norrland), Remissyttrande över Promemoria med utkast till lagrådsremiss. Ett förstärkt integritetsskydd i försäkringssammanhang (Ju2005/4619/L2), 2010-04-23 (dnr 25/10). Enskilda försäkringsanstalter (1914–1981), Stockholm: Insurance Supervisory Authority (Försäkringsinspektionen). Financial Supervisory Authority (2005) (Finansinspektionen), Remissyttrande över Försäkringsbolags tillgång på patientjournaler (Ds 2005:13), 2005-10-31 (dnr Fi/2005/ 4263). Government Bill (2010) (Regeringens proposition 2010), Prop. 2009/10:241. Ett förstärkt integritetsskydd i försäkringssammanhang. Stockholm: Swedish Government (Regeringen). Gunnartz, K. (2007), Välkommen till övervakningssamhället. Stockholm: Månpocket/ Bokförlaget DN. Gustavsson, M. (2014), Harmony or hidden conflicts? Proactive self-regulation in the personal insurance market. In S. Alexius and K. Tamm Hallström (eds), Configuring Value Conflicts in Markets (pp. 100–27). Cheltenham: Edward Elgar. Haufler, V. (2001), A Public Role for the Private Sector: Industry Self-Regulation in a Global Economy. Washington, DC: Carnegie Endowment for International Peace. Helte, S. (2003a, 4 February), Lämnar inte ut hela journaler. Vägrar låta försäkringsbolagen få överskottsinformation ur patientjournalerna. Dagens Medicin, 6: 14.

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Dealing with Asymmetric Information Helte, S. (2003b, 4 February), Hon vill freda barnhälsovården från insyn. Överläkaren slog larm om försäkringsbolagens insyn i barnens journaler. Dagens Medicin, 6: 14. Hult, K. (1998), Barnförsäkringar—en studie av villkor och tillämpningsproblem. Nordisk försäkringstidskrift, 1: 63–71. Larsson, M. (1991), Den reglerade marknaden: svenskt försäkringsväsende 1850–1980. Stockholm: SNS. Larsson, M., Lönnborg, M., and Svärd, S.-E. (2005), Den svenska försäkringsmodellens uppgång och fall. Stockholm: Svenska försäkringsföreningen. Leffler, J. (1901), Försäkringsväsendet. In G. Sundbärg (ed.), Sveriges land och folk: historisk-statistisk handbok (pp. 948–54). Stockholm: Norstedt. Ministry of Justice (2005) (Justitiedepartementet), Departementspromemoria Ds 2005:13. Försäkringsbolags tillgång till patientjournaler. Utredare generaldirektören för Konsumentverket Karin Lindell. Stockholm: Justitiedepartementet. Ministry of Justice (2010) (Justitiedepartementet), Promemoria med utkast till lagrådsremiss Ju2005/4619/L2. Ett förstärkt integritetsskydd i försäkringssammanhang. Stockholm: Justitiedepartementet. National Board for Consumer Disputes (2005) (Allmänna reklamationsnämnden), Remissyttrande över Försäkringsbolags tillgång på patientjournaler (Ds 2005:13), 2005– 10–24. Nordisk familjebok: konversationslexikon och realencyklopedi (1910), Uggleupplagan, 13, Johan-Kikare. Stockholm: Nordisk familjeboks förlag. Ombudsman for Children in Sweden (2005) (Barnombudsmannen), Remissyttrande över Försäkringsbolags tillgång på patientjournaler (Ds 2005:13), 2005-10-04 (dnr 9.1:0816/0). Ombudsman for Children in Sweden (2010) (Barnombudsmannen), Remissyttrande över Promemoria med utkast till lagrådsremiss. Ett förstärkt integritetsskydd i försäkringssammanhang (Ju2005/4619/L2), 2010-04-27 (dnr 9.1:0210/10). Palme, S. (1915), Försäkringsväsendet. In J. Guinchard (ed.), Sveriges land och folk: historisk-statistisk handbok. D. 2 (pp. 655–65). Stockholm: Norstedt. Schön, L. (2001), En modern svensk ekonomisk historia: tillväxt och omvandling under två sekel. Stockholm: SNS förlag. SFS 2005:104 (2005), Insurance Contracts Act, Försäkringsavtalslag, Swedish Code of Statutes, Stockholm. SFS 2010:2043 (2010), Insurance Business Act, Försäkringsrörelselagen, Swedish Code of Statutes, Stockholm. SFS 2011:12 (2011), The Insurance Contracts Amendment Act, Lag om ändring i försäkringsavtalslagen (2005:104), Swedish Code of Statutes, Stockholm. Sjökvist, I. (2007), Journalerna bestämmer din försäkring. Verdandisten, 1: 16–19. Skandia (1985), Det gäller ditt barn. Brochure. Sporrong, B. (2014), Barnförsäkringens tillkomst och framväxt i Sverige. Nordisk försäkringstidskrift, 3: 1–7. Statistisk årsbok för Sverige (1953–1958), Stockholm: Statistics Sweden (SCB). Swedish Bar Association (2010) (Sveriges advokatsamfund), Remissyttrande över Promemoria med utkast till lagrådsremiss. Ett förstärkt integritetsskydd i försäkringssammanhang (Ju2005/4619/L2), 2010-04-27 (R-2010/0331).

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Martin Gustavsson Swedish Data Protection Authority (2005) (Datainspektionen), Remissyttrande över Försäkringsbolags tillgång på patientjournaler (Ds 2005:13), 2005-10-24 (dnr 1099–2005). Swedish Data Protection Authority (2010) (Datainspektionen), Remissyttrande över Promemoria med utkast till lagrådsremiss. Ett förstärkt integritetsskydd i försäkringssammanhang (Ju2005/4619/L2), 2010-04-08 (dnr 465-2010). Swedish Insurance Federation (2005) (Försäkringsförbundet), Remissyttrande över Försäkringsbolags tillgång på patientjournaler (Ds 2005:13), 2005-11-02. Swedish Insurance Federation (2010) (Försäkringsförbundet), Remissyttrande över Promemoria med utkast till lagrådsremiss. Ett förstärkt integritetsskydd i försäkringssammanhang (Ju2005/4619/L2), 2010-04-29. Swedish Medical Association (2005) (Sveriges läkarförbund), Remissyttrande över Försäkringsbolags tillgång på patientjournaler (Ds 2005:13), 2005-11-11. Swedish Medical Association (2010) (Sveriges läkarförbund), Remissyttrande över Promemoria med utkast till lagrådsremiss. Ett förstärkt integritetsskydd i försäkringssammanhang (Ju2005/4619/L2), 2010-04-20. Swedish National Council on Medical Ethics (2002) (Statens medicinsk-etiska råd), Angående försäkringsbolagens tillgång till och hantering av journaluppgifter, skrivelse 2002-12-18 (Dnr 42/02). Swedish National Council on Medical Ethics (2005) (Statens medicinsk-etiska råd), Remissyttrande över Försäkringsbolagens tillgång till patientjournaler (Ds 2005:13), 2005-10-11 (dnr 25/05). Weilenmann, L. (2001, 9 January), 4-åring nekas teckna försäkring. Dagens Nyheter, p. C2. Winblad, J. (2003, 16 September), Tryggare kan ingen vara. Stockholm: Swedish public service television company, Sveriges Television. Zelizer, V. A. (2011), Economic Lives: How Culture Shapes the Economy. Princeton, NJ: Princeton University Press.

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13 Reform and Rescue International Organizations and the Organization of Markets Matilda Dahl

The collapse of the Soviet Union, leading to the creation of a vast number of independent states and many new markets, has been seen as ultimate proof of the success of neo-liberal market models. The inclusion of seven countries from the former communist bloc in the EU was a great moment in European history.1 It also meant an end to a period of radical transformations in these states. In particular, they transited from being planned economies to become market economies. They did not manage this transition in isolation, however— quite the contrary. In order to create functioning markets, international governmental organizations in particular provided these states with ideas and recipes for their transformation and reform. This tremendous societal and economic change required a complex reworking of old social relations in the light of processes specific to one of the boldest projects in contemporary history—the attempt to construct a form of capitalism on and with the ruins of the communist system (Pickles and Smith 2005). Taken together, these transformations in Eastern European countries constitute one of the greatest market organization projects in modern times. Together with the creation of markets came the expansion of the financial sector. Four years after the accession of the Baltic states to the EU, the global financial crisis of 2008 required a new wave of ideas to rescue these market economies from collapse. In both 2004 and 2008, international organizations 1

The Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, and Slovakia were the seven candidate countries from the former Soviet Bloc. With Slovenia, Malta, and Cyprus included, a total of ten candidate countries became EU members in 2004.

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(IOs) had strong ideas about ways of organizing markets. Anyone interested in acquiring ideas about how markets are to be organized can examine the instructions that these countries were given by IOs. The EU, the European Bank for Reconstruction and Development (EBRD), the International Monetary Fund (IMF), and the World Bank are four such IOs, each of which had determined ideas and various recipes for the organization of markets on both occasions. These ideas were seen as highly legitimate, backed by expertise and resources. In this chapter, I explore what IOs have conveyed about the organization of markets in times of market construction: How were economies to be reformed and rescued according to the involved IOs? In order to answer this question, I examined the kind of market organization that is described over time and the ways in which IOs can use organizational elements in the construction of markets. Empirical data for this chapter have been sourced from two studies. The first study was centred on the role of the EBRD and the European Commission during the accession of Estonia, Latvia, and Lithuania to the EU from 2002 to 2004 (Dahl 2007, 2010). The second study, which focused on the financial crisis faced by the Swedish banks and the Baltic states, was conducted between 2008 and 2012, during and after the financial crisis. My empirical material comprises such documents as speeches and press releases, along with interviews, participant observation at conferences, and informal talks with senior bankers. In the first section of this chapter, I describe how the concept of market economy was being constructed in Eastern Europe through the example of the EBRD, the key IO in this context. The second section discusses the role of IOs after the financial crisis in 2008, drawing on examples from Latvia and the IMF. The chapter ends with a discussion on how IOs try to organize markets through the two organizational elements of membership and monitoring.

Organizing Markets: The Transition to Market Economy By assessing the progress of states as they develop into market economies, IOs set the framework through which others define a market. The EBRD is a good illustration. It was created in 1991 with the explicit aim of promoting the transition to market economies in Eastern European countries. The EBRD is an investment bank that invests only in projects that can be defined as having a transition impact on the country—that is, the projects must promote the overall transition to a market economy in the targeted country. Every year the EBRD accounts for the progress of the states in their endeavours to create functioning markets through its Transition Report. This report circulates ideas 200

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about the nature of markets, how they are to be organized, and what is considered success and failure in this respect. The EBRD recipe for becoming a market economy builds on three overarching principles: liberalization, stabilization, and privatization. A set of indicators to measure the degree of transition towards a market economy has been formulated based on these principles. The resulting index, the Transition Index, is then used as a tool for monitoring the progress towards a market economy over time and for comparing countries. Indicators are divided into three main groups: enterprises (e.g. large-scale privatization), markets and trade (e.g. price liberalization), and financial institutions (e.g. competition policy). These indicators reflect necessary factors for a country to be considered a market economy, and translate the ideal of a market economy into practice. Each indicator assumes a score on a five-point scale ranging from 1 to 4+. The lowest score of 1 is equivalent to a non-market: ‘little or no change from a rigid, centrally planned economy’. The highest score, 4+, refers to the ‘standards of an industrialized market economy’. The indicators provide the ingredients in the recipe of a market economy, and a wide community of investors, researchers, and IOs with an interest in the progress of economic transition accept it as the way to assess a state’s degree of market economy (Korhonena 2001). At the head office of the EBRD in London, country desk officers use checklists in deciding the grade that a country should be awarded on each indicator—a ‘tricky business’, according to interviewees at the EBRD. What should or should not be included in the evaluation is, in its turn, derived from agreed-upon ideas about the needs of a country if it is to become a functioning market economy. States assume the role of pupils in the market economy school, and are awarded grades on the basis of their performance. Some states are characterized as ‘laggards’ at times (as was Lithuania), and others as ‘best in class’ (the case of Estonia) in their endeavour to create, or rather to become, market economies. The EBRD uses the term ‘graduation’ once a country is considered to be at the ‘end point of transition’ to becoming a market economy. After that, the monitoring, advice, and investment in transitioning the country are no longer seen as necessary. It is considered a market economy, like any other modern, Western state. Passing judgement on the end of the journey to becoming a market economy introduces a dilemma, however, as no one knows exactly what comprises a functioning market economy. Even though the recipes convey a unified picture of the ingredients, market economies may look very different, in practice, depending upon the national contexts. Therefore we can say that the Baltic states, like the other Eastern European countries, modelled their markets on an ideal of a market economy rather than on the practice of a market economy. As the EBRD explains: 201

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Matilda Dahl Progress is measured against the standards of industrialized market economies, recognizing that there is neither a perfectly functioning market economy nor a unique endpoint of transition. (EBRD Transition Report 1999, 22)

Thus we are facing a dilemma. Market economies are created according to various separate ideas of what a market should contain, yet no one can really say what a market economy is. It is a bit like giving someone the recipe for a cake and asking them to bake it, without being able to tell them much about the cake. Nobel Prize winner Ronald Coase identified this dilemma in 1991, just after the Soviet Union and the Baltic states started their journey of transformation into market economies: These ex-communist countries are advised to move to a market economy, and their leaders wish to do so, but without appropriate institutions no market economy of any significance is possible. If we knew more about our own economy, we would be in a better position to advise them. (Coase 1991)

The need for these ‘appropriate institutions’ is a central concept, often repeated by the EBRD. In order for markets to function, governments need to create appropriate institutions in the form of organizing that supports and monitors markets: financial inspections and rules that guide market behaviour, for example. Thus the IOs primarily direct their attention towards what states should do in order to create the things that markets need in order to function properly. The advice is manifold. Governments are required to reduce their activity by abandoning their control of prices, trade, and access to foreign exchange. Creating a market in these terms can thus be described as a process of reducing hierarchy: the state should stop interfering and should not exercise its position as being above markets hierarchically. Processes of liberalization and privatization of formerly state-owned and regulated assets are seen as central to the creation of markets. IOs and advisers are promoting this lessened interference according to existing neo-liberal ideas, in agreement with leading economists. Fair competition in markets does not emerge, however, without organization in terms of rules. As stated in an EBRD report: For markets to function well there must be robust entry into and disciplined exit from markets to ensure that the most efficient and innovative producers are those that operate in a market. (EBRD 1999, IV)

The EBRD (1999) considered arbitrary behaviour in misbehaving governments, which tended to hinder competition, to be a key problem in the newly created markets in Central and Eastern Europe at the end of the 1990s. According to the EBRD, the state should not withdraw from the markets, however, but should become an active supporter, as this quote illustrates: 202

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According to EBRD reports, a problem is created if the pace of liberalization and privatization is not matched by progress in the development of the institutions required to support a well functioning market economy (EBRD 1998). The imbalances are described as causing market distortions in the transition economies, which, in turn, generate substantial gains to particular interest groups (often with close ties to the government), while imposing great costs on the rest of society. The high profits made by banks serve as a good example of these imbalances, generated by the liberalization of the financial system without the creation of an ‘effective regulatory framework’. The basic level of financial intermediation needed for the real economy to function is described as remaining severely underdeveloped (EBRD 1998). In other words, the banks earned money, even though they were not providing the basic service of a financial intermediation in an efficient way. The state’s ‘lack of regulatory power’ was seen as having created problems regarding the sellers in the market (in this case the banks). To solve this problem, according to the EBRD, the governments needed to commit to institutional reforms. In summary, the markets run and develop more quickly than do the organizations needed to support them. This situation seems to be particularly true for financial markets, which have a tendency to expand and develop much faster than any supporting institution possibly could. The stability of the financial system in the Baltic states in 1998 was judged to be precarious, due to weak prudential regulation and monitoring capacity. Such basic organizational elements as rules, sanctions, and monitoring, which governments are supposed to create, were missing from individual governments, a situation that, the IOs contended, weakens the markets. Central bank supervision, in particular, was seen as insufficient. So, what, then, was the solution to these deficiencies in the financial markets? A widely accepted idea in the Baltic states in the late 1990s and early 2000s was to solve the whole problem by enhancing competition and increasing private ownership. Expanding the financial sector and increasing the number of rules to support that sector is the way to achieve a strong market economy. More market and more organization will do the trick, or, in the words of the EBRD: The legal framework for sound finance is also very weak. It is therefore imperative to foster an expansion of this sector, driven by the market, while ensuring that relevant laws and regulations, including the capacity for their enforcement, keep pace with this growth. (EBRD 1998, 11)

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Thus IOs have firm ideas about what needs to be put into the batter of the cake so that a market can be baked properly; they were active promoters as the states reformed and created new organizations, in order to become market economies with functioning markets. But what happens if the markets that have been constructed according to the IOs’ recipes and numerous reforms fail or collapse? What happens to the ideas of how to organize (the very same) markets? Do the ideas change? Is something learned or revised? Or do the ideas of market organization remain intact, despite market failures? In the next section, I demonstrate how IOs also play a role in rescuing markets that have collapsed in spite of—or because of—the IO recommendations they previously followed.

Rescuing Markets: Financial Crisis As the new states were defined as new markets, with the potential to grow and become competitive, they were also transformed into a place for investments, and foreign capital poured into the countries. Foreign banks rushed to establish offices in order to gain market share and educate people to become bank customers. During Soviet times, people living in Latvia, for instance, knew little or nothing about mortgages. In the 1990s, Swedish banks told them, quickly expanding their market shares in the Baltic states, as the Baltic markets grew and financialized. The crux was that the rapid growth of the financial markets, promoted by neo-liberal ideas about market organization (remember the privatization, liberalization, . . . ) and the enormous inflow of foreign capital, also created an economy that was highly vulnerable to external shocks. Less than a decade after the successful creation of markets in the Baltics, these states, especially Latvia, were suddenly in severe crisis. The global economic crisis revived the discussion of financial regulation and control (Mayntz 2012). Financial crisis often leads to public sector reform (Peters et al. 2010), which happened in Latvia. Once again, IOs had strong ideas about how the states ought to organize—but this time the goal was not to reform the recently created markets but to rescue them. But both reform and rescue seem to demand organization. As a global financial crisis was triggered in 2008 by the bursting of the US subprime bubble and the collapse of Lehman Brothers (Soros 2008), Latvia’s newly created market economy suddenly found itself in severe trouble, with a budget deficit that was escalating out of control. In order to avoid state bankruptcy, the Latvian authorities asked the IMF and the EU to provide technical and financial support. In close cooperation with the EU, the IMF provided assistance in the form of an economic programme in order to 204

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maintain Latvia’s exchange rate. Early in the crisis, the IMF announced plans to lend approximately EUR 1.7 billion to Latvia to support the country’s plan for stabilizing the economy. The IMF’s loan was supplemented by financing from the EU and the World Bank; several Nordic countries, including Denmark, Estonia, Norway, and Sweden, contributed as well, for a total package of EUR 7.5 billion. At the outset of the crisis, experts proclaimed a standard economic recipe and advised Latvia to devalue the national currency (Åslund 2010). The currency crisis in the Baltic states was compared to that of Argentina at the turn of the new millennium (Roubini 2009). As the price of the domestic currency is lowered, prices in the country become lower compared to prices in other countries, its cheaper goods render the country more competitive in the global markets, and the downturn in output is halted. The government of Latvia did not support currency devaluation, however. Rather, it wanted to remain pegged to the euro in order to meet one of the conditions of becoming a member of the Economic and Monetary Union (EMU) in the not-too-distant future. Other IMF members, such as Sweden, also had strong interests in Latvia not devaluing its currency. Swedish banks had large risk exposure in the Baltic states, and a devaluation of Latvian currencies would undoubtedly have led to a severe banking crisis in Sweden. But in order for the Latvian currency to remain pegged to the euro, there was a need for external financial support and a highly restrictive budgetary policy. Public spending needed to be severely cut. Rather than devaluing the currency, then, the Baltic states did what came to be called internal devaluation (Åslund and Dombrovskis 2011). They cut public spending in order to lower domestic prices, undertaking what economists describe as structural reforms. Hospitals and schools were closed and wages in the public sectors were cut—first by 25 per cent, then by another 20 per cent. The private sector followed the lead of the public sector. Strong argument came from abroad against the internal devaluation; experts were afraid that it would lead to social unrest, and many of them said it was a mistake for the IMF to support Latvia’s currency (Krugman 2008). Not all economists were convinced that the country would be able to adjust enough in order to starve itself through a fixed exchange rate (Hugh 2008). Or as the IMF mission chief put it: This will require agreement on exceptionally strong domestic adjustment policies and sizeable external financing, as well as broad political consensus in Latvia. (IMF Press Release No. 08/310, 7 December 2008)

A central idea of the IOs repeatedly directed towards the states was that structural reforms should be pursued in order to increase competition. 205

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This type of advice was presented both during the transition and after the financial crisis: Regardless of whether or not they join the euro, all three Baltic countries need to continue to implement the reforms necessary to make sure they can thrive under a fixed exchange rate. These reforms include raising labour productivity and boosting competitiveness to put them on a permanent path of higher and more inclusive growth. (IMF President Lagarde in Riga, 5 June 2012)

Monitoring has been proclaimed as central to controlling the financial markets. Having been redundant during the years of economic success in the Baltics, the IMF made a strong comeback when the Baltic states were hit by the financial crisis. The granting of IMF emergency loans soon after the crisis hit meant that the whole monitoring apparatus that had played a key role in the 1990s regained strength and re-entered the scene. According to the Swedish minister of finance: Surveillance is at the heart of the Fund’s mandate and continues to be the key to crisis prevention. In many ways, the world economy needs more than ever a truly multilateral IMF with a global reach and a strong policy leadership. (Anders Borg in an address to the IMF, October 2008)

A financial crisis rejuvenates the IMF, because states need emergency loans to avoid economic collapse, creating space for IOs to influence market organization. The emergency loans and rescue packages provided by the IMF and the EU are made under strict conditions. Loans are conditional, and the IOs have established the conditions and monitored the states to ensure that they are followed. Similar to the time when the same states wanted to become members of the EU, conditions were set and monitored by various IOs, one of which is the EBRD. Here again, such organizational elements as monitoring, sanctions, and rules are in the service of IOs, in the name of preserving and restoring markets. The IOs assisted the states in rescuing the same markets that they previously had assisted the states in creating.

Reforming to Conform through Memberships and Monitoring I have used two empirical illustrations to shed light on the role of IOs in organizing markets. One of the key ways in which IOs organized markets in these cases was to attach conditions to memberships or resources that the states wanted. In fact, memberships in IOs can be seen here as a driving force in transforming into a market economy. The conditions for membership in the EU speeded up the 206

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reforms of the states, in order to create market economies. The conditions of the EMU motivated Latvia to undertake severe reforms, in order to keep a fixed exchange rate in times of market collapse. In both cases, IOs repeated the need for structural reforms to support markets and enhance growth and competitiveness. Another significant organizational element used by IOs was monitoring. The conditions attached to memberships or to financial assistance create many possibilities for monitoring. It is the states rather than the markets that are scrutinized by IOs. The prescriptions of IOs concerning both the transition to a market economy and their prescriptions for solving the crisis focused on what the government should or should not do in order to achieve the desired market organization and thus create well functioning markets. The first type of advice evolved around the role of the state as a market distortion, saying that the states should not disturb the markets. The second type of advice focused on the state as a responsible market organizer and reformer. The state was seen as courageous and strong when undertaking structural reforms in the public sector (i.e. the internal devaluation). It may seem surprising at first glance that ideas about market organization translate into concern about public sector reforms. But this phenomenon has been noted by previous researchers of financial crises (see Peters et al. 2010). By turning our attention to the role of memberships in meta-organizations (Ahrne and Brunsson 2005) as a key aspect of market organization, this appears less surprising because it is the states—not the markets—that are IO members. Thus, through using conditioned, attractive memberships as a significant tool, IOs make states play the role of market organizers. Despite all the recipes, principles, and indices, what happens in countries in the wake of market growth, transformation, crisis, or recovery often remains unpredictable. IOs have managed to reinforce the idea that states can control markets by organizing them. Irrespective of which problems are faced by markets and whether the government is seen as part of the problem or the solution, there is amazing homogeneity in the content of ideas that IOs direct towards states about markets. The need for institutional reforms is one such often-repeated idea—bringing to mind theories about organizations suggesting that constant reforms can be used as a way of maintaining the status quo (Brunsson 2009). What can be said about and learnt from the field of market transition, market reform, and marketizations on state levels from a scholarly organizational perspective? Needless to say, these are fields that empirically belong to economics and financial economy and are seldom studied by organizational scholars, this book being an obvious exception. First of all, I have shown the relevance of using organizational theoretical tools in order to illustrate the role of IOs in organizing markets. Whereas, from an economist’s perspective, 207

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the IO is not even an object of study (albeit often the sender of the pay cheque), an organizational take on markets can make these actors visible. And this is significant because they are the main carriers of ideas about markets and organizations to which states listen when they set out to organize markets. Second, I have shown that certain organizational elements— membership and monitoring—were at the very core of requiring states to follow the ideas of the IOs as they organized markets. Attached to the memberships were conditions (which can be seen as rules) and sanctions, which have also been depicted as organizational elements outside of formal organizations. Third, the ideas promoted by IOs are extremely useful in identifying the mainstream, legitimate ideas about the way markets ought to be organized in order to function properly. This does not mean that they actually work or that states actually apply them. But nonetheless, there is a collective societal belief in them, and many resources are expended in enforcing them through various means. Thus organizational scholars that want to enhance their knowledge about the way markets ought to be organized according to the mainstream view are advised to look at what IOs have to say about what states should do in order to have functioning markets. Will IOs continue to occupy this critical role in defining how states should reform in order to be considered well functioning markets? Needless to say, their role in Eastern Europe during times of transition and crisis cannot be underestimated; the transition and the crisis enhanced the power of IOs, opening up organizational space and manoeuvrability rarely seen before. In a referendum in June 2016 a majority of the British population voted in favour of their country leaving the EU. For the first time in its history, a member of the EU has voted to end its membership. Through memberships and various other organizational elements, states, markets, and international governmental organizations are and will probably continue to be intimately linked.

References Ahrne, G. and Brunsson, N. (2005), Organizations and meta-organizations. Scandinavian Journal of Management, 21(4): 429–49. Åslund, A. (2010), The Last Shall Be the First: The East European Financial Crisis, 2008–10. Washington, DC: Peterson Institute for International Economics, 2010. Åslund, A. and Dombrovksis, V. (2011), How Latvia Came Through the Financial Crisis. Washington, DC: Peterson Institute for International Economics. Brunsson, N. (2009), Reform as Routine. New York: Oxford University Press. Coase, R. (1991), Nobel Prize Speech, Stockholm. Available at: https://www. nobelprize.org/nobel_prizes/economic-sciences/laureates/1991/coase-lecture. html.

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Reform and Rescue Dahl, M. (2007), States under Scrutiny: International Organizations, Transformation and the Construction of Progress. Doctoral dissertation. Stockholm University. Dahl, M. (2010), Under scrutiny: The magic of measurability and the Baltic states entry into the EU. Forskning i Fickformat, Stockholm School of Economics. EBRD (1998), EBRD Transition Report: Financial Sector in Transition, European Bank for Reconstruction and Development. Available at: http://www.ebrd.com/down loads/research/transition/TR98.pdf (accessed December 2015). EBRD (1999), EBRD Transition Report: Ten Years of Transition, European Bank for reconstruction and Development. Available at: http://www.ebrd.com/downloads/ research/transition/TR99.pdf (accessed December 2015). Hugh, E. (2008), Why the IMF’s decision to agree on a Latvian bailout programme without devaluation is a mistake. In RGE Monitor, 22 December. Available at: http:// fistfulofeuros . net/afoe/why-the-imfs-decision -to-agree-a-lavian - bailout-programmewithout-devaluation-is-a-mistake/. Korhonena, I. (2001), Progress in economic transition. Baltic States Post-Soviet Geography and Economics, 42(6): 440–63. Krugman, P. (2008), Latvia is the new Argentina (slightly wonkish). In New York Times blog, 23 December. Available at: https://krugman.blogs.nytimes.com/2008/ 12/23/latvia-is-the-new-argentina-slightly-wonkish/. Mayntz, R. (2012), Crisis and Control: Institutional Change in Financial Market Regulation. Frankfurt: Campus Verlag. Peters, G., Pierre, J., and Randma-Liiv, T. (2010), Global financial crisis, public administration and governance: Do new problems require new solutions? Public Organization Review, 11(1): 13–27. Pickles, J. and Smith, A. (2005), Theorizing Transition: The Political Economy of PostCommunist Transitions. New York: Routledge. Roubini, N. (2009), Latvia’s currency crisis is a rerun of Argentina’s. Financial Times, 11 June 2009, 9. Soros, G. (2008), The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What it Means. New York: Public Affairs.

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14 Organizing Marketplaces The Constitution of Trade Shows in a Cutting-Edge Industry Patrik Aspers and Asaf Darr

Trade shows are indispensable organizations in most industries. They allow for the visual display of an industry’s products and provide a physical setting for social interaction among buyers, sellers, and mediators of exchange. In emerging markets, where the identity of market actors is yet unclear and the nature of products is still being negotiated, trade shows are of paramount importance; they serve as sites for the coalescence of the various elements that constitute a market. Taken together, trade shows help to solve many of the significant issues of market coordination and can help bring cutting-edge products through their product development and into more general use. In this chapter, we examine how coordination problems and uncertainties embedded in an emerging market were addressed by the organization of a trade show. This trade show was initiated by a computer engineer to bring innovative computing products to the doorsteps of potential buyers across the USA. It showcased computing products that enable the transfer, storage, and processing of digital signals in real time. Many of the internet applications, test equipment, and video-on-demand systems currently in use are based on this technology. In this chapter, we focus only on the real-time computing, which constituted cutting-edge technology in the 1990s, and demonstrate that these trade shows served to spur on product development and diffusion of the emerging technology. The 1990s were the formative years of the real-time computing industry, when technology developed for—and often by—the US Army started to penetrate the civilian market. Besides the intended market-coordinating effects of

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the trade-show organization, there were also such unintended effects as seller collaboration and industrial espionage. Our empirical data on trade shows comprise extensive interviews with 62 buyers’ and sellers’ representatives, including sales engineers, field application engineers, salespeople, purchasing agents, and design and test engineers on the buyers’ side, at four trade shows in both regional and local markets (see Darr 2006 for a full account of the study). Before we delve into our research context, we provide a short review of the literature on trade shows, including their historical roots.

Trade Shows as Marketplaces The county fair was the origin of what is currently called a trade show. This was a physical space, sometimes a permanently designated fairground, but often, and originally, an area used temporarily for a recurring event. It was a place of exchange, in which items changed hands within the broader context of a carnival that included artistic performances, gambling, drinking, and prostitution (Braudel 1992, 82–4). In contrast to the exchange parties that we know from social anthropological studies of traditional societies (e.g. Malinowski 1922; Thurnwald 1969), the trade fair was characterized by a variety of products, events, and social interactions. Braudel offers a good summary of research on fairs, and other scholars discuss fairs in specific historical contexts (e.g. Curti 1950; Epstein 1994; Loosley 1933). The fairs that enabled tradespeople, customers, and all types of goods to come together in a nonpermanent marketplace were also a way for the organizers to profit from taxes and fees. Markets in Europe were established and regulated by kings and local aristocrats to enforce and control their right to collect taxes, but it is unlikely that ‘jokers, sellers of miracle-cures and drugs . . . fortune tellers, jugglers, tightrope-walkers, tooth pullers, and travelling musicians’ (Braudel 1992, 85) were part of the original planning and organization. Historical analysis thus exposes the socioeconomic reasons for and outcomes of trade-fair organization (Britnell 1981; Masschaele 1992; Schumpeter 1975). The fair was economic in the sense that it afforded dealers a meeting place. The recurrent meetings among tradespeople engaging in repeated exchanges facilitated the constitution of trading networks. According to Weber (1981), the fair represents a ‘prior stage of the exchange’ (p. 293), and the permanent fair is an intermediate type between the exchange that we can observe in contemporary stock exchanges and the traditional fair. The heyday of the fair as an engine of the economy ended with the rise of permanent trading 211

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locations, most notably Amsterdam. Although trade fairs never vanished, they were no longer centrepieces of the economic system. Today, given the explosive growth of online selling and buying and the seemingly free flow of information and products over global networks of trade, the persistence of trade shows in many industries deserves greater research attention. Why do trade shows still exist? We look to recent studies of shows for answers to this question. Skov (2006) has studied trade shows in the fashion industry, and Entwistle and Rocamora (2006) have analysed London Fashion Week. Geographers Power and Jansson (2008) have studied trade shows in the furniture industry, and have provided a review of the existing literature on trade shows in general. These scholars consistently demonstrate that even in the internet-age market, participants must interact socially—to sign deals, gather information on what is happening in markets, share gossip about key actors in a given industry, and raise capital for collaborations and customization of products.

Coordination Problems, Uncertainty, and Market Organization Markets are centred on the products that are traded in them. Our study of the organization of the trade show provides a fluid depiction of one hightech market featuring product development in real-time computing. In this market, as in others, products are best described as the result of a form of ‘association’ across the market interface. In associated markets (Aspers 2006), innovation is the result of ‘producers’ and ‘consumers’ coming together to develop new technologies and customize them to meet the needs of specific buyers. Products in this cutting-edge industry are characterized by a high level of ‘interpretive flexibility’ (Wiebe et al. 1984). This means that different social groups, buyers and sellers in our case, have different interpretations of the use of products. To buy and sell, to create a sustainable market, buyers and sellers must negotiate the design and the use of the innovative products offered for sale. But how can collaborators find one another? A main concern of buyers in any market is obtaining information about the available offerings. Offerings are not reducible to the products presented for sale, but, as Chamberlin (1953) asserts, they include both the products and the manner in which they are sold (e.g. with extended warranty). Social relations are essential for information gathering and for collaboration to occur in associated markets. Neoclassical economics assumes that the nature of a product and its future use are clearly defined and essentially unproblematic for both producers and consumers (Knight 1921); yet some markets, such as emergent technology markets, lack a formal structure and conventions such as warranties and branding. Furthermore, the problem of uncertainty is amplified in emergent technology 212

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markets, as neither sellers nor buyers have a fixed set of applications in mind for the products being offered for sale (Darr 2006). Producers in the emerging real-time computing market have more information about a product, its origin, and quality than potential buyers do. This information is deeply rooted in engineering design work, which, in this field, is conducted mainly by small firms. Buyers are also engineers; they are employed by large corporations and are looking for innovations to advance the designs on which they are working. They have information about overall market trends and have decided how much money they are ready to spend. In economic situations, plagued with uncertainty and the fact that the utility and meaning of a product offering is not institutionalized—which is the case for the emergent technology market (Karen and Washington 2001)—the social structure functions to establish clarity and definition. Buyers in the emerging real-time computing market need to know what their suppliers have to offer, and suppliers need to know what the market demands. Both sides also need to negotiate the exact meaning and the capabilities of an innovative product and its uses by the potential buyer. This specific structure of knowledge, we suggest, leads both sellers and buyers in cutting-edge technology markets to engage in intensive information searches. Buyers must assess the quality of the products offered for sale, the technical ability of the sellers, and their financial stability. Sellers must seek information regarding a customer’s application, so they can assess the feasibility of customizing their product to fit that client’s needs. Before the social structure of an emerging market can become established, showing the track records of certain firms as superior in the eyes of buyers, buyers must juggle the available information. The trade show is specifically organized to assist market actors to overcome uncertainty, to help an intensive information search, and to facilitate cooperation between sellers and buyers and among the sellers. To explore the organization of trade shows and the problems they help solve for actors in the field, we draw on a year-long larger research project that looked at sales practices in standard and emerging technology markets (see Darr 2006).

The Travelling Trade Show By the mid-1990s, much of the trade of cutting-edge products in real-time computing was being conducted at one specific trade show, nicknamed the ‘Travelling Circus’ by its participants. The Travelling Circus was established by the owner of a small high-tech firm who wanted a way to identify potential clients. With no marketplace where he could meet and socialize with potential buyers, he was having difficulty developing and selling his products. The first 213

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show he organized was extremely successful; apparently, he was not the only producer who suffered from what we are calling ‘client uncertainty’. He soon abandoned his small engineering firm in favour of running the trade show and hired a specialized workforce to assist him. Within a few years, it was being held more than 40 times a year in cities across the USA. By providing physical and temporal opportunities for face-to-face interaction and networking, it served as a remedy for the uncertainty that all actors in the nascent realtime computing industry were facing. The story of the organization of this trade show is also the story of the making of an industry. The Travelling Circus was a field-configuring event, in the basic sense that it drew together the various elements that enable an industry to develop and formalize. It was a trade show organized by engineers for engineers. The organizers placed great emphasis on membership. Prior to the show arriving at a city, they issued formal invitations to vendors, who were responsible for passing them on to their existing or potential clients in the vicinity. Information for sellers about how to participate in the trade show was circulated in two main ways. Advertisements were placed in specialized real-time computing journals, one of which was established and owned by the show’s founder. Information also travelled by word of mouth, as vendors who participated in the show spoke to other vendors they met during business encounters and at other, more generalized, industry shows. To be admitted to the show, visitors were required to present their invitations at the entrance. Admission and parking were free. Although the invitations were forwarded by the vendors to a wide range of companies in the hopes that they would become clients, the invitations served another role. Private and personal invitations ensured the creation of a specialized body of buyers, in contrast to general trade shows, which admitted anyone willing to pay for admission. This specialized body of sellers and buyers increased the chance of successful encounters. The show was carefully organized to encourage employees of the large corporations that received invitations to visit the show, mainly during their lunch breaks, and to view the display tables, arranged in two or three long aisles. One key fringe benefit offered to the visitors was lunch. The promise of a free lunch could be seen as a gift meant to create a limited obligation for the visitor to reciprocate by walking through the displays, ideally to initiate a purchase (Darr 2006). The personal invitation and gift offer also led potential buyers to visit the display booth of the company that had issued the invitation. It should come as little surprise that visitors were happy to gather at the lunch tables and enjoy the salads, sandwiches, cold meats, and soft drinks provided by organizers. The organization of the physical space and the free lunch gave them an opportunity to catch up with 214

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friends, exchange ideas about what they saw at the show, and talk business. Thus, the role of the trade show as a hub of professional information and gossip among the buyers should not be overlooked.

Social Agency and Market Interactions Did the organization of the trade show have any impact on the interaction between sellers and potential buyers? One crucial advantage of the travelling trade show was the interaction it facilitated among expert engineers, thereby rendering the co-production of products much easier. In many cases, interaction was a condition of product development and innovation, because products required extensive customization work before they could be used by the buyer. This cooperation blurs the division between sellers and buyers, at least in the context of industrial markets in which cutting-edge technologies are traded among firms. Sales interactions at the trade show constituted the initial stage of the customization process, during which buyers and sellers negotiated specific product use. Customization is labour intensive, and sales engineers work on the adaptation process, often with the client’s engineers, for months— sometimes up to a year. Given the high cost of customization and the high level of risk associated with it, the sales engineers had to devise a mechanism that could assist them in overcoming this type of uncertainty. They became experts at searching for applications that were technically feasible and required minimal adaptation of their products, thus incurring the lowest cost. This search occurred at the trade show. To reduce their uncertainties, both sellers and buyers engaged in a screening process when seeking out potential sales partners. From the outset of the sales process, the sales engineers tried to understand how the clients wanted to use their products and the changes and product development they might have to undertake to complete the sales. The sales engineers required a good understanding of the desired application, as it was their basis for assessing the feasibility of the customization process. They reported that customization could involve travel to the client’s plants all over the globe and intensive shared practice with the client’s engineers. It was also common for potential buyers to inspect the sellers’ plants and to talk to the sellers’ engineers to assess their technical ability. A customization failure meant a substantial loss to the buyers and could even result in the demise of the firm for smaller sellers. The initial screening process was thus both critical and creative. To succeed in assessing the feasibility of customization, the sales engineers had to employ interactive social skills—skills associated with the efficient management of social encounters at the trade show. Their social skills were facilitated by the trade show’s organization: attracting a specialized body of visitors and 215

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promoting interaction during the lunch break. The simple, standard display tables, the many product demonstrations, and the large aisle space in front of the displays further encouraged meaningful social engagement. The screening process employed by the sales engineers during initial sales interactions illustrates the creativity involved in the mutual exploration of technical ability and feasibility of the customization process and was a key component of the organization of this nascent marketplace. Products such as circuit boards were displayed at the trade show on special stands. Visitors looking at the boards understood little about their inner logic and function. Although they could identify some of the chips on the boards—memory chips, for example—they could not discern what the boards were designed to do or trace their inner logic. Nevertheless, a visitor would often pick up a board on display and ask a salesperson, ‘What is this? What does your product do?’ After providing a short answer, the salesperson would then ask a series of questions about the visitor’s own work. At one show in Boston, after briefly explaining what a particular computer board was designed to do, a sales engineer asked a group of engineers gathered round his booth, ‘What types of things are you guys doing?’ Salespeople typically tried to obtain information about the specific projects on which visitors were working. At a show in Dallas, Texas, Darr stood next to the booth of one of his informants, who worked for a small electronics company offering VME single-board computers and PCI add-in boards. (VME and PCI were two competing industry standards.) A visitor touched a chip bearing the name INTEL 360 with his finger, and inquired what the board was designed to do. The salesperson replied that it was a powerful computer designed to transfer and process digital data in real time. He also described the industry standard to which the board adhered: Seller: This is a VME bus, and we also have [boards for a] PCI industry standard. What do you need it for? [referring to the board the customer was holding] Buyer: It’s a new project . . . [says something in a low voice]. Seller: Do you use a VME bus? Buyer: Yes. Seller: What sorts of interface? Buyer: Oh, well, we have VME, SCSI [Small Computer System Interface]. Seller: Do you use something like C3 ETM? Buyer: I don’t know. We haven’t decided yet. Seller: Until you determine what kind of interface you would like to use, there is little we can do. [The seller smiles and extends his hand.] Buyer: Yes, that’s right, thank you. [Shakes hands with the seller.] Seller: Thank you.

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Technological skills, expert knowledge, and interactive social skills were interwoven and pivotal in the early moments of these sales encounters. These were the moments when the screening process began and innovation and creativity sometimes started to take concrete form. At this stage of negotiation, exploring a potential buyer’s existing toolkit reduced the seller’s uncertainty regarding the feasibility of pursuing collaboration, which was the main concern at that stage. In some cases, initial encounters led to intensive collaboration between the parties. In most cases, however, it became clear that customization was not feasible. Not only did we find collaboration between buyers and sellers, but we also observed collaboration among competing sellers. The trade show provided sellers with an opportunity to learn about their competitors. As in any market, buyers took advantage of the opportunity to compare the products on display. Here we focus not on the well-known theme of competition, but mention that competition could also manifest itself in dishonest ways. The openness and transparency of trade shows served a significant function in the circulation of ideas and the establishment of collaborations. But there was also a downside. The old county fairs attracted businesspeople from all walks of life, and not all these people were virtuous. Similarly, the travelling trade show served as a site for industrial espionage. Spying could be undertaken in a variety of ways. One informant, a salesperson, revealed that after he had left his previous company, a salesperson for one of its competitors ‘tried to pump information out of me about the new line of products Lectronix [his previous firm] is working on’, but that the informant refused to provide the information. In a second example, a sales engineer mentioned that he was sent to the travelling show in the guise of a potential client to learn about a competitor’s products simply by asking many detailed questions. Despite competition and a few attempts at industrial espionage, the trade shows remained the best locations for collaboration and the establishment of social relationships. They provided more collaborative ties than competition, furnishing a social infrastructure for this emerging industry. This finding is somewhat at odds with Simmel’s (1955, 147, 155–6) observation that rivals may compete at the market level but still collaborate on a more general level. What we see here is collaboration actually occurring in the marketplace, as part of the ongoing exchange of goods. By participating in several shows, buyers and sellers could, over time, establish relationships that were necessary for trust to emerge (Möllering 2006). Trust served as the groundwork for further collaborations and product development. For many actors, it seemed better to join forces with others, facing the uncertainty of the market together. Did the trade show assist them in accomplishing this end? Collaboration among vendors was a key aspect of the organization of the trade show, facilitated by the establishment of behavioural scripts and 217

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norms relating to interaction, collaboration, and much more (cf. Geertz 1963; Macaluay 1963). We should remember that all the vendors were in a similar position on the morning of the show: waiting to see, with great hope and trepidation, how many buyers would attend, who their buyers were going to be, and what products they would need. In fact, one vendor described the show as a lottery system and said that he was feeling on the morning of the show as if he were waiting to learn if he would win a prize at the end of the day, and, if so, what that prize would be. The equal positioning of different vendors vis-à-vis the market contributed to a basic sense of solidarity, clearly expressed in one short conversation between vendors waiting at their display tables for the first visitors to arrive: Vendor A: Are you going to stick around all day, Bob? Vendor B: Yes. Vendor A: Well, let’s knock them dead!

This excerpt captures the two vendors’ excitement, anxiety, hope, and sense of a shared goal. It should also be seen in the light of the uncertainty that characterizes an emergent market or a nascent industry. The similarity of the sellers’ positions in the market is made clear through their participation in the trade show and may also explain some forms of cooperation. When asked about reasons for vendors to collaborate, one sales engineer offered two additional possibilities. He said that salespeople may want to share information with employees of competitors’ firms and maintain positive relationships with them because they may want to seek employment with them some day. He also suggested that collaboration reflected the high level of specialization and the lack of standards in the real-time computing industry in the mid-1990s. During the trade show, the vendors learned about the types of products offered by other small firms in the industry, and this knowledge sometimes helped to create synergy. In one case, a Vendor A discovered during the initial screening of a potential Client A that selling his product would require Client A to buy a piece of software from Vendor B. Vendor A and Client A approached the display booth of Vendor B together and tried to work out a combined deal.

Conclusions The Travelling Circus was an industry-configuring event; through its organization, an amorphous body of sellers and buyers crystallized into concrete form. Clearly, the engineer who organized the show created a periodic marketplace, thereby providing a basic and central element of what was 218

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destined to become an industry. This initial organization of the marketplace was, indeed, an entrepreneurial action (Schumpeter 2000, 51). The organization of a physical space for recurrent meeting is fertile ground for further ordering of the market. Potentially, it can foster much broader collaboration. The trade show itself can be seen as a market organization that furthers not only competition, but also social association and collaboration. In an economic environment characterized by technological uncertainty, the market may never become completely ordered; it can remain in a process of formation for many years. Nonetheless, the uncertainty that actors, whether sellers or buyers, face in such situations is mitigated by the design of the trade show. The show provides opportunities for observation, comparison, and, above all, interaction and the building of trust and friendship ties that assist in developing innovations. When there is no cognitively shared view of who the market actors are or the nature of the products, the trade show provides a valuable location for filling at least some of these information gaps. The travelling show we describe was founded and organized by an engineer. Its members were engineers specializing in an emerging field, and the underlying engineering knowledge and culture facilitated the ongoing exchange of customized products. The trade show provided a designated arena, concentrated in space and time, where market actors could reduce their technical, economic, and social uncertainty as they interacted. The culture that emerged in the trade show and in the market in general may appear to have developed through spontaneous processes, but in reality it was formed by decisions to organize. The final outcome of this interactive process was a successful customization process that integrated the producers’ initial design ideas with the needs and capabilities of the clients. Like the old agora, the bazaar, and the protected marketplace of the fortified city state did, the modern-day trade show provides a physical space for the regular exchange of goods and services. The trade show has played a significant role, as we have shown, in the initial marketization phase of the emerging real-time computing industry, producing the social infrastructure necessary for the ongoing interactive exchange and development of cutting-edge digital technologies.

References Aspers, Patrik (2006), Markets in Fashion, A Phenomenological Approach. London: Routledge. Braudel, Fernand (1992), Civilization and Capitalism 15th–18th Century, Volume 2: The Wheels of Commerce. Berkeley: University of California Press.

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Patrik Aspers and Asaf Darr Britnell, R. H. (1981), The proliferation of markets in England, 1200–1349. Economic History Review, 34: 209–21. Chamberlin, Edward (1953), The product as an economic variable. Quarterly Journal of Economics, 67: 1–29. Curti, Merle (1950), America at the World Fairs, 1851–1893. American Historical Review, 55: 833–56. Darr, Asaf (2006), Selling Technology: The Changing Shape of Sales in an Information Economy. Ithaca, NY: Cornell University Press. Entwistle, Joanne and Rocamora, Agnes (2006), The field of fashion materialized: A study of London Fashion Week. Sociology, 40: 735–51. Epstein, S. R. (1994), Regional fairs, institutional innovation, and economic growth in late medieval Europe. Economic History Review, New Series, 47: 459–82. Geertz, Clifford (1963), Peddlers and Princes: Social Change and Economic Modernization in Two Indonesian Towns. Chicago: Chicago University Press. Karen, David and Washington, Robert (2001), Sport and society. Annual Review of Sociology, 27: 187–212. Knight, Frank (1921), Risk, Uncertainty and Profit. Boston, MA: Houghton Mifflin Company. Loosley, Allyn (1933), The Puerto Bello fairs. Hispanic American Historical Review, 13: 314–35. Macaluay, Steward (1963), Non-contractual relations in business: A preliminary study. American Sociological Review, 29: 55–67. Malinowski, Bronislaw (1922), Argonauts of the Western Pacific: An Account of Native Enterprise and Adventure in the Archipelagoes of Melanesian New Guinea. London: Routledge. Masschaele, James (1992), Market rights in thirteenth-century England. English Historical Review, 107: 78–89. Möllering, Guido (2006), Trust: Reason, Routine, Reflexivity. Oxford: Elsevier. Power, Dominic and Jansson, Johan (2008), Cyclical clusters in global circuits: Overlapping spaces and furniture industry trade fairs. Economic Geography, 84: 423–48. Schumpeter, Joseph (1975), Capitalism, Socialism and Democracy. New York: Harper & Row. Schumpeter, Joseph (2000), Entrepreneurship as innovation. In R. Swedberg (ed.), Entrepreneurship: The Social Science View (pp. 51–75). Oxford: Oxford University Press. Simmel, Georg (1955), Conflict & The Web of Group Affiliations. New York: Free Press. Skov, Lise (2006), The role of trade fairs in the global fashion business. Current Sociology, 54: 764–83. Thurnwald, Richard (1969), Economics in Primitive Societies. London: Oxford University Press. Weber, Max (1981), General Economic History. New Brunswick, NJ: Transaction Publishers. Wiebe, Bijker, Pinch, Trevor, and Hughes, Thomas (1984), The Social Construction of Technological Systems. Cambridge, MA: MIT Press.

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15 Handling Opposing Market Logics Public Procurement in Practice Staffan Furusten

The Act of Public Procurement: A Specific Market Logic The European Union has made extensive attempts to organize its inner market, in order to direct and standardize public procurement among the member states. The EU’s public procurement directives were originally developed between 1987 and 1993, based, in turn, on the World Trade Organization’s (WTO) Government Procurement Agreement for regulating procurement practices in public organizations. This WTO agreement has served as the starting point for later versions ratified by its member organizations. The principles of the WTO, the EU, and national acts correspond well. Thus, national acts are local representations of a transnational attempt to organize procurement practices across national borders, the goal being the standardization of the behaviour of market actors across nations. The Act for Public Procurement (APP) represents a specific market logic. It is derived profoundly from mainstream economics and from the implicit and explicit assumptions about markets that are made in this literature. In many cases, however, the daily practice of public procurement emanates from an opposing market logic, based on unique offerings, substantial social relations, and long-term connections between buyers and sellers. How, then, do buyers of individual markets deal with a market organization in the form of the APP that clearly does not suit them? Using the empirical example of public procurement of management consulting services, this chapter illustrates the opposing market logics of the APP and market practice, and the ways in which buyers and sellers handle them. Data have been gathered through 26 interviews with management

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consultants and people involved in the procurement of services in Swedish public organizations. Documentation from 28 cases of public procurement has also been studied. All data have been subject to qualitative analysis and categorization.

Market Organization One ambition with the EU act was to remove national barriers for trade of goods and services, and thereby to create conditions for open competition across national borders and a right to settlement in case of market related conflicts. (Furusten, 2015, p. 49)

It was argued that competition is central to the achievement of rational allocation of public assets and a way of securing the fundamental democratic principles of nondiscrimination, equal treatment, transparency, proportionality, and mutual recognition (EU Commission Green Paper 1996). All suppliers, irrespective of the national base of their activities, should be given equal opportunities when bidding on public procurement of goods and services within the EU; they should not be treated differentially because of nationality or location. The information that a procurement process has been opened should be available for all potential suppliers within the EU and everyone should have access to the same information at the same time. A document from the Swedish authority in charge of public procurement at the time (the Committee for Public Procurement, NOU) read that there should be: a natural relation between qualification, requirements and what is being purchased, and documents and certificates issued in one member state must be accepted in others. (NOU 2002)

A fair interpretation of the act is that it seeks to prohibit nepotism, corruption, arbitrary judgements, and other phenomena that could result in an inefficient exploitation of the advantages of a common market, and, in the long run, of taxpayers’ money (EU Green Paper 1996). Most public organizations, including the state, municipalities, and county councils, must follow APP when purchasing goods and services that exceed a certain threshold value. There are specific journals in which upcoming and ongoing procurements must be advertised.1 Announcements should clearly specify the demands relating to the assignment, and buyer organizations must carefully design the documentation on which the procurement is based—the so-called ‘contract documents’—in which the assignment must be described 1

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in detail, and which must list the criteria upon which the evaluation and selection of the supplier will be based, preferably in order of precedence. All tenders should be subjected to a nondiscriminatory evaluation process. The buyer must award the supplier who offers the cheapest or economically most advantageous option in consideration of quality, environmental concerns, technical features, running costs, or other predetermined evaluation criteria. The evaluation procedure must be documented, and parts of it must be made public as soon as a deal is closed (EU Green Paper 1996). The law makes little distinction between the volume and type of goods and services to be purchased. With small variations, the principles of the law are supposed to apply to such highly standardized products as office materials and building components as well as more specific, tailor-made services such as eldercare and education. Thus, whenever a public organization purchases goods and services, six steps are to be taken in a specific order. First, the buyer must have a clear need. Second, the buyer must use the APP procedures to put this need on the market. Third, the buyer is to evaluate all offers according to the criteria for evaluation that the buyer stipulated when the need was put on the market. Fourth, when all criteria are considered, the buyer can select the option with the best offer and invite this particular supplier to deliver. Fifth, processes in public organizations must be transparent and open to monitoring. The principle of public access to official records requires public organizations to keep their documentation in order and open for examination from citizens, politicians, or service providers whose offers the organization has turned down. Sixth, anyone who is suspicious that the APP was not followed properly has the right to report this concern to the Swedish Competition Authority. If the committee finds that there is a cause for the report, they have the power to stop the purchasing process and force the public organization to re-evaluate the offers. Non-compliance with the law may result in even more serious sanctions for the purchasing organization; it may be required to pay damage claims or redesign its entire procurement procedure. Deals can be contested if a supplier has suffered or perceives a risk of suffering a loss during a procurement process. A supplier who can prove such a loss can claim compensation from the buyer. It is clear that APP reflects a model of the standard market (Aspers 2007)—a market with many suppliers and buyers, in which standardized and comparable products or services are exchanged, and market processes are basically the same. It also reflects the idea of the ‘perfect’ market in neoclassical economic theory, in which the roles of the market actors are clear-cut; there is perfect information on demand, supply, and price; and the procedure of rational decision making and the optimal outcome of that procedure is possible in every purchasing situation. 223

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Not All Markets Are ‘Perfect’ Standard Markets Scholars who have studied purchasing in industrial markets have developed theories that differ from those that form the basis of the APP model. From the literature on purchasing, we learn that different purchasing situations tend to arise in different types of organizations, depending on the type of market in which they operate (e.g. Axelsson and Wynstra 2002). It is also argued that these differences require different purchasing skills (Axelsson 1998, 2005); not all market situations are characterized by deals on standard markets. Axelsson (1998) has illustrated this notion by defining four typical purchasing situations representing four types of markets, depending on the way in which they are balanced: the number of potential suppliers, the character of the offerings, and whether they are common to many sellers or unique to each seller. Quadrant 1, Figure 15.1, represents Situation 1. With many potential suppliers and a standard offering, the buyer should make sure of the existing competition and base the choice of product or service on their functions alone. The products and services on such markets are homogeneous, and the buyer is supposed to pick the best supplier based on extensive information about the functions and prices of the products or services. In Situation 2, with many potential suppliers and unique offerings, the buyer should commit to one supplier because of the uniqueness of each offer. The premise is that a rupture of the relationship involves costs for both suppliers and buyers in the form of customized production, administration processes, and earned trust. The creation of new relationships also requires time and resources. The buyer in this situation is trying to develop and leverage existing

Many potential suppliers

1

2

One standard offering

Unique offerings

3

4

One (few) potential suppliers

Figure 15.1. Purchase situations in different markets. Source: Axelsson 1998.

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relationships with suppliers, even if they should also monitor alternative supplier development (benchmarking), either to develop the established relationships or to begin preparing a possible switch of supplier. Situation 3 characterizes markets with few potential suppliers and standard offerings. Compared with Situation 1, it is easier for the purchasers to be informed about other suppliers in the market because there are few potential suppliers. There is only one type of product or service and few suppliers. The buyers can pick any one of the suppliers, and long-term relationships between buyers and suppliers are likely. In Situation 4 we find few potential suppliers and unique offerings. In such markets, it is likely that great effort is devoted to building close relationships between buyers and sellers in order for each party to learn about the other and develop mutual trust. As in Situation 2, the buyer tends to build long-term relationships with the supplier and is therefore careful in monitoring the development of the relationship. The transaction costs in this market situation are high for such items as search, analysis, and contracts for new suppliers in this market situation. Because there is no other supplier with the same offer, the seller may gain greater power. Too much seller power provides an incentive for the buyer to leave the market solution by insourcing the production of the good or service into its own organization. The APP is based on the assumption that the market functions as in Situation 1, with many potential suppliers and standard offerings. So, what do buyers do when there are directives that force them to act according to the market logic in Situation 1, when they are actually in Situation 2, 3, or 4? I investigated this dilemma based on a study of Swedish public organizations procuring services from management consultants. Although the empirical study is limited to public organizations making deals with management consultants, this case can be seen as typical for procurements in Situation 4, characterized by great complexity. The case represents procurements in which the offerings can be seen as unique, as management consulting is a service that is often a result of interchange and discussions between the buyer and the seller. Because of this situation-based adaptation, buyers cannot compare prefabricated options before deals are made, as in Situation 1 (Furusten and Werr 2005, 2009). Public organizations face a number of procurement situations in which this complexity and others are likely to occur—when providing housing for refugees in times of massive crises, eldercare for individuals with various needs and demands, and food supplies to schools, and in large construction projects and many forms of consultant services. In all these situations and many others, there are challenges in dealing with both the APP and individual market practices.

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Procuring Management Consulting Services: An Empirical Example The market for management consultancy has special features, which places it under Situation 4: it has unique offerings, few suppliers, and tight relationships between buyers and sellers. Management consultants provide services built upon an expertise that the buyers consider themselves to be lacking. Management consultancy differs from other forms of expertise, however. Compared with auditing, which is organized according to a professional logic, with strict systems for public authorization (Freidson 2001), management consulting represents another more locally assessed and interpersonal trustbased expertise (Furusten 2003, 2009, 2013; Furusten and Werr 2017). This situation makes it difficult for buyers to sort the offerings of all the service suppliers in the market without having individual interaction. Management consulting does not represent a standardized service, which makes it difficult for buyers to orient themselves among all providers. Uninitiated buyers who have no personal relationships with consultants may have a difficult time specifying which service they require. In fact, they may often have to turn to consultants for assistance with this very decision. Buyers therefore emphasize the importance of a consultant that can instil confidence in their organization: a consultant who is qualified in the area, diligent, and seriously wanting to help (Furusten 2003). And buyers believe that the only way to judge these characteristics is through trust (Näslund and Pemer 2017; Furusten and Werr 2017). It is extremely rare that a relationship with every one of these components occurs all at once. More likely, it requires longstanding relationships between consultants and buyers (Näslund and Pemer 2017; Furusten and Werr 2017). Thus, two characteristics in the market for management consulting exist: the difficulty of comparing and evaluating options and the fact that personal relationships between buyers and sellers are typically used to establish trust (Furusten and Werr 2005, 2009, 2017). But the relevance of trust in markets is contrary to the APP rule that suppliers should not be hired based on personal relationships. According to the APP, even the consideration of personal traits is problematic, because these traits cannot be objectively measured, evaluated, or compared. Thus the consideration of personal traits in the choice of a consultant runs counter to the ideal of transparency.

Handling Opposing Market Logics in Practice How do public sector procurers handle this clash between conditions in the management consulting market and the APP’s rules? When it came to the problem of personal relationships, several of the procurers I interviewed 226

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referred to procurements in which personal meetings with potential consultants had occurred. One public buyer also admitted that the consultant’s personality had been crucial in the choice of supplier, although it was not specified as a selection criterion in the contract document. Technically, meetings that result in a choice of suppliers are against the law. As one interviewee expressed it: APP makes it difficult to evaluate personal traits. The law is not suitable for procurements in which personal qualities are important.

The buyers saw problems in simultaneously handling their obligations, choosing the best supplier, and adhering to APP restrictions. The consultants were even more critical than the procurers. Their general attitude was similar to that of the buyers: the APP leaves no room for personal relationship factors. The consultants maintained that the market for management consulting in the private sector is characterized by personal relationships, but that the APP creates the opposite situation in the public sector, where deals tend to be closed to people who get along well socially. Many of the consultants expressed concern over the situation, but the following statement is illustrative: It is equally important in the public as in the private sector that choice of supplier is based on personal factors. The quality of the service is dependent on how close they are to the client organizations and how well they understand its processes and culture.

The use of personal factors makes it difficult for newly established consultants in public sector markets to sell their services. Several consultants confirm this point. As one said: Indirectly, the APP has made it harder for newcomers to win contracts, because new consultants are never given the opportunity to establish confidence with the buyers.

Yet personal factors are still important for buyers in the consulting market. As described in the next section, there are ways of handling this dilemma.

Avoiding the APP When relations between buyers and consultants have already been established, the APP becomes an obstacle to be bypassed, or as one state authority buyer put it: The law is easy to get around in order to maintain established supplier relations, but it takes a lot of energy.

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Buyers are creative in finding ways of bypassing the law—whether legally or illegally. About one-third of the public buyers studied referred to procurements in which they had met with several potential consultants in person before deals were closed. If these meetings resulted in the selection of suppliers based on criteria not previously stated in the contract document—factors such as personal relationships—the selection process would be against the law. There were other ways, however, that were not that obviously against the law. Still, buyers, as intimated in the last quote, argue that the law is easy to get around. The following section outlines three ways in which procurers avoided undesired rules: through framework agreements, seller specifications, and splitting assignments.

Framework Agreements Framework agreements are one way in which buyers and sellers of management consulting services can legally avoid the relational restrictions. They require the buying organization (sometimes in cooperation with other buying organizations) to sign long-term contracts with a number of preferred suppliers. As long as the framework agreement was procured according to APP law, the buyer may then purchase directly from these suppliers whenever needed, thereby avoiding the six APP steps for every individual purchasing situation and saving valuable resources. Both buyers and consultants experience the process as being faster and more cost efficient. As one municipal buyer expressed it: We use framework agreements because individual procurements according to the APP are far too costly, both in terms of time and administrative input.

One-half—14 of the 28 observed procurements in the study—were framework agreements. Because framework agreements typically extend over several years, buyers can cooperate with specific suppliers over long periods. Most agreements did not mention how often or to what extent specific consultants would be used within the period of the agreement, however. Agreements were often vaguely specified and broad enough to cover several areas within the wide category of organizational and business development. Compared with single procurements, this type of agreement is rarely based on a specific needs analysis. In its usual broad delimitations, it tends to leave room for future consultancy needs in other areas. Thus framework agreements allow buyers to maintain the all-important relationships with their supplier, which also allow them to act according to the market logic for management consulting. This also means, as expressed by some suppliers, that framework agreements carry certain disadvantages, making it more difficult for new suppliers outside of framework agreements to 228

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attract buyers. As one consultant remarked, ‘Being included in a framework agreement does not guarantee any assignments.’ Thus the final choice of supplier is based on the market logic of the consulting market, where assignments are based on established trust and relationships. By using framework agreements, sellers reduce the number of procurement procedures, thereby reducing buyers’ options as well. Moreover, framework agreements in the public sector are often made by centralized procurement units rather than by the end users of goods and services. Thus the listed consultancies may have little knowledge of the single public organization that hires them. In practice, however, it is often the consultants with established relationships whose names are listed in framework agreements. One buyer describes this situation: We formulated the requirements in the contract document so that Supplier X would fit perfectly. Many of our framework agreement users wanted to work with Supplier X. If X hadn’t been included, the users would probably turn to that firm directly, and what, then, is the point of framework agreements?

Avoiding Undesired Rules through Seller Specification To handle the demand for long-term relationships, buyers gave more and more weight to such factors as prior experience and references when they formulated the documents for the selection process. Thus, although the APP’s intention is to be a vehicle for equality, the opposite is the result of this method, even though the APP is being followed. One consultant commented: In the public sector, our international experience isn’t worth anything. If you don’t have prior experience of working with Swedish authorities, it’s almost impossible to win a contract.

Another consultant noted that, ‘because you can’t meet the buyers, it’s difficult to gain credibility if they don’t already know you’. Consultants who have established relationships with public buyers have no need to present themselves in personal meetings; they have the upper hand. In practice, this means that the buyers have already decided with whom they want to work. Either the buyer knows the consultant from previous assignments, or the consultant was involved at an early stage, when the needs were being identified. The buyer then tailors the evaluation criteria to fit the preferred supplier perfectly. As in a case described by one consultant, the buyer could require that the consultant have a PhD in information technology (IT) management or that the consultant must travel to assignments by public transportation or by bicycle, for environmental reasons. Obviously, few other suppliers could live up to such requirements—a procedure that the consultants described as ‘very common’. 229

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Avoiding Undesirable Rules by Splitting Assignments Another frequently used method for sidestepping APP laws is to split entire assignments into smaller parts so that each part falls under the APP’s threshold value. Public organizations are free to procure under the limit while still adhering to the letter of the law.2 One consultant described a case in which the public buyer asked the consultant to divide the job into several assignments costing SEK 1,200,000 each (EUR 120,00), so that a public procurement would be in compliance.

Avoidance as a Strategy for Handling Opposing Market Logics The three commonly used strategies to avoid the APP’s restrictions, described in the previous section, imply that the APP has little impact on the way public organizations select consultants in practice. The two first forms of avoidance— framework agreements and seller specifications—can be seen as ways of concealing the actions taken (Oliver 1991; Pache and Santos 2010), but they can also be seen as strategies of decoupling what is said and what is done (Meyer and Rowan 1977/1991). Those who apply the third form, however—the splitting of assignments into smaller parts—manage to comply with the letter of the law while avoiding the spirit of the law. Yet all three forms of avoidance demand energy and resources, although this appears to be less true for the strategy of referring to another rule. Disguising practice gives the procuring organization the opportunity to maintain the quality of its performance by selecting a trusted consultant. It will work if the organization can make it appear as if the selection has been made according to APP logic. Yet the avoidance of undesired rules also causes trouble for the buyers. They risk being revealed, and they may have to pay damages or start all over again by redoing the procurement process. Obviously, both buyers and sellers in the management consulting market consider it worthwhile to use these avoidance tactics, given the alternative. They choose to avoid the rules rather than risk deals with a supplier they do not trust.

References Aspers, P. (2007), Theory, reality, and performativity in markets. American Journal of Economics and Sociology, 66(2): 379–98. Axelsson, B. (1998), Företag köper tjänster. Stockholm: SNS Förlag. 2

According to the Swedish Competition Authority, the limits for state authorities are about EUR 128,600 and for other public agencies, enterprises and foundations EUR 199,000. http://www. konkurrensverket.se/upphandling/om-upphandlingsreglerna/om-lagstiftningen/troskelvarden/.

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Handling Opposing Market Logics Axelsson, B. (2005), Purchasing as supply management. In S. Furusten and A. Werr (eds), Dealing with Confidence: The Construction of Need and Trust in Management Advisory Services (pp. 39–58). Copenhagen: CBS Press. Axelsson, B. and Wynstra, F. (2002), Buying Business Services. Chichester: Wiley. EU Commission Green Paper (1996), Public procurement in the European Union: Exploring the way forward. COM(96) 583 final. Brussels: European Commission. Freidson, E. (2001), Professionalism: The Third Logic. Cambridge: Polity Press. Furusten, S. (2003), God Managementkonsultation—Reglerad Expertis eller Improviserat Artisteri? Lund: Studentlitteratur. Furusten, S. (2009), Management consultants as improvising agents of stability. Scandinavian Journal of Management, 25(3): 264–74. Furusten, S. (2013), Commercialized professionalism on the field of management consulting. Journal of Organizational Change Management, 26(2): 265–85. Furusten, S. (2015), Dåliga kunder gör bra affärer – ett dilemma för offentlig upphandling. Stockholm: Liber. Furusten, S. and Werr, A. (eds) (2005), Dealing with Confidence: The Construction of Need and Trust in Management Advisory Services. Copenhagen: Copenhagen Business School Press. Furusten, S. and Werr, A. (2009), The need for management advisory services: A consequence of institutionalization, organization, and trust. In A. F. Bouno and F. Poulfelt (eds), Client –Consultant Collaboration: Coping with Complexity and Change (pp. 179–200). Charlotte, NC: Information Age Publishing. Furusten, S. and Werr, A. (eds) (2017), The Organization of the Expert Society. London: Routledge. Meyer, J. and Rowan, B. (1977/1991), Institutionalized organizations: Formal structure as myth and ceremony. In W. W. Powell and P. J. DiMaggio (eds), The New Institutionalism in Organizational Analysis (pp. 41–62). Chicago: University of Chicago Press. Näslund, L. and Pemer, F. (2017), Disembedding Expertise: The Shift from Relational to Formalized Purchasing Practices. In S. Furusten and A. Werr (eds), The Organization of the Experts Society (pp. 119–32). London: Routledge. NOU (2002), Upphandling av konsulttjänster enligt 6 kap. LOU. Available at: http:// www.konkurrensverket.se/upload/NOU-arkiv/pdf/infdec02.pdf Oliver, C. (1991), Strategic responses to institutional processes. The Academy of Management Review, 16(1): 145–79. Pache, A.-C. and Santos, F. (2010), When worlds collide: The internal dynamics of organizational responses to conflicting institutional demands. Academy of Management Review, 35: 455–76.

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16 From a Free Market to a Pure Market The History of Organizing the Swedish Pipe and Tube Market Kristoffer Strandqvist

In 1864, the Swedish Parliament passed the Decree of Freedom of Commerce (näringsfrihetsförordningen), which provided legal rights to Swedish citizens to establish businesses. The markets were no longer to be organized by guilds, and the government should not interfere in business life. However, this change also meant that almost no restrictions were in place, that everything was permitted, and that contractual freedom prevailed. The idea was that the markets should be ‘free’: market actors could act and organize as they liked. This lack of organization was not accepted by sellers in many industries, who slowly began to organize their markets in their own way by forming cartels. For many years the Swedish state did not actually cherish these cartels (as some historians have argued), but they tended to accept them. A similar development occurred across Europe at this time, which made the cartels a substantial element in the governance of the economy and in the functioning of businesses. This grudging acceptance stands in sharp contrast to the strong negative view that states currently hold towards cartels; today’s states believe in market organization, but want to establish a ‘pure’ market with a high degree of competition, in order to achieve various societal values. According to this view, cartels have no role to play but are examples of organization forms that have to be avoided and resisted. The present European Union Competition Law, derived mostly through the Treaty on the Functioning of the European Union from 2007—and its systems of monitoring and sanctions—represents a very different view of markets than the one prevailing

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among states at the end of the 19th century. The change in perspective has been a slow process, however. In the late 1940s, after WWII, many European states, including Sweden, began to change their view on the way markets should be organized and who should be the organizers. The seller-initiated organization in cartels was questioned more and more. In this chapter, I investigate how the Swedish state developed a new view on the role of cartels and how the sellers and their cartels reacted and acted in the process leading up to and following the new Swedish Competition Act of 1953. I view this process through the lens of the Pipe and Tube Wholesalers Cartel and its handling of the situation. This chapter is about organization and about resistance to organization. The state offered resistance to the organization of cartels and the cartels tried to resist the new market organization that the state wanted to achieve. What ideas and arguments were important among state organizations and committees? What did the cartels do to influence the outcome of the legislative process? Did they change the way they acted during the process? How did they handle the new legislation? Even before the law was adopted, they, like much of the business community, tried to influence the drafting of legislation, while simultaneously acting in various ways to handle it. In the end, the legislation was relatively weak, and the cooperation among sellers—especially around prices—continued. Nevertheless, the resistance to the new legislation diminished over time, and prices fell—even if other factors also contributed to price declines. The 1953 Competition Act has been seen as hopelessly weak and unable to bring more competition to Swedish industry and trade (e.g. Fölster and Peltzman 1995). Based on a study of historical sources, documents retrieved from both public and private archives, I present empirical evidence pointing in a slightly different direction. But first I provide the historical background to set the scene for these developments.

The Cartel Period The Swedish pipe and tube (and sanitation) market traces its origins to the late 19th century, supplying material to the emerging gas and water systems in Swedish towns and cities. A cartel, Svenska Rörkonventionen, was formed in 1909 by the wholesalers. The 1920s witnessed a major upsurge of new construction in Sweden, which, combined with modernization, led to widespread demand for pipes and plumbing products. There was a lively start-up operation of plumbing wholesale businesses, and the sleepy Pipe and Tube Wholesale Cartel organization also became more active. In the mid-1920s, the cartel began making more decisions on prices, which, in particular, would discourage competition in tendering, and developments 233

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in the field of cartels increased during this period. Internationally, the pipe manufacturers introduced a cartel that worked during most of the 1920s and 1930s—with some interruptions in the form of severe price wars. The Swedishorganized pipe and tube wholesalers managed to reach exclusive agreements with the foreign manufacturers and could, to a certain degree, stifle supply to outsiders, thereby maintaining the price level in Sweden.1 During the 1930s, however, the established iron merchants—firms with high turnover—made their advent into the pipe market, spearheaded by the large company Söderberg & Haak.2 This entry, in combination with the Depression, which weakened compliance with cartel rules among cartel members, led to falling prices and shrinking profitability for pipe and tube wholesalers. In turn, further organization, such as deciding on quotas, became the response of the organized wholesalers. But such solutions were short-lived. WWII changed the Swedish pipe and tube sector, along with most Swedish business life, in several ways. The state became a major organizer of the markets. National commissions for handling the economy were established, and the plumbing and sanitary products sector began to ensure that the production of goods that had previously been imported was founded or expanded in Sweden. Consequently,due to delays, greater production of tubes and pipes began in Sweden after the end of the war, possibly creating better conditions for competition. These national commissions also made the state more familiar with intervention in the economy and business life, thereby rendering it more prone to organizing. Furthermore, as a tool for organizing, the commission’s cooperation with the cartels tended to strengthen the cartels.

The Immediate Postwar Swedish Pipe and Tube Market The war years had not stalled economic activity completely. But notably, the building sector received a boost in 1946, when the availability of plumbing products increased markedly in Sweden. The goods contained within the plumbing, heating, and sanitation sector were produced by firms belonging to various industries: ironworks, machine shops, foundries, and porcelain factories. Items could be divided into six groups: pipes, radiators, boilers, bathtubs, bathroom fixtures, and fittings, where the former is usually divided into several subgroups. In 1946, domestic production supplied over 90 per cent of the domestic demand in most of the commodity groups,

1 Konkurrensbegränsande samverkan inom värme- och sanitetsbranschen. Del III, Svenska Rörgrossistföreningen, report, Stockholm 1954, Monopolutredningsbyråns arkiv, Kommerskollegiums arkiv, RA, pp. 15ff. 2 Ivar Rosings accounts of Hugo Asplund & co., 15/4 1975, attached to Gösta Wallgrens unpublished manuscript ‘Ahlsell 100 år’ (1977).

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except for cast tubes and sleeve pipes, the imports of which were above 50 per cent (SOU 1955:49). A relatively large number of cartel agreements were also in operation. At the manufacturing level, there were nine agreements registered in the official register of cartels (Cartel Index Nos 2, 3, 12, 14, 50, 56, 189, 190, and 323). At the wholesale level, there were four cartels: the Swedish Pipe Convention (Svenska rörkonventionen, Cartel Index No. 52), the Swedish Society of Pipe Wholesalers (Cartel Index No. 55), the Swedish Pipe Association (Svenska Rörföreningen upa, Cartel Index No. 46), and the Normal Pipe Association (Normalrörföreningen upa, Cartel Index No. 53). The latter two were imports—compounds formed by the supply commissions’ participation shortly after the outbreak of WWII.3 Finally, at the Installer level, four cartel agreements were registered (Cartel Index Nos 42, 193, 197, and 203). Sweden’s production of the main pipe and tube products was divided among some 190 companies; wholesalers numbered about 40, with some 1,500 employees in total; and installers numbered over 2,800 firms, with more than 20,000 employees in total (SOU 1955:49). The four wholesale cartels were closely related; they had the same members, the same managing board members, and a single ombudsperson. Furthermore, the association agreements followed the same structure, comprising two separate agreements on pricing and quotas. In addition, there was a specific annex on sales and delivery terms. This form of organizing consisted of several organizational elements. Monitoring occurred through the self-reporting of supply and sales data to a central office and information that had been intercepted by other cartel members, such as the interpretation of ads and the recovery of business offerings. Trustees on the management boards of the cartels decided on sanctions in the form of penalties, and the Chamber of Commerce arbitration panel could also serve as the monitoring agent.

State Reaction and Resistance At the end of the war, a discussion began in Sweden about the importance of competition for the market and its functioning. Similar trends existed in much of Western Europe at the time, inspired by US perceptions of trusts and cartels (Fear 2006; Schröter 1996; see also Djelic 1998). One of the initiators in Sweden was Professor of Economics Gunnar Myrdal, a Social 3

Konkurrensbegränsande samverkan inom värme- och sanitetsbranschen. Del III, Svenska Rörgrossistföreningen, report, Stockholm 1954, Monopolutredningsbyråns arkiv, Kommerskollegiums arkiv, RA, p. 34.

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Democrat who became Minister of Commerce in the new postwar labour government. He appointed a committee in the summer of 1946—the Experts of New Establishment (Nyetableringssakkunniga)—that would examine the need to eliminate private control over entry into the business sectors and ‘inappropriate methods of competition, such as boycotts, exclusive contracts, and price differentiation’. Market reform was in the air. Before the committee was named in 1946, legislation about cartels was enacted in Sweden, based on the results of a prewar investigation. It did not include a direct ban on cartels, but it did establish that cartels would be recorded in an official cartel register. The government’s Commerce College body (Kommerskollegium) and its newly formed Monopoly Investigation Bureau (Monopolutredningsbyrån) would organize the register. This would increase transparency and knowledge about the nature of competition in the Swedish industry (Lundqvist 2003, 14–15; SOU 1945:42; Riksdagstrycket n.d.—Kgl Majt. Proposition 1946:264). This legislation was the result of ideas and proposals emanating from a 1930s investigation conducted by the 1936 Professional Body of Commercial Experts (näringsorganisationssakkunniga) and contained in their report from 1940, and was further developed by the Commission for Economic Post-War Planning and presented in their 1945 report (Lundqvist 2003, 14ff.). In the 1930s, economic nationalism had made cartels popular among governments wanting to use them as tools to control the economy. To accomplish this goal, the state also wanted control over the cartels, and registration of cartels became mandatory in some European countries, such as Hungary in 1931 and Czechoslovakia and Poland in 1933 (Resch 2005, 10ff.). The chairperson of the new committee was Economics Professor Karin Kock, and committee members were appointed from among representatives of commerce, trade unions, and cooperative movements. The directive to the investigation referred to what had emerged in a few previous investigations: the 1936 Professional Body of Commercial Experts (SOU 1940:35), the Commission for Economic Post-War Planning (SOU 1945:42), and the consultation responses to these. The 1930s investigation found practices of private control to entry, including the practice of exclusive contracts and the reluctance of banks to lend money to some firms, dubious. The latter practice gave rise to major problems in industries that required large capital investment. Proposals for action were waived because of the war situation, however. The Commission for Economic Post-War Planning found that private entry control had been strengthened during the war and recommended that the issue of further tightened legislation should be urgently investigated. The mission of the new committee—in collaboration with the Commerce College Monopoly Investigation Bureau—was to examine private entry control and submit legislative proposals that ‘as far as possible eliminate[d]’ it (Lundqvist 2003, 15–16; SOU 1951:27, 7 and 39ff.). 236

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Contrary to arguments from commercial organizations about ending up with too many small competitors going bankrupt and causing ‘unnecessary supplier losses’, Minister Myrdal thought that: a stronger price competition from more efficient companies would represent, from Society’s point of view, a far superior method of preventing less efficient companies to subsist in the market and that this method should allow an increase in turnover per company and a general rationalization of the relevant industries. (Riksdagstrycket n.d.—Kgl Majt. Proposition 1946:264)

Thus competition was the theme of the day (SOU 1951:27). Gunnar Myrdal resigned as Minister of Commerce in 1947, to be replaced by Karin Kock. On 30 April 1947, Kock resigned as chairperson of the Experts of New Establishment committee and was replaced by the former secretary, Richard Stern. Eighteen months later, on 12 November 1948, the directives to the committee were extended. Now the investigation would also look into ‘the need for legislation to prevent socially harmful cartel agreements’. As reported publicly in June of that same year, prior to an announcement of the extended mission, the Swedish Cooperative Union (KF) wrote a letter to the government, in which the Cooperative Union asked thorny questions: If a party to a cartel agreement violated the same agreement, would it be reasonable that the legal system would help enforce the agreement? Should the other parties to a cartel agreement be entitled to use the legal system to ‘bring an action for penalties in the form of damages or liquidated damages due to breach of contract’ against a violating party? The Trade Ministry understood the concern, in that ‘public bodies’ appeared to maintain ‘in the public interest unsuitable cartel agreements’ (SOU 1951:27, 46; Lundqvist 2003). The committee noted in its final report in 1951 that 350 of the 510 cartel agreements ‘and similar restrictive agreements’ that the monopoly investigation bureau had recorded as of December 1950 were still in force (SOU 1951:27). Resale price maintenance was part of most agreements—either horizontal (various vendors at the same level in a channel of distribution coming together on a price to their clients) or vertical (manufacturers setting a price that retailers must charge their customers—also known as a gross price system). If resale prices were not maintained, the alleged threat was refusal to supply or similar measures. But according to the investigators, a retailer’s belief or perception that such penalties could be inflicted led to ‘effective price linkages’. Some of the problematic occurrences listed by the experts included discounts advantaged and disadvantaged, exclusive contracts between suppliers and retailers, market sharing agreements, collusive tendering, and dominant local firms. They noted that, ‘In different ways, the competition is thus in broad areas of the economy strongly inhibited’ (SOU 1951:27, 12–13). 237

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The committee report also noted that developments in competition within the industry went in the right direction, especially after the investigation had started and the monopoly investigation bureau publishing business had begun. The threat of action against practices that restricted competition likely stimulated ‘interest in the elimination of conditions which may be subject to criticism and used as a justification for the legislation’ (SOU 1951, 15ff.) in many businesses and cartel organizations (SOU 1951:27, 15ff.). The committee did not believe that this self-purification was enough, however. It was inadequate because the purification measures ‘do not go any further than just the single business, which accounts for a particular restriction of competition, considered reasonable’. Moreover, the intensified interest in de-organizing would be significantly reduced if the state declined to take ‘direct action’ (SOU 1951:27). The committee suggested that a Freedom of Trade and Industry Board (Näringsfrihetsnämnd) should be established. This organization would assess the extent to which specific restrictions on competition would be harmful. The committee was somewhat divided, however, on how far it should go. The labour majority of the committee, which also dictated the final report, suggested that in order to assist the board it would have to have a new law passed that defined competition standards and listed the practical work of a monopoly upon which the investigation bureau would focus. In addition to assessing the harmfulness of agreements and barriers to competition, the board would ‘be empowered to take action with binding force’. The first option, however, would be negotiations with the parties involved, in order to reshape the way business was conducted or to remove barriers to competition. Coercive action would take place by injunctions presented by the board, which required a party to lift or reshape a restriction of competition. If such an injunction were not followed, it should become a case for the court (SOU 1951:27, 17–18). The committee also proposed that an independent Ombudsperson for the Freedom of Trade Issues (Näringsfrihetsombudsman) be established to assist the board. The ombudsperson would act as a prosecutor, choosing which cases to pursue (SOU 1951:27, 18). According to the final report, three cases of competition restrictions would be admissible. First, an investigation would take place if a company or a group of companies, as a result of common ownership interests or other similar grounds, represented a major part of the business within a specific area. This first point is about industry concentration or dominance, but the committee didn’t want to refer to any particular percentage of market concentration or market share held by one company or a small group of companies, above which competition could be said to be limited. The committee should, however, take account of the effectiveness of the competition that existed from both domestic and foreign operators. The second case for intervention would be when companies acted together 238

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because of a cartel agreement or other arrangements. The investigators wanted to emphasize that they focused not only on written cartel agreements; even when a company behaved ‘as if an agreement on organized collaboration existed’ such a case would be admissible. The third case for intervention would occur when a company provided instructions in its sales activities to retailers about the lowest price to be charged for a resold good, a practice referred to as gross fixed prices (SOU 1951:27, 19–20). Yet target prices would be allowed (SOU 1951:27, 20; see also Kjellberg 2004). It was also emphasized that only societally harmful (samhällsskadlig verkan) restrictions of competition should be eliminated. But what were the societally harmful effects? The committee defined three conditions: (1) high prices in relation to actual costs, (2) a substantial risk that a cost reduction was prevented or a technical/economic development was inhibited, and (3) substantial danger of restriction of economic activities of societal importance (SOU 1951:27, 20). The committee also raised the issue that business competition required various companies to be able to act in the market relative to its effectiveness. Furthermore, certain companies would not be arbitrarily discriminated against, which specifically referred to the refusal to supply some actors, especially providers that had banded together and stipulated that only certain customers would receive goods. A particularly difficult case would occur if a client were discriminated against because it did not belong to a particular association or was represented by a specific organizational form. There were some severe cases in which competitors were able to exercise influence over a supplier’s position, for example, or a seller tried to force a customer to join restrictions on competition (SOU 1951:27, 21). The committee also realized that it could be extremely difficult to prove that harm had been done through a restriction of competition. They considered changing the burden of proof, so that it was the competition restriction that should be justified. The solution they settled on was something they called legal presumption—that in some cases it could be seen as a given that adverse societal effects were present. There were three cases in particular in which the rule was valid: situations in which (1) a sole supplier disadvantaged some entrepreneurs; (2) cartels were oriented towards price cooperation, submission of bids, market sharing, or the disadvantage of certain businesses; and (3) gross fixed pricing existed (SOU 1951:27, 22).

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societally harmful behaviours had disappeared, usually due to protests, but also because of the complex, cumbersome, and inadequate legal wordings and constructions suggested in the committee report. Prohibitions against gross fixed prices (§ 2) and collusive tendering (§ 3) were, however, introduced. In addition, the Business Freedom Council (näringsfrihetsråd) was established to eliminate, through negotiation attempts, any ‘harmful effects’ of private business restrictions. The Business Freedom Council was, through its corporate composition and its intended form of work—negotiations—primarily a child of the Swedish model of cooperation (Lundqvist 2003, 19–20). The bans were also dispositive; exceptions could be made if cost savings were passed on to consumers or if a better organization of an industry could occur.4 In organizational terms, monitoring increased and there was little hierarchy, few precise rules, and relatively weak sanctions.

Responses and Resistance from the Wholesalers The committee’s investigation lasted a full five years, and over this period members came and went and the directives changed. In the meantime, businesses and organizations in industries in which the impact of a new law could be substantial understood reasonably well what was likely to occur and took steps to avoid or mitigate the effects of the law. How did the organized pipe and tube wholesalers react to the legislative process and to the development of a potentially tougher competition law that could totally reform their market? They did not want new legislation on competition, but facing the inevitable, they were intent on avoiding the worst-case scenarios, which seem to have involved some kind of new authority for special investigation into their practices. A memo from a general meeting of the pipe associations, dated 7 October 1948,5 reveals that development. After several wholesaler cartel members from the three largest Swedish cities exited from the price agreement on 17 September 1948, which meant that the agreement would end one month later, the issue of the cartels’ future was urgent. The matter of the dismissal had been on the agenda for quite a long time, at least since 1947. The question had been discussed by the board, whose members thought that the various cartels should be dealt with at the same time and that ‘the release of prices would be a viable option’ for three reasons:

4 Kungl. Maj:ts proposition nr 103, Bihang till riksdagens protokoll år 1953, Första saml., 9 bd., RA, Kommerskollegium, Monopolutredningsbyrån, F1, Vol. 51. 5 CfNH, Svensk Handels arkiv, Rörgrossistföreningens arkiv okatalogiserade handlingar i mapp, memo attached to a letter from L. Piltz to S. Sjölander, 27 April 1948.

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 Prices would be respected for the foreseeable future, given the shortage of supply.  In times of ample supply of goods, cheating with agreed-upon prices would always occur. If prices were maintained, one could expect that unscrupulous members would profit at the expense of loyal members during the transitional period.  The government had recently ordered an investigation in accordance with §6 of the Act on Competition. According to reliable sources, the pipe and tube business would be subject to investigation next. Although the current prices could not be challenged because they were price-controlled, a system of bound price rates would probably be considered, contrary to the principles of a free economy and possibly leading to various types of pressures. We can also fear legislation directly affecting the cartel agreements.6 A fourth reason seems to have existed as well: The Organized Wholesalers seized the opportunity to eliminate wholesalers owned by the Swedish cooperative union, Cooperative Companies (KF), among its members. This point demands some explanation, and a small deviation is necessary here. KF had long opposed the established Swedish pipe and tube wholesalers and their organizations. The opposition was partly based on KF’s desire to defend the interests of its consumer members and reduce prices in general, but also because KF’s desires had taken practical expressions in the form of its direct involvement in the industry. In 1937, when the porcelain industry was in crisis, KF acquired Gustavsberg’s factory, a large porcelain industry manufacturer, and diversified it by venturing into sanitation porcelain (Kylebäck 1983, 168). In addition, KF had bought two pipe and tube wholesalers: the Sanitation Firm GG in Stockholm and the old firm, AB Park & Co. in Gothenburg (SOU 1955:49, 91). These acquisitions made KF a direct member of the wholesaler organizations, the cartels, even if they refrained from price collusion. Furthermore, KF made populist gambits in the press to bring about changes in the plumbing market and produce pricing pressures. In addition, it made a famous notification to the committee about the cartels and the dubious law enforcing violations of its statutes in public courts. When the reorganization from cartels to a trade association occurred,7 there was an appropriate opportunity ‘to leave the KF-owned companies

6 CfNH, Svensk Handels arkiv, Rörgrossistföreningens arkiv okatalogiserade handlingar i mapp, memo attached to a letter from L. Piltz to S. Sjölander, 27 April 1948. 7 Some researchers studying cartels would also classify the new trade association, Svenska Rörgrossistföreningen, as a cartel. But I believe, like the actors themselves during the time, that a distinction should be made between the cartels that existed up until October 1948 and the trade association established thereafter. The trade association also did not enter into the register of cartels until more than a decade later.

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outside’.8 The inner cabinet of the cartel organizations, spearheaded by its ombudsperson, Lars Piltz, took careful steps to ensure that the KF-owned wholesalers did not become members of the new trade association. And they succeeded. A couple of questions arise regarding the pipe and tube market and the wholesalers’ actions after 1948. Did the abolishment of price fixing result in changed prices? And did the wholesalers try to maintain some private organization of the market in another form? At the end of the note attached to Lars Piltz’s letter of 27 September 1948, he touched on these issues. He addressed three questions regarding (1) product classes and discount schemes, (2) quotas, and (3) the relationship to outsiders. Piltz wrote: Classes and discount system with consequent delivery rules are maintained and contracts should be able to be negotiated so that they would be respected. The right to make deviations is attributable to the extra discounts that could be contemplated. Such a system is natural; otherwise chaos in the market would result. The quotas have relevance now only as regards the Swedish tube mills, and as I understand, the works will apply quotas in their own interest, as long as the shortage continues. The issue is not yet discussed with the works, but this will soon take place. Finally, as regards outsiders, abolishment of the quotas means that they may purchase directly from the tube mills, if the mills so wish. If the works were opposed to this, the current system would persist in the form of purchases by the association or its members. There may not be any formal agreement about this, but the works have to unilaterally take a position to do so.9

The quotas were the partition between the organized Swedish pipe and tube wholesalers of the pipes and tubes manufactured in Sweden, which they bought on an exclusive basis. The organized wholesalers were relatively confident about keeping the purchasing monopoly, as long as there was a shortage of goods. But the risk was, as the third point suggested, that outsiders would now be able to buy Swedish-made tubes directly from the factories. But that could be prevented if the organized wholesalers managed to persuade the pipe manufacturing works to say no to outsiders, an attitude that could hardly be described as a relaxation in the mind of the frozen cartel structures. This question of the Swedish pipe manufacturers’ plant sales to members of the organized wholesalers and to outsiders became a recurring issue in the following years. As early as 1949, one of the biggest outsider firms, AB Odelberg

8 CfNH, Svensk Handels arkiv, Rörgrossistföreningens arkiv okatalogiserade handlingar i mapp, memo attached to a letter from L. Piltz to S. Sjölander, 27 April 1948. 9 CfNH, Svensk Handels arkiv, Rörgrossistföreningens arkiv okatalogiserade handlingar i mapp, memo attached to a letter from L. Piltz to S. Sjölander, 27 April 1948.

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& Olson, asked the manufacturer, Wirsbo Bruk, about buying directly from them. When the association’s executive committee of forged pipes became aware of this and the circumstances behind it, it stated in a memo: that from a consumer’s point of view, the distribution of goods could not be in need of another wholesaler; the wholesalers that already distributed tubes should be considered satisfying enough.10

This somewhat cartel-like position would be verbally transmitted to Director Lagercrantz, the manager at Wirsbo. The association did not want to grant membership to Odelberg & Olson, a firm that was considered an outsider. This would be explained to Lagercrantz on the grounds that the pipe and tube wholesalers saw Odelberg & Olson primarily as an iron wholesaler and that the iron wholesalers’ associations would be unlikely to allow a pipe wholesaler in if it happened to sell small quantities of iron! In addition, Odelberg & Olson could probably cope safely with imported goods. It is difficult not to conclude that the pipe and tube wholesalers, through their trade association, continued to try to shut out market members and keep competition under control. Chairperson Lars Piltz, however, tried to change the organization somewhat. At a large summit with the Swedish pipe association on 28 April 1949, he questioned whether the association’s ‘policies should become more liberal’ regarding membership, making the association encompass all firms selling tubes and pipes on a wholesale basis. That opinion was not well received among the old wholesalers; a ‘restrictive policy’ would still be observed. All four applications for new membership were turned down.11 The choice to broaden the trade association or exclude all pipe and tube wholesalers that were not similar to the core companies in all respects should have been seen as a dilemma. But it seems that the old, organized wholesalers had their minds made up from the start. Perhaps, and most probably, if Odelberg & Olson had become a member, the old members would have had the opportunity to control that firm’s market activities to some extent. By joining the trade association, a company was required to comply with the organization’s rules and principles, which would have ensured some compliance with issues such as price lists. Instead, by rejecting Odelberg & Olson, a price war was born. * Price changes could actually be noted as early as 1949. It was confirmed at a meeting with the new trade association on 28 April 1949 that ‘price cuts had 10 CfNH, Svensk Handels arkiv, Rörgrossistföreningens arkiv okatalogiserade handlingar i mapp, Stockholm, 15 September 1949, memo on meeting with the Working Committee for Forged fittings, Tuesday, 13 September 1949. 11 CfNH, Svensk Handels arkiv, Rörgrossistföreningens arkiv okatalogiserade handlingar i mapp, protocol from regular meeting with Svenska Rörgrossistföreningen, Thursday, 28 April 1949, at the Stora Hotellet in Örebro.

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been noticed in respect of the bath-tubs and water closets’ in some parts of Sweden. Somewhat concerned about this issue, the association promised to monitor the development of prices carefully and decided that actions could be discussed later on.12 In March 1950, the Malmö district wanted to fix the prices of water closets, but the Gothenburg district was ‘not prone to any price fixing’ with reference to the existing strong outsider firms on the west coast of Sweden. Price fixing could only be accepted if the outsider firms were to respect the prices as well. A deterioration in the price situation of forged pipes and tubes had been noticed across the country during 1949, however.13

On the Verge of New Legislation The new Competition Law was to be instituted 1 January 1954, and before the end of 1953 concerns were raised among the organized pipe and tube wholesalers about what the new law would bring. They believed that they had already complied with the law through such actions as shutting down common decisions on prices, eliminating the cartels, and creating a trade association in its stead. And they had complied, at least with the letter of the competition law, and formally had gone even further. But they still had some concerns as new legislation was about to be instituted. In an internal letter from Ahlsell-Rylander, the biggest wholesaler after the 1951 merger, Director Eric Grudin expressed these concerns in an attached memo. They centred mainly on the issue of retailers and major consumers turning directly to the Swedish manufacturers to receive direct delivery from them, thereby going over the heads of the wholesale merchants—similar concerns to those expressed in 1949 about outsider firms. These retailers and others could conceivably turn to, or threaten to turn to, the newly established Business Freedom Council to receive a hearing on their requests for direct deliveries. As Grudin wrote: We have seen how downright cowardly some of our suppliers have been in the past, and how, at the slightest hint that a requestor would go to the authorities [with complaints], they have chosen the path of least resistance and started to deliver. Once that is done, it will become very difficult if not impossible to reverse this behaviour, and a precedent is also established.14

12 CfNH, Svensk Handels arkiv, Rörgrossistföreningens arkiv okatalogiserade handlingar i mapp, protocol from regular meeting with Svenska Rörgrossistföreningen, Thursday, 28 April 1949, at the Stora Hotellet in Örebro. 13 CfNH, Svensk Handels arkiv, Rörgrossistföreningens arkiv okatalogiserade handlingar i mapp, Stockholm, 13 March 1950, memo on meeting with the Working Committee for Forged fittings, Wednesday, 8 March 1950. 14 CfNH, Svensk Handels arkiv, Rörgrossistföreningens arkiv okatalogiserade handlingar i mapp, memo attached to a letter from E. Grudin to S. Sjölander, 18 November 1953.

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Grudin wanted ‘carefully to plan our [the organized wholesalers’] defence in advance’. Pipe and tube wholesalers and suppliers ought to act in the same way, making their views known, so the Business Freedom Council would be forced to consider their opinion on matters affecting ‘our industry’. He then listed arguments for the wholesalers’ cause: that competition would not necessarily lead to lower prices for consumers, as more players would create increased distribution costs; that the authorities had examined the industry and come to the conclusion that it works ‘reasonably effectively’; and that wholesalers functioned, to some extent, as a regulator for the manufacturing sector.15 How, in reality, did the Swedish pipe and tube market eventually develop in the 1950s? What happened with prices and competition in subsequent years? Did cooperation between wholesalers, suppliers, and others continue in other forms? Was the market reformed? In the early 1950s, the same Eric Grudin wanted Ahlsell-Rylander and other wholesalers to respond to iron wholesalers who also brought pipes and tube materials and competed more and more. And one problem was that iron merchants were accustomed to lower margins in their operations. Grudin had an idea for tackling the problem of the iron wholesalers’ operations in the pipe market: Ahlsell, perhaps along with the other pipe wholesalers, would begin limited sales in the iron industry through a small firm—an upstart in the industry. Such a small company would then operate not primarily to gain profit in the iron industry, but as ‘insurance’ for the pipe sector. It would operate in such a way that as long as the iron merchants respected the customs and practices of the pipe and tube wholesalers, the ‘insurance’ company would observe the iron industry’s customs and practices. The company did, of course, require only a small portion of sales to influence prices, and then a ‘balance of power’ could arise. The insurance company idea was certainly interesting in terms of the market, where direct retaliation thinking would help to maintain market order. ‘Custom and practice’ is reasonable, meaning that the pipe wholesalers maintained market-sharing trade practices and pricing. In an undated four-page memo, the trade association, Svenska Rörgrossistföreningen, provided its perspective on how to deal with the upcoming situation.16 The idea behind the memo seems to have been to prepare an argument directed towards the Business Freedom Council in favour of the present order, halting, if possible, reformation of the pipe and tube market in Sweden.

15 CfNH, Svensk Handels arkiv, Rörgrossistföreningens arkiv okatalogiserade handlingar i mapp, memo attached to a letter from E. Grudin to S. Sjölander, 18 November 1953. 16 CfNH, Ahlsells arkiv, A1:2, Protokoll mm från Svenska Rörgrossistföreningen 1950s, undated memo found in between acts from 1953 and 1954.

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A memo was issued by the trade association at the same time as the new law of competition, referred to as the cartel law. In the first sentence, it reminded the wholesalers about the installation of the new Business Freedom Council— a council that could interfere through negotiations and by issuing directives. The council seems to have enjoyed a great deal of respect in the minds of the organized pipe and tube wholesalers at the time, which almost feared its coming actions.17 Eight main defensive arguments are listed in the memo; they are, however, somewhat intertwined, overlapping, and repetitious.18 The points made in the memo are summarized next. A main line of argument was to question the notion that more competition and an increased number of sellers would lower prices to end users. The idea was that a larger number of players would lead to higher costs overall and that these costs would eventually have to be paid by consumers. A second point was that more sellers would be bad for service levels and would inflict higher costs for manufacturers, because the manufacturers would have to expedite more small orders. The third point that can be extracted is the claim that the wholesalers contributed in ways that benefited other actors in the chain and even the economy as a whole. With their large assortment of products and storage facilities, the wholesalers offered delivery of different parts at different times when they were needed in a construction project, thereby reducing storage needs for the building entrepreneur. And with their large and almost constant orders from the manufacturers, the wholesalers functioned to some extent as regulators of the economy of the country. The fourth point is actually self-critical. The pricing policies traditionally used by the pipe and tube wholesalers had not taken quantity discounts depending on order size into consideration; no matter how large an order or what it included, the same margins/discounts that a specific customer was entitled to had been applied. This made it easy for outsiders to compete in standard product orders—bulk products—with lower prices. Unprofitable orders for the remaining ‘special’ products, which were also needed, were left to ordinary pipe and tube wholesalers. At the same time, the wholesalers gave the impression of having unjustifiably high margins for the standard products. The memo continued by saying that the organized wholesalers now had arranged for differentiated prices (quantity discounts), making their prices easier to justify. The memo also mentioned a need for the wholesalers to

17 CfNH, Ahlsells arkiv, A1:2, Protokoll mm från Svenska Rörgrossistföreningen 1950s, undated memo found in between acts from 1953 and 1954. 18 CfNH, Ahlsells arkiv, A1:2, Protokoll mm från Svenska Rörgrossistföreningen 1950s, undated memo found in between acts from 1953 and 1954.

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continue this price differentiation even further and to stand by it even if problems should arise. The argument outlined in the memo was also intended for suppliers and manufacturers. It was necessary to communicate with these groups about how the entire pipe and tube supply chain should work, to ‘get them to embrace the wholesalers objective views’.19 The wholesalers wanted to organize the whole supply chain. Increased government market organization—increased monitoring through the creation of the cartel register and the agency for monopoly investigation, combined with the threat of tougher legislation—resulted in the Pipe and Tubes Wholesalers disbanding their cartel agreements. But their abandonment of price-fixing collusion occurred on paper. What happened in reality is a little unclear. Some cooperation on price issues continued.

Epilogue The spring of 1954 saw additional discounts on the sale of forged pipes and tubes. Competition had apparently emerged. The organized pipe and tube wholesalers were not too happy. They saw the situation as ‘very difficult’ and business was unprofitable. In May 1954, the wholesalers seem to have managed to agree on what has come to be called the ‘3% rule’, an agreement to limit the extra discounts to 3 per cent. This measure resulted in greater profitability, at least in Stockholm. The following year, Swedish pipe manufacturers raised prices on a couple of occasions and the wholesalers followed. As a result of the price increases, outside competitors provided even more discounts and gained a greater market share. Not all members of the pipe association followed the agreed price increases, however. It all ended in October 1955, when the largest wholesaler, Ahlsell-Rylander, suddenly returned to the price list that had been in place in February of that year, before the manufacturer increases. The measure, which drew some criticism from other wholesalers, became known in the industry as the October Revolution. Prices of pipes and tubes decreased from 1953 following a peak in 1952, and though some part of the peak in prices could be explained by the Korean war, the decrease in price can also be interpreted as connected to increased competition. And it is also likely that this increase in competition was connected to the new competition legislation and the presiding legislative process. A re-evaluation of the new Competition Law of 1953, which had been seen as hopelessly weak, seems in order. When the passage of time indicated that 19 CfNH, Ahlsells arkiv, A1:2, Protokoll mm från Svenska Rörgrossistföreningen 1950s, Undated memo found in between acts from 1953 and 1954.

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the legislation was not as strong as expected, the Pipe and Tubes Wholesalers’ Trade Association, as it was known by then, reverted to cartel behaviour—and by 1965–66 it was again registered by the authorities as a cartel. The collaboration was not as extensive as before, however. The fact that it was again called a cartel outside the industry was a sign that the tolerance for cooperation among sellers had diminished.

References Centrum för Näringslivshistoria (CfNH). Ahlsells arkiv Svensk Handels arkiv. Djelic, M.-L. (1998), Exporting the American Model. The Post War Transformation of European Business. Oxford: Oxford University Press. Fear, J. (2006), Cartels and Competition: Neither Markets nor Hierarchies. Working paper, Harvard Business School. Fölster, S. and Peltzman, S. (1995), Samhällsekonomiska kostnader av regleringar och bristande konkurrens i Sverige. In R. B. Freeman, B. Swedenborg, and R. Topel (eds), NBER-report: Välfärdsstat i omvandling. Stockholm: SNS förlag. Kjellberg, H. (2004), Wirsälls Marginalanteckning, Eller: Vem Ska Bestämma Priset på Varan? In C.-F. Helgesson, H. Kjellberg, and A. Liljenberg (eds), Den där Marknaden: Om utbyten, normer och bilder (pp. 205–33). Lund: Studentlitteratur. Lundqvist, T. (2003), Konkurrensvisionens framväxt. Konkurrenspolitik, intressen och politisk kultur. Stockholm: Institutet för framtidsstudier. The National Archives of Sweden (Riksarkivet RA). Kommerskollegiums arkiv. Resch, A. (2005), Phases of Competition Policy in Europe. Vienna: Vienna University of Economics and Business Administration. Riksdagstrycket (n.d.), Kungliga Maj:ts propositioner. Schröter, H. (1996), Cartelization and decartelization in Europe, 1870–1995: Rise and decline of an economic institution. Journal of European Economic History, 25(1): 129–53. SOU (Statens Offentliga utredningar) 1940:35, 1936 års näringsorganisationssakkunniga, Organiserad samverkan inom svenskt näringsliv: betänkande, Stockholm, 1940. SOU (Statens Offentliga utredningar) 1945:42. Betänkande angående övervakning av konkurrens-begränsande företeelser inom näringslivet. Stockholm. SOU (Statens Offentliga utredningar) 1951:27. Konkurrensbegränsning. Betänkande med förslag till lag om skydd mot samhällsskadlig konkurrensbegränsning avgivet av nyetableringssakkunniga. Del 1., Stockholm. SOU (Statens Offentliga utredningar) 1955:49. Värme- och sanitetsbranschen. En ekonomisk strukturanalys med särskild hänsyn till distributionsproblem. På Byggmaterielutredningens uppdrag utförd av Per Holm. Stockholm.

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17 Multiplicity, Complexity, and Recurrent Change Nils Brunsson and Mats Jutterström

In the preceding chapters, we have described the organizing and reorganizing of 14 markets, not counting the side markets that were sometimes organized in order to affect the functions of focal markets, and not counting the reorganizing attempts that were directed at several markets. Although we studied only markets outside formal organizations, we found that organization played a major role. We found an abundance of organizers, the use of all organizational elements (as identified in Chapter 2), and other methods of fashioning the markets involved. The situation was far from the common image of markets, as the result of mutual adaptations among unorganized sellers and buyers, with occasional interventions by the setting of state rules. The markets studied for this book reflect what can be viewed as a more general contemporary situation, whereby organization is seen as the solution to almost any social problem and in which many organizations are involved in organizing themselves and others (Meyer and Bromley 2015; Ahrne et al. 2015). Markets provide no exception to the increasing rationalization and organization of modern society. In most of the empirical cases in this book, we found significant shifts in the amount and kind of organization used. The markets were highly dynamic, as opposed to the image of institutionalized and stable markets, reproducing the same patterns of interaction for decades or centuries. They varied in their organization and in other respects, producing an image that did not reflect the ideal type of ‘the market’. The organization and reorganization of markets, as compiled from the studies presented in this book, constitute a story of multiplicity, complexity, and almost perpetual change.

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In this chapter, we do not try to summarize all the intricate processes and mechanisms of market organizing and reorganizing described and analysed in the individual chapters. Rather, we present some of the more general tendencies that were found. We provide an overall view of market organizers, characteristics of market organization, and market organizing processes. We also describe the observed patterns of market organization change and discuss the reasons for them. This chapter is followed by the last chapter, in which we compare the organization of markets with the organization of formal organizations.

A Multitude of Organizers: Sellers, Buyers, Profiteers, and ‘Others’ A multitude of organizers were involved in the organization of the markets described in this book, including hotel owners, landowners, insurance companies, consulting firms, social movement organizations, municipalities, state authorities, certification and accreditation firms, industry associations, and international government organizations. In public discourse, only a few organizations are defined according to their role in market organization, and when they are, they are often described according to the organizational elements they are using—standardization organizations or rating institutes, for instance. Scholars in the social sciences have usually distinguished between state and non-state organizations, between state and private regulation, and even between state regulation and self-regulation. Our studies demonstrate that these are crude distinctions, indeed. Neither ‘selves’ nor states and private organizations are monolithic entities with the same interests or positions. We have seen how various state authorities have been involved in market organization, as have government representatives and municipalities. A study of the Swedish state indicates that 53 Swedish state authorities, representing almost one-fourth of all authorities, are tasked primarily with market organization; many more are involved in some way in market organization, and these authorities often have conflicting purposes and strategies (Andersson et al. 2017). States and municipalities are also big sellers and buyers in many markets. If ‘self ’ in markets is interpreted as sellers and buyers, states and municipalities are part of this self. And states, sellers, and buyers are not the only types of organizations that organize markets. Drawing on Ahrne et al.’s (2015) classification, we consider it more useful to distinguish among various organizers according to their structural position and their interests in the markets they are organizing. Some of them are sellers, for which we have provided many examples. In Chapter 6, for instance, we 250

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discussed how sellers of public relations (PR) consultancy and coaching engaged in organization when they tried to open up new markets. Market organization was an intrinsic and necessary part of the innovation process. The case of insurance companies (Chapter 12) is an example of how sellers engaged in the reorganization of existing markets. Organizations such as cartels and business associations—meta-organizations with sellers as their members—were influential organizers for many decades in the market for pipes and tubes (Chapter 16) and were revived in the reorganization of the railway market (Chapter 3). They worked for greater predictability, and in the cartel case, they worked to achieve profitable prices as well. On the international scene, various types of business associations form the majority of what are often called non-governmental organizations (NGOs), and they tend to play a key role in organizing markets—not least within the European Union (Jutterström 2004). We have also provided many examples of buyers as organizers. The founding of cooperative societies described in Chapter 10 was typical of their time in most industrialized countries. And the more contemporary Swedish consumers association has its equivalent in many countries. Buyers used market organization to achieve a favourable mix of price and quality, as in the snow clearance market (Chapter 5), or because they wanted to see greater integrity introduced into the child insurance market (Chapter 12). Some organizations have become buyers involved in market organization through outsourcing. When organizations cease in-house production and decide to buy that product in a market, the organization of that market becomes salient for them. The cases of healthcare (Chapter 4) and eldercare (Chapter 11) demonstrated how the buyers were deeply involved and invested great effort in organizing and reorganizing the new market to match their interests. And buyers’ organization of markets sometimes included their own reorganization, as when a city constructed several buyers for purchasing snow clearance by decentralizing procurement to local units, only to centralize it again later on (Chapter 5). There are organizations other than sellers and buyers that engage in market organization in order to further their economic interests. They act as profiters or ‘profiteers’ of one or several markets and are interested in ways of organizing these markets that helps them to earn, or at least not to lose, money. Early states organized marketplaces in order to tax sellers and buyers (Weber 1981), for example, and contemporary states continue to do so through the use of such mechanisms as value-added taxes. As described in Chapter 14, organizing trade shows may be a way to profiteer from markets. Many profiteers are sellers in other markets—they form part of a side market that is dependent on a focal market (Jutterström 2010, 2014). Classic examples include intermediaries such as competing brokers and auction houses, or 251

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agents that sell their services to sellers or buyers in the markets for houses. They organize the focal market by setting rules for how the exchange shall take place, for example. Intermediaries in the preceding chapters include the new firms described in Chapter 8 that recognized the opportunity to sell the service of choosing among pension funds, or the firms described in Chapter 10 that sold guides for consumer products or even guides for choosing guides. A second kind of profiteer active in market organization is the seller in an existing side market that was never created for organizing another market. A focal market may develop or be reorganized in a way that disturbs other markets. Such a situation triggers sellers in the side markets to try to reorganize the focal market. Chapter 7 demonstrates how the owners of hotels, airports, and railway stations perceived the taxi market to be organized in a way that reduced their own business, and decided to reorganize it. A third kind of profiteer is one that does not initiate market organization, but whose participation is necessary if a market is to be organized in a certain way. The certification firms described in Chapter 9 are examples of organizations that offer services in direct relation to a certain market organization decided mainly by others. Their service is an essential part of monitoring in certain product markets. And accreditation organizations are an essential part of monitoring in the certification market. The demand for certification services was heavily dependent on organizers of other markets having decided that certification or accreditation should be ingredients in that market. But the policies that certifiers and accreditors chose became a significant part of the organization of the focal markets. And the secondary side market gave rise to a tertiary one—thereby leading to greater opportunities for profiteers. A fourth category of market organizers can be called ‘others’, in the sense that Meyer (1996) uses the term. ‘Others’ claim that their interventions in markets are not motivated by their own interest, but that they work in the interests of specific other persons or organizations, or even in the interests of everyone. Even if some of them may finance part of their activities by selling, their main interest is not to make profit but to help others. Many of the organizations described in Chapter 13 can be classified as ‘others’ trying to help people to act as rational consumers. Various thrift societies provide an historical example, and civil society organizations for environmental protection of forests and for social accountability mentioned in Chapter 9 constitute contemporary examples. And such international government organizations as those referred to in Chapter 13—the European Union, the International Monetary Fund, and the European Bank for Reconstruction and Development— also serve as ‘others’. State authorities often act in the role of ‘other’ as well, by representing certain interests that are allegedly in need of protection. In the cases described in Chapters 3 and 8, the authorities were concerned about

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competition and consumers’ conditions, but they may also represent such values as environmental protection or employee health.

Many Organizations The studies in this book reveal a close connection between the organization of markets and formal organizations. The organization of markets involved many organizations, and often implied an increased number of organizations. Almost all market organizers described were formal organizations, and many were meta-organizations: cartels, business associations, and international governmental organizations, for example. The main purpose of some organizations was involvement in market organization; for others, market organization involvement was a side activity or even a temporary activity in response to an accidental problem. Many organizations had long existed with at least partial purposes other than organizing markets. But many of the organizations described were created with the purpose of participating in organizing markets, thus adding to the overall amount of organization and to organizational complexity. Chapter 9 illustrated how handling the problem of trust generated a great number of new organizations, including certifying firms and accreditation organizations, as well as the various meta-organizations of market organizers. Chapter 10 identified a large number of organizations that were established to create and educate consumers over the past hundred years. Other chapters described how business associations, public authorities, cartels, and a trade fair organization were created in order to organize markets. As described in several chapters, the organizing of a market often involved the active creation of—and incentive to create—more selling and buying organizations in that market. The organizers of the railway market described in Chapter 3 founded a substantial number of firms that were expected to sell their services to train operators. By various means, the organizers also tried to encourage the foundation of new competitors, both for the service market and for the market for train operators. Similarly, such buyers as the governments described in Chapters 5, 8, and 10 were anxious to stimulate the creation of new sellers in order to increase supply and competition. Early established selling firms in the coaching market wanted others to establish similar selling firms in order to create a market that should be both well known and legitimate. Organizations involved in market organization tended to represent different ideas about how a certain market should be organized. They often competed as organizers and reacted to the organization that other organizers proposed or had achieved by trying to change the organization to fit their

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purposes. Sometimes they cooperated and built new organization initiatives on an existing organization.

The Use of All Organizational Elements Chapters 3–16 exemplify how all the organizational elements described in the beginning of the book—rules, monitoring, sanctions, membership, and hierarchy—were used in attempts to influence markets. They also exemplify how the organizers tried to influence all components of a market: sellers, buyers, products, competition, transactions, and prices. Rules were used extensively and could be directed to all market components. There were rules for the competence and resources that sellers of train transportation should have, the characteristics that healthcare services and financial products should have and how they should be traded, how buyers of pension funds should behave, how public procurement processes should work, how prices should be set in and outside of cartels, and how producers should control their production processes in order to be certified. Many rules were set in order to stimulate a large supply side to increase competition—in the market for snow clearance, for instance. In many cases, monitoring was used extensively and directed towards the activities of sellers, buyers, and other market stakeholders. Examples included decisions on how to track when, where, and how sellers performed snow clearance services; how hotel firms would monitor sellers in a taxi market; and how insurance companies, in cooperation with public healthcare organizations, would monitor their customers. In some cases, including the market for train transportation, the initial market organization contained elaborate monitoring. In other markets, decisions about increased monitoring came about as a reaction to having experienced unwanted market behaviour. Monitoring was often related to rules, and was an expression of distrust about whether rules would be followed in the absence of monitoring: the monitoring of sellers in the market for eldercare and buyers in the child insurance market represent distinct examples. Monitoring was also achieved through the use of side markets for monitoring organizations, as the certification described in Chapter 9 exemplifies. When sellers tried to avoid rules—in order to manage procurement or to increase profits, for example—a common reaction from the organizers was the introduction of more monitoring, in some cases including new, more technologically advanced forms of monitoring, as described in Chapters 5 and 10. Or more monitoring organizations were created, as in the case of certification and accreditation. Monitoring was also used to collect data on the workings of the market, without comparing the data with rules; the Premium Pension Authority (PPM) 254

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described in Chapter 8 regularly collected a significant amount of data on buyer and seller behaviour. The mapping of buyer behaviour in this case led to attempts to change buyer behaviour, although the buyers had broken no rules. Chapter 11 describes how municipalities monitored sellers of eldercare in order to provide buyers with information to help them choose more rationally. Furthermore, monitoring was used for administrative purposes, as described in Chapter 8, in which transactions were monitored to determine quantity discounts for buyers. Sanctions were used less often than rules and monitoring. A conspicuous example of lack of sanctions was in the market for child insurance, whose new rules included hardly any sanctions for sellers. But PPM could fine financial firms that neglected to report their transactions. And the snow clearance firms described in Chapter 5 as delivering inferior services were obliged to repay part of their commissions and could also lose their contracts. In both these cases, however, sanctions were seldom used, although small and significant violations recurrently occurred. A similar tendency was described in the eldercare market. Sanctions were not only negative. An example of a positive sanction was the tempting prospect of future membership in the European Union that was attached to the market reorganization of the Baltic states, described in Chapter 13. International organizations repeatedly displayed lists of prospective states that were best in class or laggards in reorganizing their markets, thus using both positive and negative sanctions. Although often the case, sanctions were not always decided by buyers or their proponents and directed to sellers. Sellers in the pipe and tube market threatened other sellers with sanctions if they deviated from the cartels. Membership was commonly used. Who gets to act as seller was one of the key decisions that municipalities made when organizing primary healthcare, and PPM decided which sellers and products were allowed into the premium pension market. The central state decided who the buyers were and what resources they had to obtain. Owners of railway stations and airports decided which sellers would be given a fair chance to sell their services, and cartels and trade associations decided which sellers were to be included or excluded. And as described in Chapter 14, some potential buyers were given access to the travelling trade fair, and others were excluded. Sellers that did not follow rules or avoided monitoring could be kicked out of the markets or be faced with worse conditions than other sellers (see e.g. Chapter 10). And sellers of child insurance could exclude buyers who declared false information on their application forms—a buyer behaviour that was also punished by the state. A remarkably large number of the decisions described in this book were binding rather than voluntary; hierarchy was a commonly used element. It was mandatory to be a buyer in the premium pension system. Many healthcare 255

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centres (Chapter 4) must participate in the national diabetes register, and only some taxi firms were allowed to enter the attractive transportation hubs. Sellers in the pipe and tube market excluded foreign sellers from the cartels and thus from the market, and the Swedish state later forced the sellers to register their cartels. The organizers of the travelling trade show (Chapter 14) decided who was invited to explore the products. Hierarchy was far from omnipresent, however. Rules came not only in the form of directives—as mandatory rules. The education of consumers described in Chapters 8 and 10 includes many examples of standards—rules that people could decide whether to comply with or ignore (Brunsson and Jacobsson 2000). And standards were an important part of the ‘new approach’ of certification and accreditation shown in Chapter 9. In summary, there were differences in the use of organization among the cases presented in this book in terms of the organizational elements used in specific situations, the market components addressed, and the combination of elements used to address various market aspects. Although the markets were organized differently, there are similarities as well. First, we find that all the elements of organization were used at some point in the cases, making them examples of ‘complete’ rather than ‘partial’ organization at that point (cf. Ahrne and Brunsson 2011). Second, the degree of organization was extensive. In some of the cases—the markets for train transportation and premium pension funds, for example— the markets seem to have even more organization than many large organizations. And the extensive use of organization did not stop with the focal market. Going from a formal organization to a market solution could split up the earlier operations into several new side markets, as described in Chapter 3, eventually calling for organization to coordinate the many markets with each other. Such a coordinating ‘macro-organization’ was also found in Chapter 9, in which certification firms, accreditation firms, and associations were strongly coordinated around the focal market to make it work. Third, the degree of market organization had a tendency to increase over time. We found that more organization was the standard answer when individual markets were perceived as malfunctioning or failing. This tendency did not always prevail, however. The taxi market changed from extensive to less organization during the 1990s, only to shift back again when problems and criticism escalated.

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effects of market organization and reorganization were difficult to achieve and that the legitimacy of organization could be weak in certain situations. In several cases, market organizers turned to additional instruments. Market organization was often accompanied by the diffusion of information. Many market organizers learnt the disturbing lesson that buyers and sellers deviated from the common assumptions of rational decision making and actorhood. Because a great deal of market organization is built on these assumptions, such deviations threatened the proper functioning of the markets, and attempts were sometimes made to solve this problem through information campaigns. By using more or new forms of information, organizers hoped that the behaviour of buyers and sellers would change to suit the market organization better. Individual consumers were common objects of information efforts. In the market for premium pension funds, the low general interest of buyers to choose and change financial funds was met with several large-scale information campaigns, mainly with disappointing results. Consumer guidance (Chapter 10) also included information texts and campaigns, to the extent that there was finally a perceived need for information about ways to handle all this information in the form of information guides about information guides. Organizers of the market for eldercare (Chapter 11) provided individual consumers with a great deal of information about the quality of other services, but were faced with the dilemma that some market rules significantly interfered with the possibility of providing the information that many consumers requested. The result of information campaigns is even more uncertain than is organization. No wonder some organizers took the opportunity of combining organization with powerful artefacts. Transmitters and booms were used in the taxi market (Chapter 7) in order to allow some taxis to access advantageous physical positions in the marketplace. In the snow clearance market (Chapter 5), global positioning system (GPS) transmitters were used to reinforce the monitoring of seller activities. And information technology was used in some cases to support specific buyer behaviour— in the form of decision-making support models in the eldercare and the premium pension market, for example. In most cases, information and artefacts represented complements to organization; they were used to support the intended function of the market organization. In some situations, however, information and artefacts were seen as substitutes for organization. The many information campaigns used to affect buyer behaviour, as described in Chapters 8, 10, and 11, indicate that organizers perceived organization as difficult or inappropriate to use, at least when the buyers were individuals. A suggestion to force buyers to choose among PPM funds was judged as illegitimate, and information campaigns were used instead. 257

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Processes and Change of Market Organization In the processes of organizing and reorganizing markets described in this book, a great deal happened and many organizations were involved. The processes revealed a strong element of multiplicity, complexity, and dynamism, supporting our argument that the empirical analysis of markets must be oriented to process rather than starting with end states. The present state is the temporary result of previous processes. The organizers met with several demanding difficulties, and the organizing work seemed to be never ending. Unintended consequences of market organization were common. Outcomes of decision making that deviated from expectations imposed substantial problems for market organizers, generally leading them to further reorganizations. In the railway passenger market, organizers created a market with autonomous sellers in order to enhance competition, but the sellers used their autonomy to hinder competitors from entering the market. In the premium pension market, the organizers were surprised by the fact that buyer activity and interest skydived after a successful market launch, forcing them to reorganize and invest in expensive information campaigns. In the real-time computing market, the organization of a trade fair led to industrial espionage. In the snow clearance case, the market organization with many buyers led to unexpected problems of coordination and insufficient buyer capacities, with organizers eventually imposing monopsony instead. The openness of markets was another source of unintended consequences. Some organizers met unexpected and unwanted competition from other organizers, from sellers in other existing markets, or in new markets created with the purpose of organizing the focal market. The taxi market (Chapter 7) and the premium pension market (Chapter 8) are good examples—cases in which newcomers brought in new sellers and new products. These interventions also added to the dynamism and complexity of market organization processes. Decisions are often explicitly challenged, leaving the decision makers faced with suggestions for yet more decisions (see Chapter 2). Active resistance to organization complicated life for the organizers, both during processes of decision making and after decisions were made. In the market for premium pension funds, sellers and their business association were active lobbyists during decision-making processes. In the case of child insurance (Chapter 12), buyers and their advocates questioned the largely seller-organized market intensely, opening up the question for public debate. In other cases, people and organizations did not protest decisions, but simply chose not to comply with them; decisions were avoided. This strategy was used in the study of public procurement of consultant services (Chapter 15). And despite the gradual adoption of stricter competition laws, the pipe and tube industry continued with cartel-like arrangements 258

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(Chapter 16). In the market for eldercare (Chapter 11), public officers advised users what to choose, although they were not allowed to provide such recommendations. The unintended outcomes of decision making due to resistance imposed substantial problems for market organizers, often leading them to further reorganizations. Avoidance is trickier; if undiscovered, it gives no signal that reorganization is necessary. There were also processes of escalation, whereby the organization activities demanded increasingly more resources—more resources than initially expected. Yet the organizers did not stop the process, but continued working along the same lines, merely increasing their efforts (Staw and Ross 1987). The train passenger market and the certification market are two examples of situations in which the expansion of market organization over time was particularly extensive, demanding more and more resources to develop and manage without the organizers giving up their master idea. Almost all organizers studied here were clinging to the same overarching solution, despite the problems: the massive expansion of organization and the many recurrent reorganizations. This outcome of market organization was neither expected nor favoured; nevertheless, there were few signs of abandoning the idea of market by insourcing activities in an existing or new formal organization.

Ideals and Market Organization Many but not all organizers in this book believed in abstract ideals about how markets should be organized in order to work well. Such ideals tended to be difficult to implement in practice, however, or they did not lead to intended results; rather, they contributed to organizers’ complicated situations. As mentioned in Chapter 1, there is a long tradition of using ideals or even ideal types when defining and analysing markets—ideals that often take on substantial normative value. Many organizers built their attempts to organize on such models, at least during certain periods. One ideal that served as inspiration was that of the ‘free’ market. The idea of the ‘free’ market and its benefits relates to 19th-century laissezfaire ideas. These ideas did not in any way preclude organization, but sellers or buyers or perhaps profiteers—not ‘others’—should initiate any organization. In practice, laissez-faire reforms over time led to a substantial degree of organization—not back into the old guilds, but into sellers’ and buyers’ cartels, for example. And new laws on worker and consumer protection implied a certain organization of markets (Polanyi 1957). The organizers discussed in this book who believed in the ‘free’ market expected that once introduced, the market would produce beneficial effects without further organization on their part. Markets were essentially seen as non-problematic, self-adjusting systems. Once a shift from organization to 259

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market or a substantial market reform was completed, markets, it was believed, would take care of themselves. We also found situations with many proponents for organizing markets this way in the public debate—in the pipe and tube market and the premium pension market, for example. The very existence of a market would guarantee healthy competition, decent prices, and quality of the goods and services offered, good chances for customers to choose the products they like, and perhaps even a certain degree of innovation. We have described several organizers that were inspired by this model, the marketization of snow clearance and the so-called ‘deregulation’ of the taxi market being cases in point. Organizers building on the ideal of the ‘free’ market were sometimes able to keep the degree of organization low, but other organizers sometimes filled the void by introducing their own way of organizing, as did firms forming cartels (Chapter 16). In many other situations in the empirical cases, organizers were rather inspired by the idea of the ‘pure’ market: the pursuit for the ‘perfect’ market model by the use of significant organization. This was particularly the case for buyers and ‘others’—some public authorities, for example. Sellers, however, were generally less interested in this ideal, although they could occasionally demand specific ‘distinct rules of the game’. The lesser interest of sellers can perhaps be explained by the main purpose of the ‘pure’ market ideal: to favour buyers’ interests. In contrast to the ‘free’ market ideal, the idea of the ‘pure’ market is more similar to the one of formal organizations: they both reflect the need for significant organizational efforts. Markets should function in a special way: there should be many competing sellers and buyers, information should be transparent and symmetric, there should be no or at least low barriers to entry or exit, products should be comparable, the selling and buying decisions should be made in a rational way, and there should be no or low transaction costs and no binding relationships between the parties. Such markets must be highly organized and organized in specific ways in order to function properly or even ‘perfectly’, as argued long ago by Marshall, Weber, and Samuelson (see Chapter 1). Organization by sellers, buyers, and profiteers is looked upon with suspicion, and one generally imagines a benevolent but powerful ‘other’, such as a state or an exchange manager, to be the organizer. Even organizers who do not believe in current ideals have to pay attention to them. Sellers had fewer problems forming and maintaining cartels when the ideal of ‘free’ markets was dominating the general discourse, and more problems the stronger the ideal of the ‘pure’ market became (Chapter 16). And, arguably, the strength of this ideal more recently made the sellers of coaching services (Chapter 6) organize in a way that facilitated the creation of some competitors. 260

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Learning Processes and Change Polanyi (1957, Part II) describes how the ideal of ‘free’ markets slowly gave way to ideals reflecting the ‘pure’ market in the development of market societies. The same development, although it occurred much faster, could be seen in some of our cases. At first, these markets were often perceived as having significant autonomous capacities and requiring little organization. In the train passenger market and the snow clearance market, for instance, organizers began with relatively little market organization, experienced problems, and commonly reacted by bringing in more organization. Only as various problems emerged in the markets, produced by the organization attempts of sellers or buyers or in other ways, did people see the need for more organization. We found several reluctant market organizers that seemed more forced to organize than willing to organize. Once organizers accepted an expansion of organization, the ‘perfect’ market model offered a blueprint for the attempts. The ideal of the ‘pure’ market significantly affected many organizers—at least at some point. As was described in the chapters on railway transport, snow clearance, pension funds, consumer guidance, eldercare, and public procurement, it involved attempts to create or re-create a multitude of sellers, buyers, and competition—all fundamental aspects of the ‘perfect’ market. The ‘perfect’ market was a model that required a great deal of organization, and it was far from uncomplicated; attempts to follow it led to dilemmas. Organizers of the train passenger market met such a dilemma when the autonomous sellers that they had created used their freedom to establish barriers to entry. In the market for eldercare, the organizers wanted the users to make rational choices, but civil servants were not allowed to provide adequate information, as such information was believed to harm fair competition. The process of going from little to much market organization can be recognized as a consequence of single-loop learning (Argyris and Schön 1978), as described in Chapter 5. Because of the unintended and problematic consequences of little organization, organizers experienced that the more they wanted an individual market to reflect the ‘perfect’ market model, the more market organization they had to develop. Even though many attempts to decrease the gap between the ‘perfect’ ideal and the individual markets failed, the hope for this achievement was persistent in several of the cases, and a driver for further reform. In some cases, all this organization did nothing to destroy the belief in the idea of markets as systems of self-adjusting order, although the realization of this idea was believed to occur in a glorious future rather than in the complicated present. Chapter 8, for example, describes how organizers believed that the extensive organizational phase was basically over when the market took 261

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off. Andersson et al. (2017) reported similar expectations among market organizers; public authorities believed that their organizing efforts were temporal; once done, the markets would function without further organizational interventions from their side. Processes of market organization may also advance to double-loop learning (see Chapter 5). Even if such learning does not lead to the abandonment of the idea that there should be a market, it can lead to a more independent stance towards the ‘perfect’ market model and, consequently, to a wider range of solutions to market problems. With enough problems and significant other experiences, some organizers were willing to abandon the ‘free’ and ‘pure’ ideals for their organizing. Instead they sought more pragmatic solutions to the situations and problems at hand or embraced ideas other than those inherent in mainstream economics. They no longer believed that the ideals were useful for their purposes, but this did not stop them from continuing to organize. All in all, market organization was in flux in the studies presented in this book, and ideals, learning levels, and other factors affected organizers’ decisions. Furthermore, whereas change in several cases implied increased organization, we have also reported on different and even converse transformations within the studied time spans. The taxi market organization decreased in the 1990 reform and the premium pension market was constructed as a bureaucracy already at its initial stage. How market organization is changed is not by any means predestined.

The Complexity of Market Organization One of the themes of this chapter has been the dynamism of market organizing processes, but also the multiplicity and complexity of such processes. Many aspects seem relevant in the analysis of market organization and reorganization, reflecting the complexity. The multiplicity of market organizers and their relationships provide an elemental example. But the complexity does not end there; these studies have illustrated that organization is interrelated with the two other fundamental processes of market order described in the initial chapters of the book: institutions and mutual adaptation. As is the case in formal organizations, these two other ordering processes affect the organization of markets, and they may both be affected by organization. We have illustrated how institutionalized market ideas significantly affected organizers’ decisions, in line with ideas of ‘performativity’: how market ideals influence market organization (e.g. Callon 1998; MacKenzie 2006; MacKenzie et al. 2007). But we have also shown that, conversely, processes and outcomes of market organization could reduce 262

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the belief in widely shared ideas. Similarly, organization is often ineffective because of processes of mutual adaptation, as illustrated in Chapter 15 on public procurement. And the effects of mutual adaptation are a major reason for organization or reorganization, as illustrated in the study of the premium pension market. We come back to the relations among these three ordering processes in the next chapter where we compare markets and formal organizations.

References Ahrne, Göran, Aspers, Patrik, and Brunsson, Nils (2015), The organization of markets. Organization Studies, 36: 7–27. Ahrne, Göran and Brunsson, Nils (2011), Organization outside organizations: The significance of partial organization. Organization, 18: 83–104. Andersson, Catrin, Erlandsson, Magnus, and Sundström, Göran (2017), Marknadsstaten. Om vad den svenska staten gör med marknaderna—och marknaderna med staten. Stockholm: Liber. Argyris, Chris and Schön, Donald A. (1978), Organizational Learning: A Theory of Action Perspective. Reading, MA: Addison-Wesley. Brunsson, Nils and Jacobsson, Bengt (eds) (2000), A World of Standards. Oxford: Oxford University Press. Callon, Michel (1998), The Laws of the Markets. Oxford: Blackwell Publishers. Jutterström, Mats (2004), Att påverka beslut: företag i EUs regelsättande. Dissertation. Stockholm School of Economics. Ekonomiska forskningsinstitutet vid Handelshögskolan i Stockholm (EFI). Jutterström, Mats (2010), Organisationsreformer: marknad och hierarki—exemplet premiepensionsmarknaden. Tvärsnitt, Swedish Research Council, no. 1. Jutterström, Mats (2014), Bimarknader—huvudmarknaders problemlösare? In Jenny Björkman, Björn Fjæstad, and Susanna Alexius (eds), Alla dessa marknader (pp. 75–86). Göteborg: Makadam. MacKenzie, Donald (2006), An Engine, Not a Camera: How Financial Models Shape Markets. Cambridge, MA: MIT Press. MacKenzie, Donald, Munieza, Fabian, and Siu, Lucia (2007), Do Economists Make Markets? On the Performativity of Economics. Princeton, NJ: Princeton University Press. Meyer, John W. (1996), Otherhood: The promulgation and transmission of ideas in the modern organizational environment. In Barbara Czarniawska and Guje Sevón (eds), Translating Organizational Change (pp. 241–52). Berlin: de Gruyter. Meyer, John W. and Bromley, Patricia (2015), Hyper-Organization: Global Organizational Expansion. London: Oxford University Press. Polanyi, Karl (1957), The Great Transformation. Boston, MA: Beacon. Staw, Barry M. and Ross, Jerry (1987), Behavior in escalation situations: Antecedents, prototypes, and solutions. Research in Organizational Behavior, 9: 39–78. Weber, Max (1981), General Economic History. New Brunswick, NJ: Transaction Publishers.

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18 Organizing and Reorganizing Markets and Formal Organizations: A Comparison Nils Brunsson and Mats Jutterström

The distinction between markets and organizations is an old one that has provoked much political debate for at least a hundred years. Some people have celebrated markets as solutions to fundamental social problems; others have placed greater emphasis on the advantages of organization and the negative effects of markets. The recent trends of marketization in many countries have revived this controversy. The tendency for social scientists to be divided into those who study markets and those who study organizations has made empirically based comparisons between the two phenomena less common than one would expect, given the salience of the issue in public debate. The political debate about the pros and cons of markets versus organizations often has strong ideological overtones, in which markets and organizations as ideal types fit well into sweeping arguments. We suggest that a more empirically oriented discussion is more fruitful—one in which people attend to the possibilities and difficulties of organizing both markets and organizations and realize not only the differences, but also the similarities between the two forms. As demonstrated in Chapter 4, the similarities between market and organization may be great enough to make it possible to describe a case of outsourcing as the creation of a market as well as the creation of a new organization. And in Chapter 17 we showed that concepts often used in organization studies—such as unintended consequences, escalation, and double-loop learning—can be applied equally well to markets.

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Markets and Formal Organizations In this final chapter, we use insights gained from all the other chapters to compare the organization and reorganization of markets with the organization and reorganization of formal organizations. What are the similarities and differences in organization between markets (outside formal organizations) and formal organizations? This comparison is of interest from both a theoretical and a practical point of view. It provides a basis for discussing the extent to which existing organization theory can be used for understanding market organization, and the extent to which new theories are needed. And the comparison can introduce additional arguments to the more practically oriented debate on whether one should prefer formal organizations or market solutions in various specific contexts. We compare the extent of organization in markets and formal organizations and who is organizing and who is organized. We also discuss similarities and differences in the incentives for and the effects of organization. We argue that the continued study of the organization of markets is likely to provide a useful contribution to our knowledge about organization in general.

How Much Organization? It is difficult to identify a general difference in the extensiveness of organization between formal organizations and markets. Some organizations are highly organized, but that is true for markets as well, as has been demonstrated in this book. As pointed out in Chapter 17, the markets described in this book are cases in which most or all organizational elements are used—often extensively. Not all aspects of markets and organizations can be organized, however. Buyers and sellers in markets have a fundamental freedom to choose what to sell and what to buy, and in almost all organizations, the members’ ‘zone of indifference’ (Barnard 1938) is not all encompassing; the members do not accept that the organization controls everything they do. Our studies cannot be interpreted to mean that all markets are highly organized, however. There are certainly markets that are less organized than the markets we have studied. And there are organizations with little organization as well—sometimes because of members’ resistance. Many meta-organizations provide a case in point (Ahrne et al. 2016). And sometimes there is little need for organization, because there is little need for coordination or because coordination is achieved by institutions rather than by organization—in organizations governed by strong professions, such as universities, for example.

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Management plays a crucial role in creating order in most formal organizations—in contrast to markets. Managers in organizations have access to a wide variety of management methods when they try to change the way their organization works—methods discussed in the literature on leadership (Bolden et al. 2011), organizational culture (Alvesson 2002), or information (Bloomfield et al. 1997), for example. Managers can act on an ad hoc basis, for instance by supporting or promoting employees, trying to persuade or convince them about organizational goals and ideologies, or giving them more or less information. Market organizers do not usually have access to all these management methods, but must primarily rely on organization. Thus, markets are more likely than most contemporary formal organizations to be like bureaucracies (cf. Chapters 3 and 5). On the other hand, there seems to be a tendency to underestimate organization in markets. As described in Chapter 6, the marketing literature tells a standard story: markets arise without organization—sellers offer their new products, and customers flock to buy them. The cases of coaching and public relations (PR) consulting discussed in Chapter 6 raise some doubts about that image. In order to establish these markets, the sellers used business associations, standards, and certification systems. Chapter 14 describes how organizers had to arrange a trade fair in order to make sellers aware of the possibility of a new market. And the established, relatively mundane markets such as the market for fish or jeans that we have investigated as part of a wider research programme turn out to involve considerable organization. The market for fish in Sweden is organized through restricted membership for sellers; rules for what can be fished and how; and by the monitoring procedures and sanction systems produced by the EU, state governments, several industry associations, consumer organizations, and national and international environmental organizations. Some of these restrictions are reflected in complex labels on fish counters or fish packages (Nyqvist 2009), and the situation does not differ much in the market for jeans (Tyllström and Wreder 2009). The International Organization for Standardization (ISO), the EU, and a large number of environmental organizations set standards for sizes, for the environmental effects of cotton production, and for working conditions in production firms. Producers and importers are members of national and international industrial associations setting codes of conduct. Social aspects of production are monitored by such international organizations as ‘Clean clothes’. Furthermore, all legal markets are embedded in more general forms of organization, such as market laws. On the whole, we question if there are many markets in contemporary society with no significant organization. The expectations of organization seem to differ between organizations and markets, however. A formal organization is expected to have access to all the organizational elements, even when it rarely uses them. Furthermore, 266

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managers of formal organizations should be constantly prepared to adapt their organization because of such situational and often dynamic factors as labour and technology (Burns and Stalker 1961) or strategy (Chandler 1962). And an increased amount of organization is generally assumed and recommended as nascent organizations grow (Greiner 1998). In contrast, there is an expectation that markets will be unorganized, probably because standard definitions and descriptions of markets emphasize freedom—the freedom of market sellers and buyers to choose. Several market organizers started with an image of the ‘free’ market, assuming that the market would function well with almost no organization. And at the beginning of their organizing work, many organizers were cautious not to organize too much. The dream of avoiding organization altogether may exist in relation to organizations as well, as exemplified by the dream of turning the socialist state into a communist state. But arguably, such a radical view is not common. And it is more likely to lead to the avoidance of a formal organization, while remaining a community or social movement, for instance (Enquist 2001; den Hond et al. 2015). In conclusion, the degree of organization varies for both organizations and markets; some markets are more organized than some organizations, and vice versa. The organization of some markets may resemble the organization of some organizations more than they resemble the organization of other markets. A clearer difference between organizations and markets is connected to expectations. But those expectations should not be confused with the existing degree of organization in actual organizations and markets.

Who Organizes? Formal organizations have restrictions for organization. They have constitutions that contain decisions about how to make decisions—decisions that can be made by the organization itself or by external parties. The freedom to formulate its own constitution is a symbol of the autonomy of the state, but in order to register as a public corporation, a firm must accept the fact that the essential parts of its constitution are decided by law. Constitutions typically restrict who can organize; they rule that certain procedures must be followed and that only some aspects of members’ activities can be the objects of organization. Competition among decision makers and decisions are avoided. In a public corporation only the board or top management can make key decisions; they must be reported in a certain way and they cannot interfere with the employees outside their zone of indifference. In democratic states, there are strict rules for the procedures by which decisions can be made and for what constitutes a majority, and there is often a catalogue of citizen freedoms 267

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that cannot be the object of majority decisions. Suggested laws are scrutinized to guarantee that they do not conflict with existing laws. Such restrictions do not apply to markets outside formal organizations. Rather, as the preceding chapters have shown, there are many who try to organize markets; they do not have to coordinate themselves to make common decisions, and their organizing attempts may well compete with each other. And even if some parties, such as state authorities, do not want to organize, other parties, such as business associations, may organize instead (as described in Chapters 7 and 16). Or one organization may prod other parties to reorganize in their way, thus contributing to more organizing and greater instability. Organizations concentrate responsibility (Kühl 2005). Managers bear heavy responsibility for the organization’s operations and results, basically because they are seen as highly influential. They may even be held responsible for things over which they have had no influence or that they did not even know about. Thus critics demanding reorganization always have a target, providing an incentive for management to engage in reorganizing. But it also provides an incentive for others not to engage in organizing, but rather to try to influence the decisions of organizational managers. As long as markets are seen only as the result of mutual adaptation and institutions, responsibility is much more diluted than it is in organizations. All buyers and sellers are responsible for their own actions, but none of them are responsible for the workings of the single market as a whole. It is difficult to identify, clearly and uncontroversially, any individual or organization responsible for the present conditions of a market, and to claim that this person or organization should start to reorganize it. Critics and proponents of change do not have such a clear target for their suggestions as they do in organizations. In times of perceived market failure or other problems, everyone can claim that not they but others are the responsible ones. This diluted responsibility contributes to a situation with many organizers; those wanting change have better trying to act themselves rather than expecting that another party will intervene. All in all, the differences in constitutions and responsibility tend to produce more organizers in markets than in formal organizations. The more organizers, the likelier it is that there will be attempts at reorganization—attempts that often compete or conflict with each other.

Who Is Organized? Most formal organizations organize individuals, and they normally have a clear picture of the members that can be the objects for organization. Market organization is most often directed towards organizations. In the cases we 268

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have described, firms acting as sellers or buyers were the typical targets for organization. They were expected to change in some way; firms should become members of business associations or comply with a standard, for instance. And as we saw in Chapter 7, the organization of markets may involve claims for organizing not only sellers or buyers, but also profiteers and ‘others’. Organization was directed at individuals to some extent, but the main instrument for influencing individuals in markets was information, as illustrated in Chapters 8, 10, and 11. This is no coincidence. Directing organization to organizations rather than to individuals is easier in some respects. Although few markets have as clear a membership as most formal organizations do, choosing which organizations to target is less of a problem than choosing which consumers to target. Organizations are fewer, and producing firms are largely locked into a certain industry, unable to change their production and procurement needs overnight. Thus they are easier to identify, and one can expect some stability in their operations. There are also ideological reasons for organizing organizations rather than individuals. Contemporary markets are regularly legitimated by the idea that it is ultimately the individual consumers and their free choice that govern what is produced and offered in the markets. It is problematic, therefore, to inflict too much organization on consumers. In this respect, markets are more similar to meta-organizations than to individual-based organizations. Organizers and the organized are both organizations. Meta-organizations are difficult to organize, however (Jutterström 2004; Ahrne and Brunsson 2005, 2008; Ahrne et al. 2016), because their members must demonstrate the high degree of autonomy that is part of the conception of a formal organization. The case of the snow clearance market in Chapter 5 illustrates the ease with which organizations can organize via a market relationship—more easily than within an organization. It is highly unlikely that a meta-organization would have introduced the kind of obtrusive monitoring of which the sellers became the object. And it would probably have met with substantial resistance in any contemporary Swedish firm if it were not presented as a requirement by key outsiders.

Ideals and Practice Insofar as decisions involve descriptions of future desirable states of affairs, their contents are controlled by norms of what we can say and want. Thus organization cannot have just any content—at least not if it is to be accepted by a larger group. It must be consistent with what is considered right and true. Ideals are important for organizers. The ideal of the ‘true’ organization is a significant incentive and content of reorganizations of formal organizations (Brunsson 2009). A true organization 269

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is an organization with a clear purpose and clear boundaries, coordinated and properly controlled, and containing rational procedures (Meyer and Jepperson 2000; Brunsson and Sahlin-Andersson 2000). This ideal can be used for organizing an organization for the first time, but it is also an incentive and an inspiring source for reorganizations. Deeper insight into the ways an individual organization works tends to reveal that it departs from this ideal. It is then easy to argue for and convince others that the organization must be reorganized to become more like the ideal. Many reforms in organizations have the purpose of finally creating a ‘true’ organization, reinstalling or reinforcing the identity, hierarchy, and rationality of the organization. Organizers want to clarify objectives and business concepts, introduce better coordination and control systems, or devise more efficient planning and evaluation methods. Similarly, as described in Chapter 17, we found that many market organizers were inspired by ideals—in this case, what we have called the ‘free’, the ‘pure’ and the ‘perfect’ market. And when the markets did not work that way, they often tried to organize them in a way that they hoped would lead to the ‘perfect’ market being reached or at least approached. In other words: although the exact purpose and content of organizational efforts differ when it comes to the internal organizing of organizations and organizing markets, one common mechanism behind them is similar: they are both influenced by ideal types. And there are also similarities in what happens in the next stage. In organizations, attempts to install the true organization tend to reveal many practical problems. What seemed to be simple principles at the outset turn out to be difficult and complicated to translate into practice. We have seen a similar tendency in the organization of markets in situations in which the ideal of the free market had to be abandoned and when the ‘perfect’ market ideal turned out to be difficult to achieve, leaving room for more pragmatic solutions and other ideas.

The Supply of Problems and Solutions Reorganizations in formal organizations are dependent on the supply of problems and solutions (cf. Cohen et al. 1972; Kingdon 1984; Brunsson 1989). The perception of adequate problems and solutions not only influences people’s willingness to act as reorganizers. Reorganizers also need arguments for why people should accept the nuisance and work involved in reorganization attempts. Such arguments refer to problems connected with the existing order and solutions that seem to solve those problems. Problems are not a scarce resource in either organizations or markets. The fact that practice does not correspond to what is a ‘true’ organization or ‘perfect’ market provides a problem, and the ideal model provides an attractive 270

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solution. Other problems can be obvious for at least some organization members and some market actors who do not think that their personal interests or the interests created by their roles are satisfied. Problems can also be generated from observers. Organizations and markets do not exist in a vacuum. Most organizations and markets need legitimacy; they must function in a manner perceived to be reasonable, fair, and efficient in order to be accepted by people who are not directly involved. Their impact on others should not be adverse and should ideally be favourable. As exemplified and discussed in this book, there are many such external demands in markets and a great many individuals and organizations making demands. Just as many well-known organizations, many markets are controversial because they fulfil certain values but challenge others and because there are different views about how to handle these value conflicts (Alexius and Tamm Hallström 2014). There is a sea of ‘others’, and they work across borders—not just nationally. At least for better-known markets, critics of how they work are legion, and their views are diffused in society through the mass media. The critics of markets may engage actively in the organization of markets, but if they don’t, they provide a flow of problems that other organizers can use as justifications for reorganizations. The number of solutions seems to differ among organizations and markets, however. We believe we can see more solutions in the organization field than in the market field and a larger number of people and organizations developing and selling such solutions. The organization field has seen the development of a large and growing industry of management gurus and management consultants who are constantly hatching seemingly new solutions to organizational problems— including new ideas for how organizations should be organized. These recipes are presented in an endless number of management books, and they provide the basis for extensive management consulting (Furusten and Werr 2005; Røvik 2008). Many of the recipes involve ideas for extensive reorganizations, such as moves to create a completely new organizational structure, or introduce new processes and ideologies. Some of the recipes become fashions that are difficult to resist for managers of large organizations (Abrahamson 1996). When a recipe such as management by objectives, quality systems, timebased management, lean production, or sustainability is in vogue, organizations are expected to adopt it—and those that do not have a difficult time explaining why (Jutterström 2017). All these recipes constitute a force for reorganization, and major reorganizations are routine in many large organizations (Brunsson 2009). We have observed fewer consultants, gurus, and books with various fancy recipes suggesting reorganization of single markets. What we have observed, rather, is one relatively consistent set of ideas: scientific ideas of the ‘perfect’ 271

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market. This may have to do with responsibility concentration—that those responsible for large organizations are easily recognized and are therefore easy targets for recipes and fashions. Or the lack of theory for market organization may play a role. Sellers of market organization recipes face the hurdle of explaining why markets should even be organized. And while few of the creators of management recipes for formal organizations are active scholars, and their recipes seldom refer to scientific research, many market advisers seem to have strong ties to academia and the discipline of economics (cf. Chapter 15).

Effects of Organization We have defined organization as decision. Decisions are attempts, and their effect is uncertain. As we explained in Chapter 17, the organization of markets may have limited effects or unintended effects. The same is true for the organization of formal organizations. The members of organizations can resist attempts at organization; they can avoid them and they may transform them into something other than the organizers intended. Given that organization is an order that is easily challenged and criticized (see Chapter 2)—and together with elements of learning, hope, and contextual change—a dynamic is created whereby reorganizations are likely to occur. We cannot see any fundamental differences in these respects between the markets we studied and what is known from studies of formal organizations. The larger environment has a significant effect on the organization of both formal organizations and markets. Concepts such as escalation and double-loop learning have been formed mainly as a result of studies of processes within formal organizations, but as we have demonstrated in this book they are useful for analysing market organization as well. On the other hand, the management team of a formal organization has the legitimacy to organize its organization, whereas legitimacy for anyone organizing markets outside formal organizations is unclear and more easily contested. The legitimacy of organization in general can be questioned by referring to the free market ideal. And, as discussed, there may be competing organizers. Other things being equal, these factors are likely to reduce the ability of market organizers to succeed.

Similarities and Differences In summary, the conditions for organization and reorganization of markets and organizations are both similar and different. There are strong similarities in how organization takes place in practice. In organizations and markets there is an ample supply of problems that both form and drive reorganizations. The 272

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dynamics of market organization are similar to the dynamics of organization in formal organizations. In both forms, the effects of organization are uncertain, organization is met with both avoidance and resistance, and some effects are unintended. Organization tends to create new problems, often leading to further reorganizations. Organization is often driven by the urge to make markets or organizations work in accordance with ideal types. And these ideal types are equally difficult to realize in practice. On the other hand, most differences between the organization and reorganization of markets and organizations seem to be connected to differences in ideas and expectations about these forms. Although ideal types inspired organizational work in both cases, these ideal types were different, and differences in ideas had a number of interrelated effects. First, whereas organizations have restrictive constitutions, the organization of markets is relatively unrestricted. This makes it more difficult to predict who will act as an organizer and makes it more likely that there will be competition among organizers. Second, while organizations concentrate responsibility, the responsibility for markets is more ambiguous and dispersed. Third, the legitimacy of organization is weaker in the case of markets than in organizations. And fourth, there are significantly fewer general concepts and ideas for organizing markets than there are for organizing organizations. Given that most of the differences are connected to differences in the way markets and organizations are perceived, what happens if markets become perceived as organized and are expected to be organized, in line with the arguments provided in this book? Would that perception lead, over time, to a more concentrated responsibility, thus creating greater similarity with formal organizations? An active industry association may come to be seen as having a substantial degree of responsibility for the markets in which its members are involved, for instance. And with increased attention to the organizational aspect of markets more generally, perhaps general conceptions of markets would slowly change somewhat and become more like general ideas about formal organizations: increasing the legitimacy of organization, concentrating responsibility, and even creating a demand for effective, restrictive constitutions. Will markets outside formal organizations be seen in the same way as markets within organizations, such as exchanges and internal markets? And will we see a massive expansion of market organizing consultants, gurus, and books on the subject of market organization, perhaps leading to fashions, due to ever-changing popular ideas about how to organize markets?

Research on Market Organization Even if that does not happen, we do not believe that the differences in the organization of markets and of organizations are so radical that they need 273

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different concepts. We hope to have demonstrated that in the chapters of this book, but we believe there is much more to do: posing similar questions for markets and organizations and using concepts from organization theory when studying markets seems to be highly promising. Studying the organization of markets is an addition to rather than a replacement of the study of mutual adaptation and institutions, which are at the forefront of economics and economic sociology. Compared with mutual adaptation, it adds the striving for a collective order that is typical not only for formal organizations, but also for markets. Compared with institutions, the concept of organization reflects an order that is less stable and describes attempts—not only results, not only successes, but also failures. How organization is related to the phenomena of institution and mutual adaptation is a crucial subject for research on both markets and organizations. As for markets, we have given several examples in this book but there is obviously more to be done. One example concerns processes of institutionalization. How and why is organization sometimes turned into institution? And when do processes and outcomes of organization lead to the deinstitutionalization of established ideals? Results of mutual adaptation often create an incentive for organizing and reorganizing markets, while complicating the effects of organization. Studies of organization, institution, and mutual adaptation in markets inform each other, just as they do in formal organizations. The fact that markets are organized does not make the distinction between markets and formal organizations irrelevant. We agree with Marshall (1920), Coase (1937), and many others that these are two different social forms dominating what is often referred to as the economy. Organization rarely means that a market will be eliminated. On the contrary, we have demonstrated that organization is often necessary to bring about a market or to change an existing market. The purpose of organization is often to simplify market exchange. Yet the concept of market organization points to certain similarities between markets and organizations that are likely to affect our understanding of both. It can help in the analysis of the central question in transaction cost theory, for example: whether a firm will buy a good in a market or incorporate its production in its own organization (Williamson 1975). Incorporation, or insourcing, is just one of many ways of organizing. To diminish its transaction costs, a firm may instead, individually or with others, engage in market organization. The engagement of some companies in standardization work and their demands for certification of their suppliers, for example, can be partly understood as attempts to influence their transaction costs. The same is true of attempts to create markets with long-term relationships between buyers and sellers, as is the case in some situations of public procurement for example (Chapter 15). As demonstrated in this book, these organizational 274

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activities may—just like insourcing—be more or less successful. And as demonstrated, particularly in Chapter 11 on eldercare, neither markets nor formal organizations can always provide satisfying solutions. But we believe that a discussion about the benefits and costs of market versus organization solutions would gain from avoiding describing these forms as ideal types. We think it is more useful to treat markets and organizations as empirical phenomena as we have done here, more or less organized, and to treat people’s belief in ideal types as an important empirical phenomenon, with complex consequences. In order to analyse these phenomena, we need detailed concepts that describe what is going on, and we should not merely assume that processes in markets and organizations always differ. Given the similarities between organizing markets and formal organizations, there seems to be significant potential in further exploring the use of organizational concepts and theories in the analysis of markets. We believe that the continued study of market organization could also add to the general field of organizational studies in an interesting way. It highlights some aspects of organization that tend to be taken for granted in organization studies because they are standard features of almost all formal organizations. Examples include the existence of a constitution, concentrated legitimacy, and responsibility. Studies of markets illustrate what happens to organization when such elements are lacking. Furthermore, market organization constitutes just one example of organization that takes place outside and among organizations (Ahrne and Brunsson 2011). As Meyer and Bromley have argued in their book on ‘hyper-organization’ (2015, 152): ‘Faced with any problematic situations, the modern impulse is to create more organizational structures.’ Yet there may be definite limits to how much organization can be achieved. The questions we have posed in this book about the organization and reorganization of markets are relevant to other instances of organization as well. The continued study of the organization of markets can provide clues to the issues concerning the roots, effects, and limits of organization in general.

References Abrahamson, Eric (1996), Management fashion. Academy of Management Review, 21: 254–85. Ahrne, Göran and Brunsson, Nils (2005), Organizations and meta-organizations. Scandinavian Journal of Management, 21: 429–49. Ahrne, Göran and Brunsson, Nils (2008), Meta-Organizations. Cheltenham: Edward Elgar. Ahrne, Göran and Brunsson, Nils (2011), Organization outside organizations: The significance of partial organization. Organization, 18: 83–104.

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Nils Brunsson and Mats Jutterström Ahrne, Göran, Brunsson, Nils, and Kerwer, Dieter (2016), The paradox of organizing states. Journal of International Organizations Studies, 7(1): 5–24. Alexius, Susanna and Tamm Hallström, Kristina (eds) (2014), Configuring Value Conflicts in Markets. Cheltenham: Edward Elgar. Alvesson, Mats (2002), Understanding Organizational Culture. London: SAGE. Barnard, Chester (1938), The Functions of the Executive. Cambridge, MA: Harvard University Press. Bloomfield, Brian P., Coombs, Rod, Knights, David, and Littler, David (eds) (1997), Information Technology and Organizations: Strategies, Networks, and Integration. Oxford: Oxford University Press. Bolden, Richard, Hawkins, Beverly, Gosling, Jonathan, and Taylor, Scott (eds) (2011), Exploring Leadership: Individual, Organizational, and Societal Perspectives. Oxford: Oxford University Press. Brunsson, Nils (1989), Administrative reforms as routines. Scandinavian Journal of Management, 5(3): 219–28. (Republished in the same journal 2006.) Brunsson, Nils (2009), Reform as Routine: Organizational Change and Stability in the Modern World. Oxford: Oxford University Press. Brunsson, Nils and Sahlin-Andersson, Kerstin (2000), Constructing organizations: The example of public sector reform. Organization Studies, 21: 721–46. Burns, Tom and Stalker, George M. (1961), The Management of Innovation. London: Tavistock. Chandler, Alfred D. (1962), Strategy and Structure: Chapters in the History of the Industrial Enterprise. New York: Anchor Books. Coase, Ronald (1937), The nature of the firm. Economica. Blackwell Publishing, 4(16): 386–405. Cohen, Michael D., March, James G., and Olsen, Johan P. (1972), A garbage can model of organizational choice. Administrative Science Quarterly, 17: 1–25. Enquist, P. O. (2001), Lewis resa. Stockholm: Norstedts. Furusten, S. and Werr, A. (eds) (2005), Dealing with Confidence. Copenhagen: CBS Press. Greiner, Larry E. (1998), Evolution and revolution as organizations grow. Harvard Business Review, 76(3): 55–68. den Hond, F., de Backer, F., and Smith, N. (2015), Social movements and organizational analysis. In D. Della Porta and M. Diani (eds), The Oxford Handbook of Social Movements (pp. 291–305). Oxford: Oxford University Press. Jutterström, Mats (2004), Att påverka beslut: företag i EUs regelsättande. Dissertation. Stockholm School of Economics. Ekonomiska forskningsinstitutet vid Handelshögskolan i Stockholm (EFI). Jutterström, Mats (2017), Sustainability: A popular management idea. In Markus Kallifatides and Lin Lerpold (eds), Sustainable Development and Business. Stockholm: Stockholm School of Economics Institute for Research (SIR). Kingdon, John W. (1984), Agendas, Alternatives, and Public Policies. Boston, MA: Little, Brown and Co. Kühl, S. (2005), Ganz normale Organisationen. Organisationssoziologische Interpretationen simulierter Brutalitäten. Zeitschrift für Soziologie, 14: 90–111.

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Organizing and Reorganizing Markets and Organizations Marshall, Alfred (1920), Industry and Trade: A Study of Industrial Technique and Business Organization; of Their Influences on the Conditions of Various Classes and Nations. London: Macmillan. Meyer, John W. and Bromley, Patricia (2015), Hyper-Organization: Global Organizational Expansion. London: Oxford University Press. Meyer, John and Jepperson, Ronald (2000), The ‘actors’ of modern society: The cultural construction of social agency. Sociological Theory, 18(1): 100–20. Nyqvist, Anette (2009), Sinande naturresurs och politisk handelsvara—en studie av aktörerna kring torsk. Score report 2009:11. Stockholm: Stockholm Centre for Organizational Research. Powell, Walter W. (1990), Neither market nor hierarchy: Network forms of organization. Research in Organizational Behavior, 12: 295–336. Røvik, Kjell Arne (2008), Managementsamhället: Trender och idéer på 2000-talet. Övers. S. Andersson. Malmö: Liber. Tyllström, Anna and Wreder, Malin (2009), Jeans, blå byxor och drömmar i denim. En studie av aktörer på jeansmarknaden och skapandet av symbolvärden. Score report 2009:8. Stockholm: Stockholm Centre for Organizational Research. Walsh, K. (1995), Public Services and Market Mechanisms. Basingstoke: Macmillan Press. Williamson, O. E. (1991), Comparative economic organization: The analysis of discrete structural alternatives. Administrative Science Quarterly, 36(2): 269–96. Williamson, Oliver (1975), Markets and Hierarchies. New York: Free Press.

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Index Note: Page numbers in italic refer to illustrations. accreditation 23, 138, 140–1, 144, 252 Accreditation Services International (ASI) 145 Act on Competition (Sweden) 241 Act for Public Procurement (APP) (Sweden) 221–30 actorhood 131, 257 adhocracy 75–6 ambiguity-intensive organizations 98 appellations 23 Argentina 205 artefacts 256–7 asymmetric information conclusions 195–6 introduction 181–2 reaching the customer 182–4, 183 n. 1 reorganization 192–5 retrieving of 184, 186–92, 187 n. 3 avoidance of market organization 227–30, 259, 267, 273 Baltic states 13, 199, 202–6, 255 Banverket (Swedish Rail Administration) 34 barriers to market entry 26, 37, 71, 76, 222, 238, 260–1 boycotts 27, 236 branding 86, 97, 163, 212 Braudel, Fernand 211 business associations 116, 251 Business Freedom Council 240, 244–6 business-to-business markets (B2B) 90–1, 94–5, 98 business-to-individual markets (B2I) 90 buyers and cartels 259 and the child insurance market 254 creating market components 83 differing from users 94 and eldercare 251 and handling opposing market logics 221, 223–30 and monitoring 254 as organizers 210–19, 251 and PPM 255 rational 52, 130–1, 257 and reorganization 119–24 targets for organization 269 ‘buying centre’ perspective 59

capitalism 14, 183, 199 cartel law, the 246 cartels and buyers 259 epilogue 247 introduction 232–3 labour market 25 period of 233–5 and the pipe and tube market 256, 258–60 and railways 255 and sellers 251, 259–60 state reaction and resistance 235–40 wholesalers’ responses 240–7, 241 n. 7 centralization 75–6 certification 23–6, 86, 88, 92–4, 97, 138–41, 252, 259 Chamberlin, Edward 212 child accident benefit scheme 183 ‘Clean clothes’ (organization) 266 coaching services 85–8, 90–8, 253, 266 Coase, Ronald 33, 59–60, 202, 274 Commerce College Monopoly Investigation Bureau 236 Commerce College (Sweden) 236 Committee for Public Procurement (NOU) (Sweden) 222 communication consultants see PR consultancy competition buying from outside suppliers 21 and markets 5 markets defined by 84 and public assets 222 and trade shows 217 tubes and pipes in Sweden 234–5, 258–9 yardstick 32 Competition Authority 109–11 Competition Law 1953 (Sweden) 247 complementary markets 129 computing industry 210, 213, 258 consumers education of 256 guidance 160–1 influencing markets via 13 Meta guidance 161–4 objects of information efforts 257 and primary healthcare 52–3, 59

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Index consumers (cont.) shaping of 153–8 use of standards and monitoring to shape 158–60 Consumer Agency (see Swedish Consumer Agency) Consumers International 162 Consumers’ Ombudsman (KO) 161–2 contextual dynamism 132 cooperative societies 155, 157–8, 160, 163, 241, 251 county councils 51–2, 58, 156 decision-making support models 122, 161, 257 deinstitutionalization 274 Denmark 205 deregulation 33, 37, 90, 102–4, 111–12, 260 deregulation reform 102 dilemmas in organizing markets 86–93, 96–8, 261 double-loop learning 78–9, 262, 272 eco-labelling 22, 163 Economic and Monetary Union (EMU) 205 eldercare and buyers 251 decision-making support models in 257 information about other services 257, 259 introduction 167–8 marketization of 168–72 organizing information flows 172–7 provision of satisfying solutions 275–9 results of organization 177–9 and sellers 254, 261 emergent technology markets 212–13 employers’ associations 22 escalation 259, 264, 272 Estonia 205 European Bank for Reconstruction and Development (EBRD) 200–2, 206 European Commission (EC) 36, 142, 162 European Committee for Standardization (CEN) 140 European cooperation for Accreditation (EA) 141–3 European Union (EU) and the Baltic states 255 and business associations 251 competition law in 232–3 and macro-organizations 137–50 monitoring procedures and sanction systems 266 organizing the inner market 221 transforming Eastern Europe 199–200, 205–6, 208 exchanges 18 exclusive contracts 236

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experience-based learning introduction 64–5 market organization change 75–80, 77 particular market failure 65 snow clearance market 66–75, 69 n. 3, 76, 255, 257, 259, 269 Fairtrade (FLO) 137, 161 Farmer’s Society 155 financial markets 60, 119, 123, 125, 203–4, 206 Financial Supervisory Authority 190, 192 Finland 48 Forest Stewardship Council (FSC) 137, 145, 161 France 130 franchising 56 free markets 259–60, 261, 270 Freedom of Trade and Industry Board 238 frequency of market reorganization 132–3 fund-rating system 122 geographical information systems (GIS) 74 Germany 140–1 global positioning systems (GPS) 74–6, 257 globalization 147 Good Environmental Choice 149 Great Britain see United Kingdom guilds admittance as a seller 21 of shoemakers 22 healthcare 84, 251 hierarchy 24–5, 41, 255–6 Housewives’ Committee 159–60 ‘hybrids’ 5 hyper-organization 275 ideals/ideal types 42, 112, 259–62, 269, 270 illegitimacy discounts 87, 98 individualism 11 individual-to-business markets (I2B) 91, 94–5, 98 individual-to-individual markets (I2I) 95 information, as support for organization 156–7 insourcing 274 institutionalization 274 institutions 8, 26, 77, 132, 213, 262, 265, 274 insurance buyers in the child market 254 child 182–4, 183 n. 1, 185, 186–92, 187 n. 3, 255 child reorganization 192–5 introduction 181–2 and reorganization of existing markets 251 Insurance Contracts Act 195 Insurance Supervisory Authority 183 intermediaries 136–7

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Index International Accreditation Forum (IAF) 143–4 international meta-organization Alliance (ISEAL) 145–6 International Monetary Fund (IMF) 200, 204–6 International Organic Accreditation Service (IOAS) 145–6 International Organization for Standardization (ISO) 25, 137 international organizations (IOs) introduction 199–200, 199 n. 1 reforming 206–8 rescuing markets: financial crisis 204–6 transition to market economy 200–4 ISEAL Alliance macro-organization 150 Knight, F. 27 Kock, Karin 236–7 Labels 163 laissez-faire 259 Lex Mercatoria 24 liberalization 202–3 lobbying 41, 86, 89, 90, 128, 258 long-term relationships in markets 68, 147, 225, 229, 274 Luhmann, N. 147 macro-organizations 137–50, 256 management consultancy 85 management system standard (ISO 9001) 140 market boundaries 20, 88, 116–17 market bureaucracy 12, 33, 43, 77–8, 262 market concentration 65, 68, 78, 119 market economies 5 market failure 65, 67–9, 78, 102, 126 market organization change 64, 75–80, 129, 262, 272 marketplace 108, 124, 211, 217–19 market solutions 1, 256, 259, 262, 264, 270–1 Marshall, Alfred 2, 17, 260, 274 mechanisms of hope in organizing markets 132, 272 membership 21–2, 117, 255, 266, 269 meta-organizations 141–4, 207, 251, 265, 269 Meyer, John W. 252, 275 Mill, John Stuart 130 Ministry of Transport (Sweden) 102 Mises, Ludwig v. 10 monitoring 23–6, 206–7, 254–5 monopoly 26, 32, 33, 42–3, 58, 84, 96, 144, 148 Monopoly Investigation Bureau (Sweden) 236 Monopsony 69, 258 multiplicity all organizational elements 254–7 complexity of market organization 262–3 introduction 249–50

organizers and others 250–4 processes/change of market organization 258–62 mutual adaptation 7–8, 40, 249, 262–3, 274 the Netherlands 138, 140–1 New Approach (NA) accreditation market 140–2 avoiding the trust spiral 148–50 case of 137–9 certification market 139–40, 256 macro-organizations 144–6 meta-organizations 141–3, 144 monitoring the producers 139 solving the consumer’s problem 150 trust spiral 146–8 New Public Management (NPM) 33, 46–7, 66 non-governmental organizations (NGOs) 23, 251 Norway 72, 163, 205 open system 116–18, 133, 258 organization concept of 18 directing to organizations 268–9 and markets 8–12, 17–30, 60, 256–61, 265–75 processes of 8 and restrictions 267 and sanctions 24 ‘Others’ 252 Pacific Accreditation Cooperation (PAC) 143 perfect markets 130, 132, 167–9, 177, 223, 260, 270–2 performativity 18, 78, 79, 132, 262 pharmaceuticals 22 Poland 236 Polanyi, K. 17, 261 Porter, Michael E. 71 PPM pilot (PPM-Lotsen) 122 PR consultancy 86, 88–98, 266 Premium Pension Authority (PPM) 118–32, 118 n. 2, 254–7 premium pension market markets as open systems 116, 118–20, 122–5, 127–30, 132 multiplicity, complexity 254–8, 260, 263 price differentiation 236, 247 primary healthcare and consumers 52–3, 59 as a consumer market 51–5, 55 data collected 47 as a formal organization 55–8 introduction 46–7 market and/or organization 58–61 organizing a market for 48–51

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Index privatization 1, 202–3 processes of escalation 259 procurement 14, 32, 34, 59, 69, 71, 228 Professional Body of Commercial Experts (Sweden) 236 professional services 85 profiteers 251–2 Public Relations consultancy 91 public information see PR consultancy public procurement act of 221–2 avoidance as a strategy 230 framework agreements 228–9 management consultancy 226–8 market organization 222–4 seller specification 229 splitting assignments 230, 230 n. 2 types of markets 224–6, 261 public schools 156 pure bureaucracy 77–8 pure markets 260–1 quasi-markets 5, 46, 59–60 quasi-organizations 59–60 railway markets and cartels 255 conclusions 42–3 introduction 32–3 managing competition 38–41 and sellers 251, 253, 258–9, 261 in Sweden 33–5, 36–8 Train Operators’ Organization 41–2 Rainforest Alliance 161 reorganization conclusions 270, 272 contextual causes of 128–33 a financial market 118 introduction 115–18 organizing buyers 119–24 organizing sellers 124–8 resistance 125, 233, 235, 240, 258–9 rules 22–3, 254 Samuelson, P. 17, 260 sanctions 24 negative 19–20, 109, 255 positive 177 self-regulation 195 sellers and cartels 251, 259–60 and eldercare 254, 261 and market logics 230 a means of strengthening 21 and monitoring 254 and organising market places 216–19 and perfect markets 260

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in the pipe and tube market 255–6 and PPM 255 and profiteers 251 of public relations 251 rational decision making and actorhood 257 and reorganization 124–8 in side markets 252 targets for organization 269 and trade associations 21 sellers markets conclusions 96–9 creating 93–5 creating buyers 89–92 creating components 83–6 dilemmas in 86–9 introduction 82–3 managing exchange 95–6 motivating 92–3 side markets 35, 42, 109, 129–30, 252, 254, 256 Simmel, Georg 217 Simon, Herbert 7 single market 129, 138, 268, 271 single-loop learning 78–9, 261 Smith, Adam 7 snow clearance market introduction 11–12 and experience-based learning 64 organisation and reorganisation 66–76, 269 multiplicity and complexity 251, 254–5, 257–8, 260–1 Social Accountability International (SAI) 137 Social Accountability International Accreditation Services (SAAS) 145 Social Services Act (2001) 169, 172 Society for Nature Conservation 163 spying 217 Standard & Poor’s 23, 122 standards 22–3, 26, 274 Statens Järnvägar (SJ) (Swedish State Railways) 33–4, 37–8, 42, 106 stock exchanges 17, 20 Stockholm Centralplan square 111 Stockholm District Court Stockholm Entreprenad (SEAB) 66–73 Stockholm Municipality 64–70, 64 n. 1, 69 n. 3, 72–5 Stockholm Traffic Administration 65, 71–5 strawberry market 130 structural reforms 205 ‘supermarket state’ 46 sub-contractor 66, 70, 74 substitute for market organization 257 support for market organization 256–7 Sweden and the Baltic States 204–6 cartels in 232–48, 256 child insurance in 182–94

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Index coaching services 86 competition in tubes and pipes 234–5, 258–9 efforts at shaping consumers 154–8 eldercare system in 167–79 pension funds in 120, 124 PR industries in 90, 92 primary healthcare in 47–61 product safety in 148 and public procurement 222–3, 225, 229, 230 n. 2 public relations services in 83 railway activities in 32–43 savings banks in 155–6 snow clearance in 64, 66, 261 state-run accreditation in 138, 140–1 taxi market in 101–12 Swedish Association of Road Transport Companies 68 Swedish Consumer Agency 119, 160–3, 190–1 Swedish Investment Fund Association (Fondbolagens förening) 125 Swedish Society for Nature Conservation (SSNC) 149 Swedish Society of Pipe Wholesalers 235 Switzerland 149–50 Taxi Association (Sweden) 102–3 taxi services 13, 21, 252, 254, 256, 260, 262 technology, as support for market organization 257 Thrift Societies 155, 157 timber measurement 23 trade associations 21–3, 25

trade shows and competition 217 conclusions 218–19 history of 211–13 introductions 210–11 travelling 213–18, 256 Train Operators (TO) 41–2 transaction cost theory 2–3, 274 Transition Report (EBRD) 200–1 Transport Workers’ Union (Sweden) 103–4, 111 UK Accreditation Service (UKAS) 146 unintended consequences 258, 264 United Kingdom and HCCs 48 leaving the EU 208 outsourcing railway activities 32 service economy 82 state-run accreditation in 138, 140–1 United States 54, 82, 235 unorthodox bureaucracy 77 unorthodox market organization 77, 79 unrealistic institutionalized ideas 132 value-added taxes 251 voucher markets 48 Walras, L. 17 Weber, M. 17, 22, 42, 211, 260 Williamson, Oliver 2, 59, 65 World Accreditation Day 143–4 World Bank 200, 205 World Trade Organization (WTO) 221

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