Regulation as a Competitive Factor: Who Benefits from New Obligations

Why regulation never has a neutral effect

When a new obligation arrives, whether e-invoicing, a supply chain questionnaire, accessibility, or AI labeling, many owners first react with annoyance at the effort. That is understandable. For a business's strategy, however, another question matters more: how does this obligation change the relationship with competitors? A rule that affects everyone equally affects them equally in euros, but very differently as a percentage of revenue.

This article therefore asks: Who benefits from new obligations in competition, and who is harmed? To answer it, we first clarify the terms and the thinking model of raising rivals' costs, look at what studies show about the effects of regulation on market structures, weigh two readings, and finally derive a check that helps an owner classify new obligations strategically.

Compliance costs: fixed, variable, and unevenly distributed

Compliance costs are all costs a business incurs by complying with a regulation: working time, software, advice, training, documentation. For competition, the distinction between two types is important. Fixed compliance costs arise regardless of size, such as setting up a procedure or reading a new rule. Variable compliance costs grow with the business, such as the effort per invoice or per supplier.

The larger the fixed share, the more an obligation favors large companies. They spread the costs over more revenue and often already have specialist departments for legal, IT, and purchasing. A worked example makes this visible.

At a return on sales of 5 percent, such an obligation eats up two fifths of profit at the smallest business in the example and less than one hundredth at the largest. The figures from the KfW SME Panel show that this is not theory: according to KfW, Germany's state development bank, complying with regulations costs SMEs around 61 billion euros a year, about 7 percent of working time or 32 hours a month per company, and small businesses are hit hardest relative to their size. Bureaucracy in the Mittelstand describes the types of bureaucracy costs and what is changing politically.

The thinking model: raising rivals' costs

With the theory of raising rivals' costs, competition economics describes a strategy that seems paradoxical at first glance. A company can benefit from costs rising across the whole market if they rise more for its competitors than for itself. It does not need to become more efficient; it is enough that the others lose relatively more.

Hviid and Olczak (2016) show in a formal model that this applies particularly to fixed costs. A well-placed company can benefit from higher fixed costs, for example through additional regulation, lengthy litigation, or more expensive essential inputs, even if its own fixed costs rise as much or more and even if it is less efficient. The reason: when fixed costs rise, the weakest providers exit, and those remaining hold a larger share of the market. Because of the harm to customers, the authors consider this a matter for competition and regulatory authorities.

McWilliams, Van Fleet, and Cory (2002) place the same pattern in the resource-based view of strategy. Companies can use political strategies to block substitutes for their own strengths and thus secure resources that are valuable, rare, and hard to imitate. Is the competitive advantage real? describes how to test whether an advantage of your business holds up in this way.

An everyday analogy: when a hiking club raises the minimum equipment for a tour, it barely affects members who already have everything in the closet. New prospects, by contrast, wonder whether to come along at all. The rule is the same for everyone; its effect is not.

An obligation that affects everyone equally hits the smallest hardest, as long as its costs are fixed.

What studies show about regulation and market structure

A well-studied example is data protection. In a review article, Dubé and colleagues (2025) summarize research on the intended and unintended consequences of privacy rules in marketing. Two of their four key points concern competition. Privacy requirements can slow down new providers that target niches and underserved customer groups. And they can favor large, established companies that rely less on third-party data and can afford the compliance costs.

The authors cite studies according to which the General Data Protection Regulation increased concentration in European digital advertising markets and strengthened the market share of Google and Facebook. Apple's 2021 privacy prompt had a similar effect, raising prices and market concentration according to one of the studies cited. Dependence on platforms describes how strongly this rule change hit dependent online retailers. The authors' framing matters: they do not question the benefits of privacy protection but call for its effect on competition to be taken into account.

Boockmann and Vaubel (2009) show at state level that regulation is deliberately used against competitors. They analyzed the voting behavior of governments in committees of the International Labour Organization from 1980 to 1998. Governments from countries with strict domestic labor regulation voted more often for stricter international standards, especially when these would raise labor costs in other countries. The authors interpret this as an attempt to raise the costs of the competition.

Where small businesses can benefit from regulation

The picture would be one-sided if we looked only at the burdens. Regulation can benefit small businesses in three ways.

• Protection against undercutting. Rules that apply to everyone prevent providers with dubious practices from driving down prices. This applies, for example, to minimum standards for wages, safety, or environmental claims. Those who work decently then lose fewer orders to someone who shifts costs onto employees, customers, or the environment.
• Thresholds and exemptions. Many obligations apply only above a certain size. After the Omnibus reform, the EU Corporate Sustainability Reporting Directive covers only companies with more than 1,000 employees and more than 450 million euros in net turnover, and the EU supply chain directive only those with more than 5,000 employees. Small businesses remain directly outside.
• A head start through early preparation. When large customers pass their obligations on to suppliers, what counts is who can deliver the required evidence first. A small business that keeps its data in order can displace a competitor that leaves the questionnaire lying around. Supply chain act and EU directive describes what this looks like for supply chain obligations.

Exemptions have a downside, however. Those not directly obligated often become so indirectly through their customers. According to Sustainability as a selling point, companies that must report continue to ask their smaller suppliers for data. The threshold protects against the report, not against the question.

Two readings: regulation as a burden or as a playing field?

The first reading sees regulation mainly as a burden that hits small businesses disproportionately and promotes concentration. The fixed-cost logic, the findings on data protection, and the KfW figures support this. Those who think this way rely on relief through politics and associations.

The second reading sees regulation as a playing field whose rules change and on which one can maneuver. Obligations shift market shares, and those who understand early in which direction can win. In favor of this is that many obligations are passed on to customers, who then prefer suppliers that make them easier.

I consider both readings correct, but for different questions. In the political shaping of rules, small businesses should push through their associations to keep fixed costs low and set thresholds sensibly. In your own business, the second reading is the more useful one, because it leads to action. An owner can rarely influence whether a rule is fair. How quickly they master it, they can. When a few providers dominate a market discusses how rules work in markets with few providers.

The obligations check in four questions

From the thinking model I derive a check that I call the obligations check. It helps you read a new regulation not only as effort but as a shift in competition. It takes half an hour per obligation.

1. How high is the fixed share?

   Estimate which part of the costs is one-off or independent of revenue. The higher it is, the more important joint solutions through associations, chambers, or standard software become.

2. Who is affected directly, who indirectly?

   Check whether the obligation applies to you yourself or arrives through customers. For indirect obligations, the customer decides what to demand, not the law.

3. Who in the market is least prepared?

   Consider which competitors will find the obligation hardest to meet. That is where room for market share arises.

4. Can compliance be sold?

   Ask yourself whether compliance has value for customers, for example because it saves them work. Then it belongs in the offer, not just in administration.

For e-invoicing, for example, the check shows a low fixed share because standard software handles the formats, a direct obligation, and little room for advantages. For supply chain questionnaires, by contrast, it shows an indirect obligation, large differences in preparation, and a real sales opportunity. The e-invoicing obligation describes the timetable for e-invoicing.

Conclusion: whoever masters the obligation first gains market share

To the guiding question: new obligations tend to benefit those who can spread their costs over a lot of revenue and already meet the rules. They harm those for whom mainly fixed costs arise, and these are often small businesses. The theory of raising rivals' costs explains why established companies sometimes even welcome stricter rules. Studies on data protection show that such effects can increase concentration in markets.

Nevertheless, regulation is not only a burden for small businesses. Thresholds protect against direct obligations, minimum standards against dubious competition, and for obligations that arrive through customers, preparation decides market share. The rule itself is the same for everyone. The head start belongs to whoever gets it under control first.

• List the obligations of the next two years with dates.
• For each obligation, assess the fixed cost share and the type of exposure.
• Where fixed costs are high, look for joint solutions through an association or chamber.
• Actively raise obligations that save customers work in sales conversations.