Markets are imperfect and large technology companies are a good example, presenting regulatory headaches, as we heard from Professor Jean Tirole at the BNP Paribas Asset Management 2019 Investment Forum.
In this article, and in part 2 which follows, we outline the salient points of his talk, starting with his analysis of market imperfections and then his reflections on what industrial or antitrust policies Europe could implement in the context of information asymmetry.
We also refer readers to the three articles we recently published on Investors’ Corner, presenting key elements of his body of work . Those readers who would like to delve deeper can gain more insight (and enjoyment) from his book Economics for the Common Good (Princeton University Press).
Should (indeed, can) big tech be subjected to regulation?
Whether grouped under the acronym FAAG (Facebook, Apple, Amazon, Google) or under the somewhat broader big tech, the rise of major technology groups has transformed the economic landscape and changed daily life. This digital revolution has even generated its own counter-revolution, a backlash or ‘techlash’, calling for dismantlement, more regulation and taxation.
These companies indeed have characteristics that bring them close to being natural monopolies (economies of scale, network externalities), but the way they operate is new. This requires a novel approach. In particular, price or margins cannot be regulated in the new technology sector as they can be for monopolies that serve the public interest (or the common good) where access to the network has a cost. This difference is important and can justify the use of antitrust legislation. The fact that there is no global regulator for these international companies is another crucial point.
Once on top, persistently on top
For their part, these companies deny being monopolies. They point out that anyone can become the next giant and replace them. According to the theory of contestable markets, companies already in the market are constantly innovating to prepare for the arrival of new entrants. In practice, though, no challenges them, and market competition, which in theory limits prices and promotes innovation, does not exist.
Moreover, the theory of contestable markets can only apply if market access is free. Events in recent years show that this is rarely the case: The dominant firm can become predatory or set up systems (e.g. integrated services) that limit users’ interest in switching to other platforms.
Little room for newcomers
In addition, barriers to entry are high in markets where data is a commodity. A new entrant will not be able to charge as much for adverts as the dominant player since by definition it has fewer, less well-identified users.
Furthermore, user queries improve the platform by providing new information, so size is crucial for this, too. A new entrant finds itself in a situation where it charges advertisers less while providing a service that is less efficient than that of the dominant company.
Should big tech be dismantled? What should the antitrust policy response be?
The first question is to identify what, for big tech companies, is their “stable essential facility” (generally their production infrastructure) which should not be affected by dismantling; and what their activities downstream of the value chain are (these are often distribution activities). With earlier industries (telephone, electricity, rail network), this question did not pose any particular problem. But today, we have technology that is changing rapidly and where the frontier between infrastructure and services is blurred and moving due to cross-profits and cross-costs.
Regulating the collection and control of data is also vital. This is complicated by the fact that for big tech, data collection is the result of other activities.
These various findings call for market regulation and consumer protection to be considered, as well as for the regulator to take up responsibility for delivering it. The antitrust authority needs to give its analysis, employ experts, and constantly improve its knowledge of the industry. In particular, it must be able to judge whether acquisitions make sense from the point of view of the company’s strategy or whether they are intended to eliminate competition.
Weighing the rationale of acquisitions
In the field of digital industries, in recent years, the giants have regularly acquired companies operating in markets similar or adjacent to theirs as well as promising companies in new segments. Society as a whole certainly has no interest in seeing innovation quashed in the early stages.
Given the difficulties for the regulator to assess the ins and outs of these financial transactions, it may be appropriate to reverse the burden of proof: the acquirer has to show that the purchase is not intended to ‘kill competition.’
Beyond these steps, it is imperative that regulatory policies are more ‘agile’ and able to anticipate and conceive of new regulatory tools when faced with businesses that evolve quickly. After all, smart regulation need not impinge upon innovation.
 Also read:
To discover our funds and select the ones that meet your requirements, click here >
For more articles by Nathalie Benatia, click here >
For more thought leadership and Investment Forum articles, click here >
Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients.